POSitouch is Going to “Cloud”. Did It Make the Right Move?

Late last week POSitouch and Omnivore announced a business partnership that was three quarters in the making. POSitouch (POSi) would open up Omnivore’s cloud architecture to its merchants via POSi’s distributor channel, and all three would share revenue by bringing the “cloud” and and its benefits to merchants.

We’ve been asked for our thoughts, and I think it’s important that merchants AND their service providers pay attention.

The most obvious question is this:

[bctt tweet=”If POSitouch is a software company, why did it just outsource a major component of its software architecture to a third party?” username=””]

POSi is obviously a legacy point of sale (POS) company. However, there have been several legacy POS companies in the US hospitality market that are making investments to stay relevant and go to cloud.

So why did POSi not invest in its own business architecture to go to cloud? If they’re partnering with Omnivore, they’re obviously admitting that connectivity and data portability is the future of the POS business. Is it that POSi has only realized this lately?

Well first, POSi had a very expensive ($1500) back office product prior to this. It was so outrageous that CBS went off and built their own solution. At some level this new Omnivore cloud functionality can replace that legacy reporting product and turn it into a recurring revenue business.

But we think the reason for the partnership is much more financially driven than that.

For Omnivore to bring merchants the value of cloud POS, Omnivore must deploy a piece of software to establish bidirectional communication. Once that piece of software has been enabled, the merchant’s data can now be used by third party applications for a host of solutions, and because it’s bidirectional, products like mobile payments can write directly to the POS database seamlessly.

However, POSi doesn’t own the merchants: its dealers do. And to get the agent deployed at merchants – plus presumably cover Omnivore’s nut to install and support their agent – there must be an associated fee.

So POSi charges merchants $50/mo to have a cloud system enabled. Keep in mind that for $50/mo merchants can turn to a number of cloud POS providers and get a brand new POS.

Once the Omnivore agent is deployed and the cloud system is live, merchants can browse third party apps (though in reality they won’t) or the POSi dealer can introduce apps accordingly. If such an app is purchased by the merchant, the app developer, the dealer, POSi and Omnivore take a share of the revenue.

That’s a lot of mouths to feed.

But that’s not POSi’s problem: that’s the merchant’s problem. The POSi merchant is going to pay an increased cost for goods and services because POSi didn’t want to invest in its own product and customer base.

How much? We’ve calculated the average merchant product to cost $30/mo per location across the industry. That’s an average from loyalty, analytics, marketing and a host of other solutions in the space.

What POSi has just done is increase the cost of that $30/mo product nearly 4x. Here’s our math to get there.

1. A POSi merchant must pay $50/mo to have cloud enabled
2. The third party developer can no longer afford to sell the product for $30/mo if the dealer, POSi and Omnivore take a cut. I think we can fairly assume they would need to double the price to maintain their original revenues. So that $30/mo product goes to $60/mo
3. We add the expense from number 1 to the expense from number 2: $50 + $60 = $110/mo. Let’s now calculate the percent increase: $110 / $30 = 367% (note: I am calculating the absolute increase from the merchant’s perspective, not the percentage increase over $30 – which would be 267%).

Wowsers. And here’s how POSi likely justifies it.

POSi purports to have 30,000 restaurant customers. Below I’m whipping up a table that shows potential revenue outcomes for POSi based on conversion rate to Omnivore’s cloud offering. I’m going to throw in varying revenue share on that $50/mo figure too. I’m excluding the potential revenue share on additional applications, which undoubtedly only sweetens the pot for POSi.

Therefore we argue that POSi believed it would make more money off this partnership with Omnivore than if it invested in its own business model of going to cloud – totally at the expense of their merchants.

We know legacy POS companies that have built “cloud” (data replication) for $20,000, so it’s not like we’re talking about millions of dollars of investment here. The hardest part, rather, is deploying the replication, and POSi doesn’t even need to foot the bill for that since they have dealers.

Good on POSi for recognizing the move needed to be made, though I think it says a lot about the state of their software business, capabilities and view of their customers that they needed a third party to bridge the gap. POSi says they’re working on their own cloud, but it’s five years away. Maybe.

This move feels much more like patchwork than an ideal solution for a “software company”. That’s not to say Omnivore isn’t a great platform, but POS companies need to own something if they want to call themselves software providers. And per usual, the hapless merchant foots the bill for the POS company’s experiments.