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Vaping industry takes a page from Apple's book

CNBC logo CNBC 6 days ago Chris Morris
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As more states legalize medical and recreational marijuana, the pot culture is spawning some big side industries.

Vaporizers, which were already seeing growth from people shifting away from traditional cigarettes, have seen a sales surge as cannabis legalization has spread.

Widely used by marijuana enthusiasts, vapes have historically been low-cost, low-tech products. But many in the industry are now adopting business models that are more in line with tech giants like Apple (AAPL), Samsung (593-KR) and Sony (6758.T-JP) as a means to grow sales.

On April 20, the unofficial appreciation day for marijuana and a Black Friday-like event for vape manufacturers, it might first help to get a sense of the size of the vape market.

Exact numbers are tough to come by because manufacturers are privately held. Most vaporizers are sold either directly from company websites or in tobacco and vapor shops, where groups like Nielsen have limited tracking.

While there are some outlandish claims putting the market in the $10 billion-plus range, that seems unlikely. The Winston-Salem Journal estimated vaporizer sales (excluding e-cigarettes) would hit $2.5 billion last year.

Namaste Technologies (NULL), a leading Internet marketer of vaporizers and accessories, has predicted it will generate revenue of $15.7 million Canadian ($11.7 million U.S.) this fiscal year, and $24.9 million Canadian ($18.5 million U.S.) for the fiscal year ending August 31, 2018. It expects revenues to increase 35 percent each year through 2020.

Top vape manufacturers, though, say they're seeing annual growth rates of several hundred percent year over year. A big part of that is the decision by many to aggressively market high-end, high-dollar products that feature regular upgrades.

"I think the reason you're seeing more premium vaporizers on the market is because it's getting more competitive," said Pantelis Ataliotis, president of Dr. Dabber. "It's getting tougher to stand out in the crowd ... with a standard vaporizer."

"There's always room for great innovation," said Tyler Goldman, CEO at leading vaporizer manufacturer PAX Labs. "Like in any typical tech business, the top companies are likely to be the few who have better offerings. Consumers migrate quickly to the best products."

It's a strategy that's luring investors. In 2015, San Francisco-based Pax announced it had closed a $46.7 million Series C funding round, with Fidelity Management & Research Company and Sivia Capital among the investors.

Pax says that it has sold more than 1 million of its Pax 1, Pax 2 and Pax 3 devices, which sell for up to $275. Last September, the company released Pax Era, a $60 product for people who prefer to consume liquids or oils. The Era already has a 20 percent share of the market in Colorado, Goldman said.

Over at KandyPens, another vape company, sales increased 350 percent last year to $6.5 million, founder and CEO Graham Gibson said. The company aims to cross $10 million this year.

Rather than relying on word of mouth for sales, as some vape companies do, KandyPens aggressively markets its products to consumers. It's run full-page ads in publications like Rolling Stone and snagged celebrity endorsements with the likes of DJ Khaled.

KandyPens follows Apple's example of offering new products each year. Some 25 to 30 percent of the company's existing customers upgrade when those roll out, even if the products aren't dramatically different, Gibson said.

"Last March, we launched the Gravity. This year, in January, we launched the Elite. It's the same pen with a different finish and a different name — and we charged $10 more per unit," Gibson said. "Once people are sold on a brand, they'll buy whatever product you have coming out. And they'll give their old product to a friend."

The growth rate at Dr. Dabber has been just as impressive. Ataliotis estimates a sales increase of 400 percent to 500 percent over the past two years. And while he won't make that same prediction for upcoming years, he's optimistic about the growth potential.

"Because this industry is so new, there are so many opportunities to make new products," he said. "It's not like everything that can be thought up has been thought up. ... What's out on the market is, for the most part, all the same. There's a lot of room for innovation."

The market territory for vape companies is also expanding rapidly as more states pass marijuana laws. That has some manufacturers considering options like an initial public offering. Ataliotis says that's an idea Dr. Dabber toys with frequently, though no plans are imminent.

"We've been approached about it," Ataliotis said. "We're very dynamic and good at adapting to what's going on. ... It would definitely be something we'd consider."

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