We need to talk about a very serious transformation happening in the point of sale (POS) industry.
The POS dealer is on the verge of extinction.
We’re not referring to the 95% of resellers that don’t want to work. We’re not referring to the resellers that have become so addicted to payments that they’ve forgotten about their merchants. Nor are we talking about the resellers that are focusing on the wrong merchant segment and are being replaced with direct ISV sales, merchant self-discovery, or automation of traditional services.
We’re talking about an honest entrepreneur trying to build a POS dealership.
How would they do it today? It’s financially impossible.
In the old model a POS would cost ~$20,000. $12,000 would go back to corporate and the dealer would pocket the remaining $8,000. Install two of these deals a month and you’re up to $192,000 a year: just enough to cover your time and basic travel expenses. Get a few of the customers on your pricey support contract and you can hire a sales rep to handle the sales while you build the business.
Now contrast that with today’s environment.
Merchants are asking for as-a-service pricing. Hardware and software is cheap, and if you come in too heavy the customer buys the hardware online. Sure, payments can get you some revenue, but it’s not nearly as lucrative as selling an old POS system was – your payments residual might be $100/mo. Add this to your cut of the SaaS revenue on a new POS system (let’s generously assume it’s $100/mo) and you’re at $200/mo.
Great, only need to sign up 62 merchants and you can reach the same revenue as selling 24 old systems would have earned. Since POS resellers are not known for their sales prowess those 62 accounts would be added at a rate of two per month, meaning your average dealer would take 31 months to reach cumulative revenues of $192,000.
Until then, how do they survive?
What we have is a unique situation that favors the creation of a federation of dealers.
Small POS dealers are being pushed out of the market by their own incompetence and because their average, small customer is buying their POS directly from the ISV (or from the fastest payments rep through their doors). These smaller dealers have little in the way of recurring revenue and don’t have a large enough installation base to switch to a SaaS model and survive. Even a three-man shop would need monthly revenues in the neighborhood of $50,000 to keep the operation running, which means they’d need 250 merchants. That’s tough when you consider that they’re probably seeing 25% of their merchants churn annually, and the ones cropping up in their place are just going direct to the ISV (Breadcrumb, Clover, Shopkeep, Square, Talech, Toast, etc).
Jim Roddy’s channel study leads us to believe that ~30% of the reseller channel is in immediate peril, and another 17.5% is not far behind.
Larger dealers have a broad enough installation base to move to a recurring revenue model without starving for years on end. This puts them in an enviable position where bigger merchants, who are happy to pay for a VAR (value added reseller, not a box merchant), have lower levels of churn and more to spend on solutions… but a shrinking list of resellers who are financially solvent.
We believe the dealer market, just like the US hospitality POS market, will consolidate. There are already resellers out there who are executing on this model – look at RDS or newcomer Revzi as examples for how we expect this to work.
Federations will be a reseller brand that operates multiple offices. These groups may even start a franchise model: train local franchisees how to be a VAR and collect royalties for ongoing training on new products and services. Each office is free to choose whatever POS they want but in reality every POS manufacturer will be dying to find representation with the federation’s offices as these resellers will focus on the ideal merchant segment.
The federation further solves another major issue we’re seeing today: payments companies have no clue how to service and support POS. (The payments market will continue to operate this way so long as payments processing earns more than POS, which is something that won’t change for a number of years.) But now payments companies can punt service and support to a bonafide local expert for merchants who would otherwise refuse to take on a POS from a payments company.
It’s not hard to imagine these federations growing so large that they become more critical than the point of sale companies. As POS (i.e. payments) companies turn inward to focus on improving their products they face the realities of the costs of a direct sales force that is educated enough to sell and support the POS consultatively. Payments companies will surely try to educate their sales agents on features and functionality but payments reps sell on price, not value. The old dog, new trick adage might well prove too expensive for the payments companies in the end.
So these federations become what POS dealers were supposed to be: a true VAR. Just like POS companies are modernizing their businesses with software and automation, the federations will take the same approach to the channel, benefitting from recurring revenue valuation multiples. And because the market will unequivocally demand as-a-service pricing, new dealers won’t have a leg to stand on, giving the federation moat as wide as the Pacific.
Payments and venture capital have rushed into the market so aggressively that they’ve totally disrupted the channel. One could argue that they’re eroding the channel to the point of life support. Wouldn’t it be ironic if their actions created a channel behemoth that controlled the most desirable merchant segment? The large resellers today have a wide enough moat to test the theory.
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