There are a number of simultaneous, unfavorable trends for today’s point of sale (POS) dealer. We’ve written several articles about these trends if you’re curious, and we’re going to paste the relevant text here as a reminder. It’s important to lend close attention because the result of these confluences might just mean the end of POS dealers as we know them… unless they make drastic changes.
First is competition with direct, corporate offices from their own POS providers. This has been a growing trend with well-capitalized legacy POS companies, and the preponderance of cloud POS companies have gone straight to direct models with no channel program more hefty than a referral model. To be fair this makes sense: how much revenue share exists for a dealer on a product that costs $100/mo? The smaller merchants that are picking up cloud systems aren’t exactly open to splashing on dealer services either. Unless a dealer has 500+ accounts, cloud is a tough (though inevitable) pricing model for dealers to take up from scratch.
Second are the macroeconomic trends. A reseller has four core revenue streams. Here’s how cloud POS – really the Internet – has materially disrupted each one of these revenue streams.
1) Hardware. In the old days this was thousands of dollars in revenue share on $10,000+ hardware. Cloud has virtually eliminated hardware margins. Commoditized hardware can now be searched for and purchased online, driving down prices. On average, a new hardware setup costs $1,300. Of that, maybe $300 is margin. Split between the reseller and ISV (independent software vendor), that’s slim pickings.
2) Software. In addition to that pricey chunk of hardware, the reseller would make a revenue share on that pricey software. This could be a few thousand as well. Cloud has dropped software prices steeply. The Internet has enabled collaboration and sharing to make software faster and cheaper to develop. At $50/mo, or $600/year, cloud POS software is far less than the $3,000-$5,000+ sticker price of legacy software. Additionally, cloud software is providing features for free that legacy software put an additional price on: reporting, marketing, etc.
3) Services. This included initial setup (i.e. menu/inventory programming), training, break/fix repair, software updates, added features and possibly consulting. Cloud is slashing service revenues. While services were 2/3rds of POS revenues in the past, cloud is making conventional service revenues obsolete with remote diagnostics monitoring, updates and troubleshooting. Many cloud POS companies offer these services for free, and when an on-site rep is needed the POS company farms it out to companies like Boomtown, who are Uberizing the dealer experience and further shrinking costs.
4) Credit card residuals. Mercury upended the model when they started sharing 50% of the processing “profits” with the POS reseller. Since then, however, the payments market has continued to beat itself down on pricing so this revenue is likewise not increasing.
As POS revenues fall, POS manufacturers are not content to sit around and watch their ships sink along with their dealer channel. That’s why they’re also investing in a number of bolt-on products that they can upsell to accounts. These tools increment revenue per merchant account, which is critical as the revenue associated with POS software and hardware nosedives.
We’ve witnessed enough product failures to know that ISVs struggle to build bolt-ons that are worth mentioning, but there’s a very clear reason why they’re behaving this way. Let’s go through an example with some numbers to understand it.
Here’s a graphic of POS revenues we’ll point to as the article moves along.
A good POS dealer is selling one deal per week (compared to a mediocre payment agent who’s selling 3 deals per week). A merchant purchases a POS system with 2.5 registers on average. In the old days when legacy ISVs thrived, a terminal was ~$5,000. The software was another $3,000. Installation added an additional fee, and support was another $2,000 per year. All-in the legacy POS system was $15,000-$20,000, sometimes more.
Today that same 2.5-terminal cloud POS system costs $1,500/year for software and $3,000 for all the hardware. There are forever-free software updates, and services/support are also much cheaper since most of it is handled remotely.
The delta between the two is roughly $7,500 over the 2.5-year lifespan of the average merchant – this can be seen as the difference between the 2000’s revenues and those revenues Today in the graphic above. This $7,500 is generally split between both the dealer and the ISV. Wouldn’t it make sense that both parties would be aggressively pursuing opportunities to make up that revenue gap, especially knowing that it’s only going to grow?
In comes the POS bolt-on… at least in theory.
