People in SMB verticals are competitive to the point where they miss the big picture: the market is large enough for many billion-dollar solutions providers to not only survive, but thrive.
Take retail as a category. The numbers are conflicting depending on your source, but the market is still obviously large. US Census tells us retail establishments do $4.4 trillion in sales. NRF’s numbers are a little different, counting 3.8M retail stores doing 2.6T in sales. This market size lends itself to hundreds of billion-dollar companies.
Still uncertain? We’ll work with smaller numbers to prove it.
There are roughly 650K restaurants in the US. How many restaurants would you need to count as customers to become a billion-dollar company if you sell POS?
Let’s say a restaurant pays you $1,500 a year for POS software. At 10,000 restaurants, that’s $15M in annual revenue. The public market is currently giving software a 7.6 revenue multiple, so thats $114M in enterprise value.
Then we can assume there’s some payments referral revenue. Let’s say the POS is getting another $1,200 in annual payment revenue per merchant. That’s $12M in revenue and payments is getting around a 4x multiple, so that’s $48M in additional value yielding an enterprise value of $162M.
Now let’s say these merchants buy additional (hopefully white-labeled) software from the POS provider – could be analytics, labor, payroll, etc. We’ll just assume that the POS company’s cut is another $200/mo per merchant, or $2,400 per year per merchant. At a 7.6 multiple that’s another $182M for an enterprise value of $344M.
There’s undoubtedly some hardware and services revenue in here too, but those are 1x multiples. Let’s say there’s an additional $20M in annual revenue from these sources so our new enterprise value is $364M.
Lastly we’ll add in marketing opportunities as a DSP. Merchants will spend a healthy amount on marketing. We’re going to say they’re spending $5,000 per year through the POS (these are smaller merchants as should be obvious by the small amount the POS company is earning in its other revenue streams). Surprisingly adtech companies are getting a 10x sales multiplier right now, which is even higher than SaaS. So that adds $500M to our value, getting us to $864M.
Damn close to a billion-dollar enterprise value and we’re only talking about 10,000 small merchants. Go upmarket and these revenues will be higher per account.
How many times over could someone have a billion-dollar company in just the restaurant vertical? Well, it looks close to 65 times. Even if we throw in a fudge factor there could legitimately be 30, billion-dollar POS companies in the US restaurant vertical alone.
Which begs the question: why aren’t there?
Call us presumptuous but we think we have an answer.
POS companies of old were notoriously bad. Not only as it relates to their core product, but their underlying business model too. Can you imagine trying to support 15 versions of perpetual-license POS software while maintaining a walled garden so that you could build (and support!) every non-core solution one could possibly dream?
This mindset did nothing but hinder existing POS providers. In a great twist of irony, these behaviors prevented these POS companies from finding higher levels of financial success. A refusal to unlock merchant data fettered revenue opportunities while ignoring macro trends simultaneously increased costs. As a result, these POS companies could simply not rationalize how to increase revenue – and profit – per account. Their limited worldview was one which held that the only way to financial success was to increase the number of accounts.
Classic Maslow:
If all you have is a hammer, everything looks like a nail.
We’ve shown that cross-selling and upselling is substantially cheaper than acquiring new accounts, so why didn’t legacy POS companies understand this?
Don’t know, and don’t care.
Legacy POS companies had their chance. Now newer POS companies with smarter business models will become way more financially successful with even smaller merchant footprints.
Evolve or die. Because the market is big enough for a healthy amount of competition to take you out.
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