The Strawhecker Group (TSG) has produced a lovely compendium on the US cloud POS market complete with secret shopping for a midwestern pizza restaurant. A preview can be found here and the full report can be purchased here. We found the report to be altogether illuminating, and strikingly in-line with some of our own observations over 2017.
In reading the report we were struck by some pretty phenomenal trends. First, TSG does a general ranking of tablet systems. It may come as no surprise – or at least it should be expected – that those POS companies (ISVs) who have raised the most amount of money perform well. As an example, we’ve anecdotally heard that toast’s aggressive hiring plan often means there’s an abundance of hand holding during the customer sales process, leading the merchant to assume they will be well provided for in selecting toast. A review from MerchantMaverick says as much
Ascertaining if this level of sales and customer support is economic and sustainable is an entirely different matter. In the secret shopping exercise the toast reseller traveled 400 round trip miles to visit the customer and had the funds to dine at the restaurant. Is that scalable? What about profitable? What happens when an account this far has an onsite problem? Here’s our quick math
Given how little money is in cloud POS for dealers, toast must be really racking up the processing rates (yes, we have evidence we’ll share shortly).
Second, there was a legacy POS company included in the secret shopping exercise who advertised that they had built cloud functionality. Upon demonstration, the secret shopper found that not to be the case. This product was sold through a reseller, so you’d think the reseller – especially one carrying a legacy POS – would have known better.
Third, there was an increasing trend towards bundled POS and processing. Many of the higher performing POS companies had coupled their POS and processing solutions under one umbrella. How the secret shopper handled this concern was worth noting as well: they didn’t mind purchasing both from the same provider. For fears of “locking” merchants into processing contracts via POS, this concern seemed unrealized. Of course we would remind any merchant to check their rates early and often to make sure they don’t get surreptitiously gouged.
Fourth, and TSG admitted as much, there was preference given to homegrown bolt-ons over those delivered by third parties. For an example, preference would be given to a POS company with their own loyalty product versus a third party product that merely integrated via API. There are a number of things that merit further discussion here.
- Merchants enjoy one provider delivering multiple solutions so there’s only one throat to choke; it’s just easier from an accounting and support perspective. That’s why merchants who offer their own bolt-ons find a material attach rate among their customer base
- POS companies have loved their walled gardens. This keeps competitors out and forces merchants to suffer with the development speed of the POS company on integrations – if they happen at all
- We’ve never seen a POS company offer a non-POS product that would stand up on its own in the market. That is, pursuant to the example above, if a POS company decided to spin out their own loyalty program, the new loyalty company would be uncompetitive and die. Quickly. POS companies have enough core problems to worry about and bolt-ons are a distraction at best
- Given some of these observations it may be best for POS companies to find best-of-breeds in strategic categories and white label them as needed. This action would earn the POS company the benefit of a best-of-breed while simultaneously capitalizing on their merchant relationships (i.e. one throat to choke), driving penetration and value relatively quickly
Fifth, we’re a little skeptical of TSG’s weighting system on feature maturity. Clover is a great POS tool for a small merchant that does a few hundred thousand a year with a simple menu, but supporting a larger pizza restaurant is flatly outside its capabilities. Pizza requires a good bit of POS specialization on modifiers and it’s not trivial. It would seem to us that TSG is willingly sacrificing conventional feature parity in exchange for connectivity – something that we’ve repeatedly noted would be inevitable in this market.
Sixth, the secret shopper was only considering cloud POS systems. They implicitly admitted that there was no reason to invest money in a legacy system that couldn’t connect them to their customers. Every year the average new merchant is more comfortable with technology and wants it to help them run their business. This is a market demographic trend that is futile: you have to get to cloud connectivity if you expect to be a relevant POS company.
Lastly, and most importantly, is that the resellers these cloud POS companies are using are a liability. For each of the POS systems secret shopped, TSG makes a list of pros and cons as well as a story for their experience. In every situation except for one (toast), the reseller was a problem. They never responded to the inquiry, failed to provide a good demo, held a sour attitude the entire time, or were otherwise unprofessional.
In fact in many cases the secret shopper had to contact the ISV directly after the reseller dropped the ball!
This is absurd. When you look at it this way, maybe we’ve been wrong on the business model for cloud POS companies:
the cloud POS business model is simply the ability to take the cost and pain of a reseller out of the merchant experience!
Sure, some resellers add value, but in totality that may only represent 5% of the reseller market. This makes us think ISVs should secret shop their resellers frequently.
If you think us too harsh, remember that we make our conclusions based on data. When we have new or updated data, we change our conclusions accordingly. The data from TSG’s efforts only make it clearer (to us, at least) that the POS needs to be sold online or via payment referrals, with ISVs doing the sales and a remote service like Boomtown overseeing any on-demand, local support. We simply cannot trust a conventional reseller to be up to these tasks anymore.
Too many dealers are liabilities. Luckily their monopolies are being broken up and businesses have more options at their fingertips. Good dealers will capitalize on these changes as much as TSG’s report shows cloud POS companies to be.