These bolt-ons could be reporting, analytics, ordering, or some other value-add solution built by the ISV. The ISV figured that if their dealers could sell these bolt-ons to a reasonable number of their accounts (termed attach rate), not only would the dealer plug their own revenue gap, but also help the ISV plug theirs. Revenue shares varied but it’s fair to generalize that the ISV kept 75% of bolt-on revenue while the dealer earned 25%.
If we theorize the average ISV offers four bolt-ons with a $100/mo MSRP each, the dealer would earn themselves $1,200/year per merchant. If the bolt-ons were good enough (i.e. in reality not built by the ISV) there would be enough ROI for a reseller to justify a more lucrative business advisory service to their customer.
This bolt-on has an ROI of $1,000/mo. You will pay $100/mo for the bolt-on, which leaves you with a remaining value of $900. However, you’re only going to achieve that full $900 if you use the bolt-on the right way, so you should hire my business advisory team to make sure you do. They’ll work with you for two hours a month for $300. This way you’re getting the most from the bolt-on.
Combined with an advisory business by the dealer, these bolt-ons would close the revenue gap for both dealer and ISV after two years. Of course, the reseller’s business advisory revenue only exists if the reseller successfully sells and understands the bolt-ons…
In reality, dealers have not been able to produce any material volume of bolt-on upsells.
There could be a number of reasons for this – lack of product understanding, laziness, or something else entirely. That’s why the larger ISVs were forced to hire direct sales reps to move their bolt-ons in any meaningful volume. The way this works is that dealers share their account lists and the local ISV rep does all the sales work. Upon a successful sale, the dealer gets a cut of the revenue even though the ISV is paying $60K to a sales rep who’s doing all the work.
If you’re the ISV you start to wonder why you keep doing this. If POS systems are increasingly purchased directly online, and companies like Boomtown are democratizing on-site support (which, by the way, is cheaper because service techs don’t need the overhead of an office and are able to support different brands of POS), and the only way to keep revenue parity is to upsell and cross-sell and your channel won’t even do that, at what point do you eliminate your dealers?
Here’s the truth.
POS prices are falling and will continue to fall. Can you think of any commoditized technology that only became more expensive as time wore on? A technology product that also got harder to service? Two business truisms are that successful products solve problems, and solve those problems cheaper. Cloud POS checks both of those boxes.
This means the core price of POS will fall, as will the associated service and support revenues. We’ve already at stage 1 in the graphic above: POS and their associated service revenues are ~50% of what they used to be in their prime. The majority of VARs today have combated this by getting into the payments business, but that won’t be enough.
POS prices will only fall further, looking like stage 2 very shortly. Once POS transactional data is available via API, companies like Google and Facebook will plug into the POS and recommend promotions directly to merchants; POS data will be analyzed and lift will be measured. Since merchants spend ~5% of sales on marketing annually, and they’re more likely to spend it where success and ROI can be measured, more of their funds will be directed into measurable marketing efforts suggested by the POS. Further, there’s $30B+ annually in unused co-op marketing held by suppliers to help run these promotions, so POS companies will make way more money by tapping these data feeds than they will by selling POS.
Now we’ve reached stage 4, where POS is given away for free to capture market share knowing that the purchase data being generated is more valuable than the POS revenues ever were. Just do some quick math for yourself if you don’t believe us:
A $1MM/year merchant will spend $50K/year on marketing. Assuming ad networks take even as much as 75% of their spend, that’s still $12,500 left for the POS ISV. Add in subsidies from suppliers in the form of co-op marketing dollars and the numbers would get higher. Even payment processing, which is far more lucrative than POS today – though itself dwindling, is only a fraction of these potential marketing revenues.
POS prices are not increasing. If you want to be a reseller in this business you need to learn how to sell other products and build a local business advisory skill set on top of them. ISVs and Silicon Valley startups will not get into consulting, so these are very defensible revenues for resellers. But we know many resellers will deny this change until it’s too late.
For those willing to pay attention, don’t say we didn’t warn you.