Point of sale (POS) systems have been an absolute nightmare to integrate into since their arrival on the market nearly 30 years ago. The reasons for this truism are two-fold:
- The POS manufacturers (often abbreviated ISVs for independent software vendors) have had horrible, horrible business strategies if they held any at all. Most POS companies were started by former merchants, and we’re pretty consistent with laying out impartial data demonstrating how merchants struggle to make good decisions. Usually this resulted in walled gardens within the POS, where the ISV would develop any and all bolt-on products to force on their customers.
- Since the ISVs were former merchants, they almost certainly weren’t engineers or data scientists (as these types rarely decide to work in retail). That’s why you’ll see the same field show up 10 times in a POS data table. It’s also why integrating at a technical level has been incredibly difficult. Even if you could convince the ISV that integration was good for their business (and many ISVs made you prove this by paying them $50,000), it was still needlessly complicated to integrate into their systems. Poor architecture and data management practices meant a well-intentioned integration could break one of the core systems a merchant used.
These providers offered a pretty clear value proposition: instead of worrying about convincing an ISV to let you integrate, and securing the technical documents needed to make the integration, use our platform. In exchange, you pay us some amount of money for the hassle.
The fee for the first two providers was nearly unworkable, however. At $25/mo per location, the cost was prohibitively expensive when you consider the average merchant product costs $30/mo (this is the average price for loyalty, reporting, emailing and other popular services merchants use). Even if you were able to charge $100/mo/location, sending a cut of 25% to an integration partner would eliminate any and all profit in the deal by the time you account for distribution costs to laggardly merchants.
As POS goes to cloud, however, the market is finding some relief.
Why does this matter?
Cloud POS companies Toast and Breadcrumb didn’t emanate from merchants. While merchants may have provided input for features, their architecture and data structures were built by engineers, yielding a substantially superior technical solution than their non-engineering counterparts.
As a result, these POS systems can easily integrate to third party systems with an API – application programming interface. Costs for integrations come down, solutions are more robust (i.e. don’t drop data nor break the POS) and ultimately the experience is better for merchants. With cloud API integrations technical concerns have just been substantially mitigated and the need for a third party integration provider disappears.
But the business strategy concerns may very well persist.
Grubhub wasn’t willing to go on the record, but we’ve anecdotally heard that the Grubhub integration will come with an increased commission of 2-3% on top of Grubhub’s already-unsustainable fees. Toast and Upserve told us they’re not taking any cut of that, by the way.
In all fairness to Grubhub, the arithmetic might make sense. If we can borrow from Chowly, they’ve done the math to show merchants how integrated online ordering could be worth $43,000 in annual savings. Decreased error rates, saved time and more accurate orders certainly add up.
The point that we should take away, though, is that none of these fees are actually necessary. At least, not fees more than a few percentage points of the order total.
Grubhub’s largest expense is acquiring merchants. We say that as a software company that delivers merchant products and works side-by-side with processors and ISVs who also share this as their largest expenses. Building an online ordering product, or moving ordering data over the internet, is trivial in comparison with the sales cycles for acquiring merchants.
But If you leverage the POS to acquire your customers, you don’t need to spend as much on sales anymore. When that happens, there’s zero need to charge 15% commission plus 2-3% for the API integration because your sales are coming in from POS partners, who can sell your solution with email blasts. Now you can charge something much more reasonable – maybe 3-5% of the total order, or even a flat, monthly fee.
Grubhub’s argument, of course, will be that they’re adding incremental customers through their demand generation, thus merchants should continue paying exorbitant rates. Naturally Grubhub won’t share customer data with merchants to prove incrementality, so you just have to take them on their word for it, okay?
(Sure, just like Groupon was delivering incremental customers too…)
So what’s a merchant to do?
First, any business that does more than $500 a month in online ordering volume will find it cheaper to use a provider that charges a flat fee and not a percentage of the order. For comparison, there are companies that charge flat fees of ~$100/mo per location for online ordering. They might not do demand generation like Grubhub, but that won’t matter in time…
Because second, connected POS systems can plug merchants into demand generation portals for online ordering, reservations, ecommerce and other use cases that don’t cost an arm and a leg. This may come as a surprise (because legacy POS ISVs haven’t bothered to invest in this sort of connectivity), but POS systems can connect with a myriad of online ordering portals – they just haven’t done it yet. As companies like Facebook and Google are showing, they’re happy to assume the role of demand generator for free because they’re more interested in being known as a commerce portal to consumers at large.
We’ve rationalized that this value will only be delivered to merchants at reasonable costs through their POS providers; the POS-to-platform integration removes the need for middle men and third parties, and makes the experience all around better for merchants.
Breadcrumb and Toast are showing the market precisely how easy this can be. If legacy ISVs are under the delusion that this trend won’t continue, I feel bad for their unwitting merchants who continue to suffer with products from companies that refuse to invest in creating more value.