Have We Reached Peak Legacy POS?

In 2016 we went on the record saying that 50% of the US restaurant POS market would be cloud within five years. As evidence of that inescapable trend we analyzed survey data from Capterra, who interviewed 400 respondents. This chart perhaps best shows the starting place for our prognostication.

Our analysis in 2016 was as such:

If we acknowledge that 25% of the market comprises new entrants annually due to churn of previous merchants, and 62% of them prefer cloud, every year 15.5% of the POS market is being moved to cloud. Over 5 years that 15.5% * 5 = 77.5%.

Here we are nearly two years later. Has there been any change?

Some recent market research reports have pegged cloud penetration by US restaurant segment according to the below graph.

On top of this Pymnts Restaurant Readiness Index disclosed that 61% of the quick service restaurants covered in their index are using cloud POS.

What do these numbers tell us?

Something critical.

The law of diffusion of innovation explains that once something novel reaches 15% market penetration inertia carries it to the rest of the market. It goes from being a weird, new thing to something people are comfortable using. If we look at each segment of the restaurant market it’s clear that cloud has surpassed 15%.

But that’s not all.

A large legacy POS company has seen their POS market share remain flat for the first time since launch. In other words they’re adding the same number of accounts that they’re losing, for a net-net of 0 growth. And they attribute that flatlining to cloud POS, who’s finally moving upmarket with more mature features.

Another POS company offers two product lines: a legacy product and a cloud POS product. Their founder shared that they can’t discount their legacy systems low enough to move them anymore – customers prefer cloud.

When we asked POS dealers we hear a number of anecdotal responses that tell us merchants are increasingly seeking cloud, even if they don’t know what it is.

60% of new merchants ask for cloud.  40% don’t know the difference. That being said, we only sell 20% cloud. The 40% that decide to switch from cloud to server-based switch after our sales team outlines the pros and cons of each. The biggest reason people ultimately switch is the ongoing monthly cost.

We see about 10% of our customers asking for cloud. Half of those are only asking for cloud because it happens to be the cheapest upfront option. The other half appreciate the features.

Half of SMB customers ask for ‘tablet POS’ but they have no mental association of tablet and ‘cloud’: they simply want something cheap. However, I don’t think there’s any enterprise customer who isn’t including cloud POS in their search. So much for cloud not having enough features to take market share upstream.

Merchants have no idea what they want. They haven’t yet associated ‘cloud’ with value. But cloud POS companies are more likely to cross that threshold and prove ROI to merchants. Legacy POS companies haven’t sold on ROI for 30 years and you’d be a moron to think they will suddenly change.

Over my career I’d guess that 75% of my merchants have asked for cloud reporting on top of the system, but now a full 70% just want a cloud system.

Every year we estimate that 1/7th of the market is shopping for a new POS. These figures are supported by the actuarial life as amortized by POS companies; below is a chart from Radiant, the precursor to NCR’s Aloha POS, demonstrating customer life of 6.2 years.

If we consider that there are 650,000 US restaurants, that’s 90K merchants with money to spend on a new system each year. But 25% of the market has been estimated to still use cash registers or ECRs, meaning there are ~65K merchants who are serious about changing their POS technology.

We know the cloud POS companies well enough to calculate how many rooftops they’re adding annually; summing them all together gets us to a figure between 25K and 30K. And since the number of US restaurants has barely budged over the past few years this 25K – 30K number is being eaten from legacy POS market share.

So we feel confident enough to call it:

We’ve reached peak legacy POS.

From this point forward the percentage of legacy POS systems in the market will continue falling, even if cloud POS systems only add 30,000 locations annually. The chart below explains how we’ll reach 50% cloud POS in the US restaurant market by 2022: the total unit count will remain unchanged, attrition in both legacy and cloud will be about equal (so we’re ignoring it), and cloud consistently adds 30K locations annually.

If cloud wants to accelerate this process it needs to start selling on ROI. Actually, everyone needs to sell on ROI. Why they don’t is nothing short of astounding.