POS resellers used to have it good. Fat hardware and software margins. Kludgey systems that needed constant, high-dollar support. Exclusive territories and monopolistic access to replacement parts.
Then this thing called the internet showed up.
Now, as many dealers will lament, they need to work more hours to maintain the same levels of income. Some are seeing disappearing business models with the introduction of SaaS, and others are even seeing a disappearing market altogether.
Here are some graphics we’ll republish to show you what we mean.
The first graphic shows what’s happening to POS revenues. As should be obvious, the revenue associated with the core POS is coming down substantially. Part of this can be blamed on SaaS, which offers POS pricing in a smaller, piecemeal fashion, but the other part can be blamed on changing business models. If dealers don’t learn to sell more than just the core POS, they’re toast.
The second graphic shows the types of merchants that are considering and can afford a reseller: larger merchants who aren’t exclusively buying on price. For these merchants a true VAR (value added reseller) is well worth the money as they’ll source solutions consultatively and provide local support when needed.
Now that we have this refresher under our belt let’s further explore the comment that POS dealers are seeing their market disappear. What’s that really mean?
The long tail of the market – merchants doing less than $500K in annual revenues – are picking up lightweight cloud POS solutions. Often these merchants are exclusively buying on price. In some cases the cheapest system really is the best fit (it’s certainly better than an antiquated cash register with zero online functionality) but in other cases the merchant was bamboozled by a Free POS offering or happened to like what the first payments rep was selling better than results surfaced by their 4-second Google search for “POS”.
These lightweight POS systems, however, are getting better. If the payments company has partnered with an innovative POS provider, or if they have a software and data culture like Square, there are material R&D dollars being reinvested into improving the POS system’s functionality. So while their POS system is a great fit for the $350K a-year merchant today, in 2-3 years the average merchant might be posting more like $600K in annual revenues. It doesn’t sound like a big difference but a lot of the mid-market POS companies – and their respective reseller channels – are playing in this middle market.
The upper end of the market – Tier 1 and 2 merchants – has almost exclusively belonged to POS companies directly. Often times POS companies would tell their dealers that any account with more than 50 locations must be managed and effectively “owned” by the POS company directly, even if the account preferred to work with the reseller.
As time has progressed we’ve heard of ISVs (POS companies) developing more stringent standards and requiring that smaller and smaller “enterprise” accounts be fed to them. With a number of POS companies taking material amounts of outside capital it only makes sense that they cannibalize smaller accounts from their dealers to earn the returns they promised investors.
So when we say that dealers are finding that their market is disappearing it’s because they’re between the proverbial rock and a hard place. On one side you have the lightweight POS systems accreting features and moving more upmarket, and on the other you have the POS companies themselves moving further downmarket with their direct efforts.
There is, however, a silver lining in all of this: the mid-market is actually the most profitable market to be in.
- Mid-market merchants are less cost-conscious than smaller merchants. If there’s value, they’re more likely to pay for it because they have the money
- Mid-market merchants are more sophisticated. This means obvious things don’t need to be hammered into them… as much
- Mid-market merchants don’t have economies of scale so they prioritize software and fractional services over a full-time middle manager that does relatively little
- Mid-market merchants don’t need to extract pounds of flesh from vendors like their Tier 1 counterparts. This means fewer customizations and faster solution delivery
- Mid-market merchants are typically younger, more innovative and tech-savvy
We don’t know what the market looks like in five years but it’s definitely more dynamic than it’s ever been. Brick and mortar does move slowly but that doesn’t mean it won’t ever change, either.
If you redefine VAR to provide consultative value as a business advisor, you’ll be around for a long time.
