Once a year KBCM Technology Group – previously called Pacific Crest Securities – shares results from a survey of over 400 SaaS (software as a service) companies. We’ve used metrics from their reports before to show why selling to restaurants is a loser proposition.
With 2016’s version released we thought we would break down some of their results to help explain why the POS industry is moving away from dealer channels. We catch a lot of flack for pointing out the obvious (even when industry faces like Jon Taffer point out the problems with POS resellers), so we thought to present the case using objective data from SaaS generally.
Here’s the full report if you’re interested.
For starters, this is a reminder of how brutal selling POS is. The ARR (annual recurring revenue) is abysmal relative to SaaS industry medians of $137K. Hell, a POS company would love to get even $5K in ARR (payments revenue is NOT recurring SaaS revenue and pubic company multiples prove it). Remember how brick and mortar merchants pay very little for solutions, always trying to negotiate deals? This is partly why more modern systems have been slow to arrive in brick and mortar: no money = no innovation.
When looking at the distribution strategy for SaaS companies we see an overwhelming preference for direct sales, with channel accounting for a meager 5% of sales across SaaS companies of all sizes. Why?
Simply, it’s hard to control growth with a sales channel. If you have an enterprise product, you can attract more sophisticated channel partners that know how to setup sales the right way. They have their own CRMs, are collecting customer and lead data, and are otherwise good business people (as we said earlier, more money tends to attract higher sophistication).
But when you start crawling in the “gutters” with products that are a few thousand ARR (i.e. every SaaS POS out there), it’s damn near impossible to find good dealers. We’ve observed it’s probably a 95/5 rule, and that’s misserved the industry for far too long.
Because so few of the SaaS companies use channels, it makes channel data that might otherwise look promising less statistically confident. For example, in the KBCM report customer acquisition costs (CAC) were reportedly lower for channel sales than for direct sales methods. Assuming we can trust the CAC numbers for channel, that makes sense: employing sales people is more expensive than training a channel partner. However, the true cost of a channel needs to come out of revenue share, which can depress gross margin below the golden 80% threshold for SaaS by increasing COGS.
Since we’ve discussed POS being a low ARR sale, let’s make sure we examine the use of channel in smaller ARR products. According to the survey, no more than 7% of sales were generated by channel sales for ARR < $5K. Honestly we’re surprised channel isn’t a higher contributor for larger ARR products, but that’s likely because this survey focuses on venture-backed SaaS companies and investors prefer direct sales because there’s more control over growth. In wider datasets you’d probably see greater channel contributions as ARR increased.
Lastly, we wanted to call attention to something else important. As we stated above, most SaaS companies employ sales people because they can control the growth and achieve high ARR per full time employee (FTE). But another benefit is upselling. When you see the higher churn values associated with inside sales people (a sales method many cloud POS companies use), a realistic way to combat that is with negative churn, also termed upsells and expansion revenue. The POS channel, as we’ve observed, can’t do this. In fact they’re so bad that POS companies have to do the upsells for them!
What does all this mean for the POS ecosystem?
For starters, POS is going SaaS. It has been for a long time, and if you haven’t pick up on recurring revenue you’re going to be out of business soon enough. Being that POS will be SaaS, they’re going to be measured against other SaaS companies. Buyers, absent strategic reasons, can put their money in many places. They want to get a good deal and if a SaaS POS company looks bad against all industry SaaS metrics, buyers will pass. So expect more SaaS companies to get aligned with these averages.
Also, expect the POS channel to represent even less of POS sales than they do today. If more mature SaaS companies are finding greater success at achieving these financial metrics with direct sales, POS companies will put more resources into direct models.
Even if you ignore industry-specific POS dealer truisms, SaaS POS companies will need to do what’s right for their business. As it relates to the SaaS industry as a hole, that means controlling their destiny with direct sales.