Merchants say that moving POS systems is expensive. And to some extent, we agree. We’ve even attempted to quantify the cost of moving POS providers previously – rehashed below for reference’s sake:
- Hardware change: $3,000 per location
- Software change: N/A – it’s a wash
- System programming: $2,000 per location
- Inventory sync: $500 per location
- Installation: $2,000 per location
- Staff training: $1,000 per location
- Loss of revenue: $3,000 per location
- Recovery of transaction data: $2,000 per location
- 3rd party integration: $500 per location
- Unexpected difficulties: $2,000 per location
All-in there’s a cost of $16,000 per location to switch systems. And that’s probably being conservative.
That said, we need to consider the cost of NOT moving systems.
When people estimate costs and risks they do so from the perspective of the status quo: what is my cost to change my status quo? Unfortunately few consider that the status quo might change, or that not changing has implicit costs that can be detrimental. This is a cognitive bias known as status quo bias and has been well documented in psychology. Here’s a good summary of this observation:
When making an important choice, people are more likely to pick the option that maintains things as they are currently. This minimizes the risks associated with change, but it also causes people to miss out on potential benefits that might even outweigh the risks.
Kendra Cherry, Verywellmind
As it relates to POS, we can think of no clearer economic example than the one of integrations. (Yes, while we could vigilantly argue about the additional costs of support, stability, hardware options, speed, and ease-of-use for legacy POS systems, the numbers around integrations will leave less to debate.)
Let’s begin.
We’re going to assume our case study merchant is a single location, using a clunky legacy POS, doing $1M in annual revenues with a staff of 20. At this scale they’re large enough to have discretionary dollars for things like analytics, marketing, and other tools and smart enough (hopefully) to realize that their POS provider’s offerings in these categories are nowhere near sufficiently competitive. So you could say we’re going to assume the merchant is rational in capital allocation and understands ROI.
This merchant needs several solutions:
- Payroll. Payroll solutions help the merchant pay their employees and handle labor compliance. Ideally a payroll solution would extract wages from the POS (hours * rate). Payroll ain’t cheap, costing this business $40/mo + $12/mo per employee, for a total of $280/mo.
- Labor. A business needs a way to forecast labor needs, optimize/manage employees, and build schedules. This data comes from the POS so an integration is required. Newer software allows employees to make shift changes with their phones without being in the business. These software can vary in pricing from $30/mo to $200/mo depending on feature depth. Let’s split the difference and call it $100/mo.
- Human Resources. How will a business manage their hiring and firing? Some HR softwares are creeping into scheduling, but a pure-play HR software runs $100/mo. Let’s assume it’s a good HR software that monitors employee performance and requires POS integration.
- Inventory. At least in hospitality, inventory is a real bear. It’s why 85% of merchants don’t know COGS and why only the larger chains can justify the time and cost true inventory management requires. Our case study merchant isn’t large enough to need a full inventory suite but should approach inventory at 80/20 with a tool that pulls item sales from the POS with basic recipes. This entail a price range of $50/mo to $200/mo. We can split the difference again and call it $100/mo.
- Loyalty. Loyalty programs have proven to be incredibly successful when properly run. The best way to design such campaigns is to target customers with specific items. That means loyalty must also integrate to the POS. We’re going to assume loyalty costs $150/mo.
- Marketing. While a broad category, marketing can be nonexistent ($0) or a slush fund used to insolvency a la Groupon and third party ordering/delivery. We can agree that marketing solutions – if they’re worth anything – should be integrated to the POS to measure lift. Let’s assume our case study merchant spends 1% of sales on integrated marketing, or $830/mo.
If you’ve been keeping tabs this merchant is spending $280 (payroll) + $100 (labor) +$100 (human resources) + $100 (inventory) + $150 (loyalty) + $830 (marketing) = $1,560 per month on third party solutions.
If they’re using a POS provider with walled gardens and taxed integrations, we need to add a 30% premium to this number. For our merchant paying $1,560, that’s an additional $468 per month or $5,616 per year.
If it looks like a lot, you’re absolutely right, and here’s our analysis on the matter to prove you’re not crazy.
Our case study merchant has 2 terminals in their business. They’re using a legacy POS system that demanded they also use their overpriced hardware. They pay $1,000 a year for maintenance and software updates. Should the merchant want to swap POS systems we’re going to use that $16,000 change-figure above. We’re going to call the ongoing cost differences between the two systems a wash: one system has pricier support, the other has a higher cost for ongoing SaaS.
Also, we’re not considering the time value of money to make the math easier.
As can be seen the initial investment of $16,000 (green line) pays itself back after roughly 3 years. When you look at the cash being saved annually – $5,616 per year we would have otherwise been paying to the legacy POS provider for doing debatably nothing – we arrive at a really high internal rate of return (or IRR). Using a quick calculator we find that the $16,000 investment earns us an IRR greater than 22%.
Those of us who are not professional investors need some context to understand how great of a return that 22% compounding annual return really is. To be a top quartile (25%) performing venture capital fund you need to hit an IRR of 15%. That’s about double what the stock market does after accounting for inflation, so it’s still very good.
An IRR of 22% is roughly 3x better than the stock market. If you told an honest investor you could get them a 22% IRR they’d take it all day.
Suffice it to say you’re a moron if you don’t switch off a POS that charges tolls for integrations. Here’s a refresher chart of some analysis we’d done earlier (it’s not exhaustive but you can see who the worst offenders are, conveniently circled in red). Chart reproduced below.
And remember, if you’re choosing a new POS system you don’t even have to make that $16,000 investment to switch systems: spend the money on the right POS and you’re basically printing $5,616 every year you’d otherwise piss away to a legacy POS provider for integrations.
Don’t be that dumbass that can’t do math – choose a POS system logically. This analysis should make it abundantly clear just how expensive taxed API integrations really are.
