Shopkeep and Toast, two US cloud POS systems, have released reports on the state of SMB affairs. Shopkeep considers small retailers and restaurants their customers while Toast is more focused on mid-market restaurants.
The reports, while a little different, can be fundamentally boiled down to the same takeaway:
Brick and mortar merchants still need a LOT of help.
ShopKeep surveyed more than 1,700 small business owners with at least one brick-and-mortar store across different segments in the US and Canada in February of 2018. Retail made up 50% of the businesses surveyed, quick service restaurants 21%, full-service restaurants or bars 8%, and hybrid businesses or others 21%. As for business size, 50% of the respondents have at least 1-3 full-time employees and 25% have more than 4 full-time employees. In other words, very small businesses.
Shopkeep’s report notes that 32% of respondents said they want to improve marketing while 88% want to increase sales. Our problem with the latter is that blind devotion to sales increases sounds a lot like the message paraded about by Groupon. That was great for Groupon, but not so much for merchants.
It’s also worth noting how much stock can really be placed in what merchants say or think; remember, these are often very irrational and subjective personas. Shopkeep’s report shares that in 2016 merchants expected 50% of their customer purchases to come from mobile payments within two years (by 2018). Here’s a comforting dose of reality.
Merchants too often follow trends blindly with no frame of reference or grasp of relevance. Sometimes this can be used for good (like upgrading merchants to POS systems that prove ROI) and sometimes it’s terribly detrimental.
With that in mind, let’s look at Toast’s report.
Toast surveyed 844 restaurant owners, managers, and leaders in March and April of 2018. 54% of respondents were from casual FSRs, while 21% represented a QSR, 14% represented a fine dining FSR, 7% represented a bakery, and 4% represented a bar or nightclub. 54% of respondents owned one location, 33% owned 2-9 locations, 9% owned 10-99 locations, and 4% owned 100+ locations.
There were a few things that popped out at us.
First, Toast totally nailed their observation that outperforming merchants are focusing on the fundamentals – something we also wrote about a year ago. Toast notes this,
Marketing costs money, but the spend is justified if it leads to more customers. If a customer visits once and is unimpressed with their experience, it simply lowers the customer lifetime value and diminishes the return on investment restaurants would have with their advertisements, resulting in restaurants spending more money on ads (thus diminishing profit) and losing repeat customers (also draining profit).
It’s not quite word-for-word but it’s very close to what we said:
Successful marketing just exposes more, potentially new customers to your horrible business practices. If customers have a bad experience they’re going to get on review sites and write about it. So while that initial marketing might look like a great idea it will sink your business over the long run.
So what marketing is Toast talking about?
Toast found that 88% of restaurants still engage in paid marketing, advertising, and promotion.
What’s impressive is that most of these categories of marketing spend cannot be measured. Maybe the merchant has hired an overpriced agency to “craft strategies” and look at POS data, but they’re certainly not doing it as effectively as an algorithm. When you combine this observation with the results from Shopkeep’s survey stating that 32% of merchants want improved marketing it seems like there’s a pretty big opportunity for an industry-wide DSP via the POS.
There’s one other tidbit in Toast’s report that we find baffling. When polling merchants about the most important POS features for business success, the responses appear suspect – see the graphic below.
Toast explains this with the below blurb:
Integrated credit card processing through a POS provider means processing fees are reinvested into building a stronger POS system instead of paying a bank – essentially making every credit card transaction an investment into the future of your restaurant.
We’re confused by this.
First, we would argue that POS processing is not at all important to a merchant in the same way that analytics (labor, inventory, etc.) or marketing should be. Payments processing is a very pricey and commoditized game of zero value add. That’s not to say there couldn’t be valuable insights revealed in the processing data stream (reverse appending customers for marketing, for instance) but payments processing is not an “important feature to restaurant success” unless we’re talking about sidestepping exorbitantly high processing rates to avoid bankruptcy. And to be clear, Toast’s default processing rates are exorbitantly high. (Some merchants don’t sign up at these rates but there are clueless merchants who are undoubtedly paying Toast effective rates above 3%.)
Second, Toast appears to be presenting a rather confusing yet altruistic position. Are merchants not supposed to question their effective processing rates if that processor happens to own a POS because the processor is responsibly “reinvesting processing fees into building a stronger POS?” Does this “investment” continue in perpetuity – investors in that POS/payments company don’t ever want to reach profitability? If the POS/payments company aspires to reach profitability do they suddenly lower their effective rates and return money to merchants? Until they do are merchants supposed to be excited about paying higher effective rates to foot the bill for the POS/payment company’s engineering budget? Then why would that POS/payments company take on investor capital?
We agree that it’s much better for any company to reinvest profits into innovation on behalf of their customers, and certainly nobody is accusing the average payments company of doing this. But you also need to draw a line in the sand regarding your products: developing a laundry list of bolt-ons is precisely what got Micros and Aloha into their current troubles and what we warned overzealous cloud POS companies about several years ago. Anyone with experience will tell you that non-POS solutions homegrown by POS companies are far inferior to those built by third parties; even Apple recognizes its own limitations despite sitting on over $200B of cash. Thus we would ask that the POS/payments company think through things from this lens:
The difference between an effective rate of 3% and 2.1% (the latter of which is reasonable) for a $1M/year merchant is $9,000. We bet any savvy merchant would much rather invest $150/month in a solid third party tool to fix their problems than they would effectively donate $9,000, carte blanche, to their POS/payments provider to maybe homegrow some inferior bolt-on down the road.
But then again merchants thought 50% of their transactions would come from mobile payments by now. When you see this sort of delusion it’s no wonder companies continue taking advantage of them.
So yes, brick and mortar merchants still need a lot of help. And good POS companies can and are doing that responsibly.
But we don’t think that means merchants must pay an effective rate of 3% either.
Add comment