Another Cloud POS Raises Its Prices. So Where Exactly Is Pricing Equilibrium?

It’s long been debated whether cloud POS prices at $100/mo were economical. Many legacy incumbents no doubt wanted the answer to be no, but there’s no way of knowing the truth without auditing the books of cloud POS companies.

Here’s what we do know.

Selling to brick and mortar merchants is probably the most uneconomical exercise one could undertake. As Jason Lemkin has pointed out to us before, these are the acceptable sales cycles for investible businesses.

1.  Deals < $2,000 in ACV (annual contract value) should close on average within 14 days.

2.  Deals < $5,000 in ACV should close on average within 30 days.

3.  Deals < $25,000 in ACV should close on average within 90 days.

4.  Deals < $100,000 in ACV should close on average within 90-180 days depending on # of stakeholders and gates.

5.  Deals > $100,000 in ACV will take on average 3-6 months to close.

Let’s walk through the math of a normal merchant to drive home the point. You have a product that costs $100/mo (the POS we’re investigating in this case). Depending on the number of terminals, that’s a < $2,000 ACV category purchase.

So how long does it take merchants to buy? We hear average sales cycles of six weeks. If we look back to Jason’s guidelines, the POS would need to squeeze $10,000 a year from this account to justify this amount of effort: nearly 5x what they’re making on the POS software itself.

Some POS companies will do that by bundling payments (Toast) to drive another ~$2,000/year, and others will try to move bolt-on products and services. Still, even optimistically, none of these efforts will reach $10,000/year in remittances to the POS provider.

Some POS companies think they’ll increase revenue by increasing their prices. Lightspeed POS has been around for a long time and they’re trying this tactic themselves.

We can only think these price increases are justified by Lightspeed’s investors who are needing the company to hit profitability, even if it’s just a small profit. This will undoubtedly fuel knee jerk reactions from legacy POS companies and their dealers who will shout, “See! I told you those cloud systems were too damn cheap!” They’ll come to the conclusion that low pricing was underwritten by their investors, and now investors are running out of patience.

There’s no doubt a sliver of truth in this, but it completely ignores the larger trend.

The long-term value of POS revenues are in the data and the connectivity around that data. We’ve written a number of posts on this inevitability, but we can rehash a few opportunities off the cuff.

1. Connected POS will make money from online ordering and delivery. Cloud POS can charge a commission fee to facilitate online ordering to portals like Google and Yelp
2. Connected POS will make money from bolt-on merchant tools by having access to POS data, either by building tools themselves (the dangerous approach), partnering with, or buying solution providers
3. Connected POS will make money syndicating aggregate POS data to suppliers, distributors, market research firms and others
4. Connected POS will make money from automated marketing by partnering with advertising platforms and measuring lift

These opportunities will easily help POS companies reach $10,000/year in ACV.

So what you have are two competing forces on POS prices:

1. Venture capital/investor pull-back, which means cloud ISVs need to increase their prices to reach profitability on their own merit
2. Smart POS leadership leveraging all their data/assets to create new and offsetting revenue streams that allow them to drop POS prices further

You’d have to be a real troglodyte to ignore that the world’s largest companies have built effective monopolies off proprietary data. Therefore number two above will win out in spades.

But we recognize brick and mortar industries are chock full of tightly held dogmas that were proven wrong years ago in more sophisticated markets, so we’re not holding our breaths either.