As We Predicted, Toast Has Greatly Increased Their POS Integration Fees

We’ve authored an entire series on API fees. It ended with Apple, via its App Store, being embroiled in Supreme Court litigation over its 30% tariffs, which we argued were no different than those imposed by POS companies. For the record Apple lost the verdict and they’re now back down in the lower courts to start their argument (obviously in favor of the 30% taxes) again.

We also predicted that Toast would raise its POS integration fees for two reasons:

First, because Toast had taken so much institutional capital they would need to continue growing top line revenues. An easy way to grow these numbers would be to charge for integrations. And since Toast POS is a cloud POS, there’s no way around paying the integration fees.

Second, Toast wants to monopolize the entire stack. Payroll, scheduling, marketing, whatever – Toast wants to do it all. Of course it’s never worked out for any POS in the past (and walled gardens are being picked apart by startups all over the market), but that doesn’t matter when you need to convince investors you’ll be a $10B company. As Toast starts building or buying more of the solutions stack it makes sense to force your competition to become more expensive. How do you do that? By imposing tariffs on their goods. It’s entirely possible Toast could further increase third party rates for solution categories it’s focusing on – so if they’re rolling out a scheduling solution and you’re a scheduling provider maybe your integration rates are now going to be 50%.

Too bad, so sad: what are you really going to do about it?

As of today, Toast’s integration fees are going up to 30%. Previously integrations were $20 per month per location for unlimited integrations.

What we found most interesting was how the program actually worked. Per the revenue share agreement, any lead a third party partner sends to Toast results in a one-time payment of $500. But any customer using Toast that then integrates to a third party partner commands 30% of ongoing revenue in perpetuity.

Partner Compensation . The following shall be considered “ Partner Commission”:

1. Partner shall be entitled to receive a single, one-time rebate in the amount of five hundred dollars ($500.00) for up to a maximum of five (5) initial locations (regardless of whether such physical locations exist at the time of the contract execution) for each Partner Referred Customer that has a “Go-Live” date within one (1) year from the date Toast received the Referral Form. Notwithstanding anything herein to the contrary, the Partner Commission shall be “earned” only if each of the following conditions are met: (1) the Partner Referred Customer has entered into the applicable agreements with Toast in a form acceptable to Toast within one-hundred-twenty (120) days of Toast’s receipt of the Partner Referral Form; (2) the Partner Referred Customer’s first initial location has been using Toast products and services in a live production environment for a minimum of thirty (30) days; (3) Toast timely receives applicable payment(s) from such customer for the products and services provided; and (4) Partner is not in breach of this Agreement.

Toast Compensation . The following shall be considered “ Toast Commission”:

1. For each Joint Customer location, Partner shall pay Toast thirty percent (30%) of any revenue earned by Partner for as long as such Joint Customer location remains a customer of Partner.

Here’s some quick math for you. A SaaS business garners an 8x revenue valuation. A one-time payment business is only worth 1x annual revenues. By demanding 30% in perpetuity, Toast is arbitraging this arrangement in their favor.

Assume that a partner refers Toast a 10-unit deal. Under this language Toast is only on the hook to pay out $2,500 ($500 per site capped at 5 sites). Now let’s assume that this partner has a product that costs $100/mo/location. $30 of that goes to Toast, and since there are 10 sites that’s $300 per month, or $3,600 per year. Now remember, because this is recurring SaaS revenue it’s going to get an 8x multiple. So really that account is worth $28,800. That’s over 10x what the partner got for bringing in the deal.

Because merchants don’t do self-discovery we’d wonder what back envelope math was considered in coming up with Toast’s 30% rate. SaaS companies – the types that are likely to be Toast’s third party partners – invest 35% of their revenues, on average, into sales and marketing. Is Toast thinking that their 30% fee is less than the partner would otherwise spend acquiring the customer?

Yet we’re not buying this for a few reasons.

First, when a SaaS company invests 35% of their revenues into sales and marketing those are one-time costs. In other words, if you make $1M you’d invest $350K (35%) into sales and marketing. For the sake of argument let’s assume those $350K acquire you 100 customers. If you stopped investing $350K in sales and marketing you’d still have those 100 customers – you just wouldn’t gain any new ones the following year. So you shouldn’t keep paying Toast 30% a year for existing customers.

Second, there’s no way Toast can possibly refer sufficient business to a third party partner to make the 30% make sense. Toast has their own products to sell and is certainly not going to take the time to learn your product. Further, we’d bet that your third party product is one of many substitutes (e.g. there are probably 15 viable scheduling solutions) if it’s not already competing with a product Toast is working on cannibalizing. It’s not Toast’s fault: no partner will ever learn your product as well as you so long as they have another priority. In Toast’s case it’s their POS.

Lastly, we’d bet that you’re still allocating 35% to sales and marketing and Toast is not causing you to decrease your sales and marketing investments. That’s because we both know that you can’t depend on generating 100% of your revenues through Toast referrals; Toast doesn’t have a large enough merchant base even if they did generate enough leads for you.

Per usual we solicited Toast for comment but got none. We were hoping we’d learn why the 30% number, and what these fees would support. Does an API cost that much to support? Keep in mind dozens of third party applications have built their own integrations to legacy POS systems in the past and it never cost anywhere near 30% of their revenues to do so. Toast must surely understand that third parties aren’t going to eat this cost and will instead pass it along to Toast’s customers.

In other words, every Toast customer will now be paying substantially more for third party solutions simply because they happened to choose Toast for their POS.

Sound like another POS company we’ve chided for similar practices? It’s a tough world out there – don’t get in bed with a POS company without knowing the total cost of ownership.

Sadly, it looks like Toast is going down well-trodden road of legacy POS. For a company that has been winning a lot of business from NCR and Micros, you’d have hoped they might have learned what not to do. Walled gardens and a belief that you can do everything is not a sustainable strategy.