The worst kept secret is that POS has become commoditized. The cost and time to bring a POS solution to market is rapidly approaching a relative zero. There are the cloud entrants, the payments entrants, and the retailer’s nephew at Carnegie Mellon who needs to do something for his master’s program.
In the years since POS arrived, the market has grown into an absolute spattering of solutions. I’ll admit I’m not nearly as intelligent on the retail side of the market as I am in restaurants, but there are nearly 200 known restaurant POS softwares in the US. I venture there are hundreds – if not thousands – of others that are so obscure nobody has bothered to track them. And given that retail is much more stratified than food service, there are most assuredly thousands of retail POS softwares.
With so much fragmentation, one has to wonder if the market will ever see anything close to an 80/20. Constant churn (25% a year in SMB-world) means there are always new entrants looking for solutions; vast segmentation – from small pizza shops to large pet stores – mean fragmentation abounds.
But we don’t think that will last much longer.
The POS is becoming a connected device, as much as legacy POS vendors refuse to acknowledge this reality. Viewed a different way, it’s been said that POS – and really brick and mortar – is having its internet moment. Yes, it’s over two decades late to the party, but it’s finally showing up.
As a connected device, POS will follow the trends of other connected devices before it and consolidate. This happens to all commoditized business over time, really: he with the most of the commodity can suppress prices and force competitors out of business. For connected devices, it just happens faster.
The below chart from Statista that makes the point patently clear.
What started as a frothy mobile phone market has (relatively) quickly consolidated into the hands of two major players: Apple and Google. But the learning here isn’t that commoditized industries consolidate over time; rather, it’s why the POS industry is following suit.
At its core, what is a mobile phone? It’s a way to conveniently enable communication. Some communication is handled by the manufacturer – like the ability to make a call, or perhaps send text messages. More advanced forms of communication can be handled by third parties via integration to the phone’s operating system. In a win-win, Apple and Google don’t have to develop every feature set; consumers acquire the best and newest communication features; third parties gain access to new customers; and Apple and Google get to sell more phones by trumpeting advanced communication features (i.e. apps) available on their devices.
At the risk of strategic oversimplification, Apple and Google are leading the mobile phone market because they’ve spent considerable time fostering an ecosystem of partners built on symbiotic relationships. Consequently, consumers have come to expect a robust ecosystem that enhances the phone’s value.
As POS systems become more open, the same phenomena will catalyze consolidation. Let’s walk through an example:
We’ve already discussed online ordering becoming a significant part of a merchant’s revenues. Some estimates put that number as high as 30% in the next five years.
Now, in the mind of a legacy POS company, all that matters are “features”. They believe that the merchant will ignore the opportunity to drive 30% of their revenues with an open POS system in favor of a POS system that adds a custom, 30-second printing delay between pressing the send button on their register and their kitchen printer. Not only that, but the merchant will pay MORE for that privilege.
News flash: for tens of thousands in potential monthly revenues, that merchant will figure out how to deal with his feature request for a 30-second delay-print function.
Merchants that already use a POS system might find it harder to replace their clunky, expensive legacy machine since they’re so invested in their current solution. But the math says that, over four years, the market will have a complete turnover. And at every new business opening there’s an opportunity for that merchant to acquire a system that enables communication with the outside world, driving the merchant’s chances at success through marketing, analytics and a proverbial laundry list of solutions that closed, legacy systems cannot offer.
And this is the phenomenon that will drive consolidation: third party ecosystem connectivity, just as it occurred within the mobile phone industry. But those third parties will not work with everyone building a POS. For instance, if you’re a vendor trying to sell something to Wal-Mart, you need a universal product code (UPC); if you don’t have one, Wal-Mart and other retailers won’t take you seriously. Third parties are not going to work with POS systems that have proven inflexible or undersized.
As it becomes more widely-acknowledged that POS is a commoditized product, it’s the value of those third party integrations that will separate the systems – not core POS features. When a future merchant is being sold a POS, expect questions like, “Does this connect me to Google? What about Uber? Apple? Can I get analytics from IBM’s Watson? How are Yelp reviews gathered? Is there automated marketing? Who’s running that?”
In summary, you have two forces creating POS consolidation:
1) The third parties, who add the value to POS in a commoditized world, are going to be picky with whom they work. Meaning those unchosen POS companies will be on the outside looking in.
2) The merchants, who are already discovering the value of third party solutions, will be expecting third party “features” to be standard attributes of their next POS purchase. Trust me, I’ve heard plenty of people lamenting deals lost on these dynamics already.
The POS industry is not paving some new road through fields of destiny: it’s simply following the path of industries before it. What I share, then, is not voodoo prognostication but observations and learnings from historical events applied to today’s POS market. Now you’re welcome to disagree all you want, just don’t do it from your Apple or Google device.