The War on Drugs is a pretty great folk-rock band with a popish sound. Here they are playing at The Bowery Ballroom in New York City, March 19, 2014. Credit: Vladimir / Flickr

Recently, my partner Brad Spirrison and I attended a presentation in Chicago by a cannabis data company drumming up business for their dispensary sales analysis. They presented screen after screen of graphs of consumer purchase frequency for various cannabis products, each one with a small hump showing one groups’ particular interest, but no big trends.

The data didn’t sit right with me. The general rule of thumb for almost every retail product is to look for a big hump with the 80-20 curve: 80 percent of your product is likely to be consumed by 20 percent of your audience. Also known as the Pareto Principle, it’s a mathematical phenomenon visualized as a bell curve that extends to almost every measured grouping you can find, such as income distribution and disease spread.

I turned to Brad and asked, where’s the biggest fans?

“They all have dealers,” he said.

Recent studies have shown that somewhere between 65 and 75 percent of American cannabis sales are through the underground market. Who are these consumers, and now that they have an opportunity to purchase from legal stores, why aren’t they dumping their dealers and streaming into dispensaries?

Two weeks ago Debra Young, a Michigan caregiver and medical cannabis patient, told me the answer: “If I had to buy my medicine at a dispensary, it would probably run me about $700-800 a week. Now who could afford that?” she said.

If you’re spending $2,800 a month at a legal dispensary, you’re probably buying half a pound of weed a month, which easily puts you into the “biggest fan” category. Maybe not at the top of the curve, but pretty close.

Legislation introduced in the Michigan General Assembly earlier this month at the behest of the Michigan Cannabis Manufacturers’ Association (MCMA) seems to go right at the heart of the industry’s 80-20 problem. The trade association wants to effectively eliminate the caregiver program – slimming them down from servicing six patients each to two, while also forcing caregivers to go through the same testing and plant registration commercial cultivators have to use. 

According to a study commissioned by MCMA, about 30% of Michigan cannabis is produced by caregivers, about the same amount as legal dispensaries. And by their own admission, caregivers work in a legal gray space, growing pot for their registered patients, but then often selling up to half of their crop illegally through dealers or through friendly dispensaries who sell it under the table. 

Illegal cannabis sales are consistently about 40% of dispensary prices, I’ve observed through dealers I’ve met. The lower prices are possible because underground dealers don’t have the same regulatory requirements as legal growers, don’t necessarily produce the same quality product, and often the product comes from Mexico. Below the border, pot grown by peasant farmers usually gets massive markups as it heads north, reports Benjamin T. Smith in his excellent new book “The Dope”, which documents not just the violence of the underground industry, but the nuts and bolts of how the industry operates.

Illegal dealers, who begin with a super-cheap wholesale product and enjoy massive retail markups, are incented to stay underground as long as possible. Caregivers, who are driven by libertarian thinking and a desire to maintain their own economics, are also incented to stay underground. And both of those groups have flexible, well-managed distribution networks with decades of experience evading the law and regulators. Not following rules is second nature to them.

MCMA, a trade association made up of companies who hire attorneys to help them follow the rules, is proposing through the Michigan legislature a new set of rules meant to stop caregivers from doing what they want. The organization, led by savvy political operator, Steve Linder, has put together a strong argument that a significant majority of Michiganders – a citizenry of rule-following, tax-paying individuals – support robust rules and regulation of caregivers.

Looked at through the political lens of state legislatures, when a vast majority of voters want more rules, legislators are inclined to pass new rules. So, it seems likely that MCMA’s political persuasion plan will work.

But passage of new legislation is where the possibility of failure for MCMA begins. Because, without effective enforcement, creating new rules to limit caregivers and the gray market would be meaningless, since a significant portion of caregivers have the capacity to simply go underground.

And then how effective will the new rules be?

With the burgeoning fight over Michigan’s caregiver rules, we are watching a replay of the War on Drugs: The state creates rules meant to stop a certain type of activity, while a relatively small group of individuals have the means to evade the rules, and support the rule breaking for a significantly large group of people. As a result, the state’s ability to enforce the rules are evaded, and the state’s authority over the activity is decreased.

Meanwhile, legal, rule-following dispensaries will get no closer to solving the 80-20 rule in their favor.

As frustrating as it may seem to Michigan’s legal cannabis industry, the state’s caregiver program offers a unique window onto the underground market. Unlike every other state, Michigan’s caregivers are given an ability to operate in the daylight to some extent. Rather than legislating the group of out existence, it would seem like Michigan should attempt to entice caregivers further into the market and figure out how to bring their customers into legal dispensaries – or to even make a place in legal dispensaries for caregivers’ cut-rate products.

The War on Drugs proved that using the stick doesn’t effectively suppress cannabis sales. What kind of carrots can be used instead?


Editor Mike is a co-founder and the editor of Grown In, a U.S. national cannabis industry newsletter and training company. His career has taken him from Capitol Hill to Chicago City Hall, from...