Are POS Dealers Now A Tax on POS Companies?

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We attended this year’s RSPA RetailNow conference in Las Vegas and saw three big trends unfolding:

  1. Even more prevalent than last year was the continued movement of payments into the POS ecosystem. To underscore this point Harbortouch quietly announced its acquisition of Restaurant Manager, a legacy restaurant POS company. Looking a the booth layouts makes this even clearer: not only do the payments companies have the biggest booths, they’re also occupying the most valuable real estate
  2. POS dealers are finally acknowledging margin compression across the POS stack. A number of session topics dealt with increasing dealer revenues and how dealers must change to maintain relevancy as the internet modernizes brick and mortar
  3. Legacy POS companies (ISVs) are beginning to understand why the cloud POS entrants they long chastised are selling directly: control over business solvency

As POS earns less money, POS ISVs – and dealers, for that matter – must sell other products on top of the POS to find revenue parity. These products can come via way of partnership, acquisition, or even be homegrown (though this third approach often ends in tragedy).

But if your dealer channel refuses to sell and support bolt-on products, it puts the ISV in a precarious financial situation.

Many ISVs have now realized that the only way they’re going to increment POS revenues is by selling these bolt-ons themselves. Directly. Entirely around their channel.

Sound unwarranted? An ISV we know built a very useful (and popular) product that cost $99/mo. They wanted their dealers to sell it. In addition to a 30% revenue share, they were willing to pony up $300 for each sale.

Guess what the dealers did?

So this ISV hired an inside sales rep to call on accounts. At 80 calls per day, the rep was closing 5% of the conversations. That’s $400 in new monthly recurring without needing to spiff the complacent dealer $300 and shell out an additional 30% for the pleasure.

Of course the channel became enraged.

Hey those are my accounts!

Really? You haven’t talked to the account in months, are churning accounts to competitors, and can’t be bothered to offer them products that make their business more successful? That’s your definition of value added reseller?

The dealer’s perspective has been the same for far too long.

We make more money selling POS than selling anything else. So why would we bother?

Well, markets change. We can think of at least three reasons why this mindset is going to drown you.

  1. POS is becoming commoditized and less lucrative
  2. By selling bolt-ons on top of the POS you’re finding reasons to talk to your customers and be better aware of their problems
  3. Bolt-ons can give you new recurring revenue and new service revenues that will become greater than the amount earned on payments and POS

We don’t think the majority of dealers care to listen. Many are sunsetting their businesses. Many more want to do the minimum amount of work and turn their phones off at 5 o’clock.

Yet the ISVs still want to be around. Many of the ISVs that we know feel obligated to pay the dealers when they sell into their accounts.

We simply do not understand how this can be viewed as anything but a tax.

The dealer is not selling a product. They are not supporting a product. They don’t care to become educated on the product. Yet they’ll “earn” 20-30% or otherwise gripe about selling into “their account”.

We think this is a horrible financial position for ISVs, and we’ll explain why.

Let’s say a POS company has these bolt-on products to sell:

  • Inventory ($100/mo)
  • Mobile ordering ($100/mo)
  • Loyalty ($100/mo)
  • Gift cards ($50/mo)
  • Analytics ($100/mo)
  • Marketing ($100/mo)

In total, selling this stack would yield an additional $550/mo per merchant. This revenue is at least equal, if not substantially more, than POS software ($100-$200/mo depending on terminal count) and payments (~$150/mo) revenue. That’s not including a services business that could be feathered on top of the bolt-ons as the services revenue for the POS itself gets swallowed by the ISV through remote diagnostics.

If an ISV is doing the work of sourcing these bolt-ons, marketing them, selling them, and supporting them, they’re doing all of the heavy lifting.

Let’s assume a dealer has 200 accounts, and on a weighted average basis a merchant subscribes to three bolt-ons – that’s $250/mo in revenue per account. Across a dealer’s merchant base that’s $50,000 per month, or $600,000 per year. You’re telling us that, by doing no work, a dealer is entitled to $200,000 of that?

But it gets even worse!

The ISV must also add its cost of sales, marketing and support to that $200,000 figure. This could easily add another $100,000 to the mix.

So on gross sales of $600,000, the ISV is losing half of that to support a lazy dealer.

The dealer has just made themselves a financial liability. By refusing to do their job the dealer is nothing more than a referral agent at this point. The ISV would do better to pay them 30% of the initial purchase on hardware, software, and payments, and partner with a remote provider when local support is needed. Even more preferable would be to partner with payments providers; payments agents will sell substantially more POS systems than a dealer, and since POS is all but commoditized it won’t be an issue.

We find it financially irresponsible (and probably impossible) that ISVs continue down this path for very much longer. Something has to give. Either ISVs turn to a referral-only model, or dealers start pulling their weight. Either way, the market is too competitive for these shenanigans to persist.

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  • Christophe Delacroix

    Hi Jordan – understand well your overall point and mostly agree. To put things in perspective you should compare your $200k number to the cost of acquisition ISVs pay to non-dealers driven channels. You did that in another article. Also, In your calculation you deduct an extra $100k p.a. covering marketing/sales costs which by definition are not incurred by the ISV if the dealer acquires the account.

    • Jordan Thaeler

      Good points Chris. I did a quick and dirty on the math here. I assumed the referral model would chew 30% of the revenue. The extra $100K I assumed comes from the ISV’s cost of selling/supporting those bolt-ons since dealers don’t want to do it.