We work with POS companies across the globe. On a recent catch up with one such international partner, they mentioned that the customer acquisition cost (CAC) in America was exorbitant relative to what it was elsewhere. In a sort of back-of-the-envelope way, they calculated CAC rates here to be 3x what they are in even the UK.
Back on home turf the Washington Post shares thoughts on the matter for Kevin Alexander’s new book, Burn the Ice: The American Culinary Revolution and Its End. “There are too many restaurants,” Alexander said. “There hasn’t been a recession since 2008, and a recession gets the people who aren’t serious out of the way. Austerity breeds creativity.”
Echoing those thoughts in the Post’s article was Technomic’s David Henkes, who covers food service. David said that for a number of years, the rate of restaurant growth has exceeded population growth.
At a meeting with investment bankers two weeks ago they all shared that they’re seeing a proliferation of SMB loan companies. It was a similar trend they’ve witnessed at the tops of past cycles…
What do these observations have in common?
The US restaurant market is overbuilt. And like constructing a home on fault lines, it only takes one small slip to destroy what you’ve erected.
POS market dynamics in the US are entirely perverted. Whether it’s a merchant acquirer convincing merchants a POS is “free” by writing the cost on their balance sheet, or a venture-funded POS company doing the same, merchants honestly believe POS has no value and should be gratis.
And in some ways this tactic is genius. Merchants are too dumb to do math, and certainly don’t scrutinize their processing statements, which are intentionally opaque. Only many months after the fact, when some competitor points out how much a merchant is actually paying in payment processing fees, does the merchant realize they’ve been bamboozled by that “free” POS.
What should really worry POS companies using these “free” POS tactics – and the merchants dumb enough to believe their POS was “free” – is what happens when the market corrects. If we hit a recession, what then?
Well, many folks smarter than us think the restaurant market is about 10% oversaturated. And when a downturn happens merchants will stop buying new POS systems as their revenue numbers slide. So the financial models these POS companies were built upon (acquiring merchants in staggering numbers with a “free” POS and then recouping those costs over 2-3 years with aggressive payments processing rates) falls apart really quickly.
When this happens, the merchants who go under first may the lucky ones.
The merchants who are unfortunate enough to be customers of these “free” POS companies will surely be left to feel the pain of an imploding financial model. It makes sense that these merchants will see their effective rates quickly climb as their POS providers struggle to make numbers. Remember, these POS companies will have tens of millions of dollars of accounts receivables on their balance sheets in upfront hardware that could quickly become bad debt. As sales reps stop making quotas and existing customers churn, remaining merchants will likely experience the turning of the payments crank; if the economy didn’t put them out of business their POS “partner” certainly might.
We’ll show you what we mean.
Here’s the statement for a 3-terminal restaurant using Toast (who has since switched to a different POS provider). This merchant does $220K in monthly payments volume, or $2.6M a year. With cash and check let’s call it $3M. Merchants of this size should be paying effective rates around 2.1%.
This merchant, however, is paying an effective rate of 2.79%. The difference – 0.69% – equates to $18,295 dollars annually.
Over 3 years, assuming payments rates don’t go up (which might be a big assumption), that’s nearly $54,885 for a cloud POS system that they could have purchased for ~$12,500, including monthly software subscription fees.
Here’s that math.
- SaaS for 3 terminals at $80/mo/terminal for 3 years = $8,640
- $4,000 for all hardware (see below from Upserve, which assumes a merchant has 3 terminals)
Remember, we’re assuming this same merchant is already paying an effective 2.1%, so we don’t add that back in to the costs – it nets out of the example.
Using our own “free” POS calculator this equates to an APR of nearly 65% – or a figure that might make any usury defendant blush.
There are simply too many merchants and too many dollars willing to acquire merchants at any cost. It’s unsustainable and we’re predicting an industry implosion at the slightest economic slowdown, much like the cascading 2008 financial collapse. Those merchants who fail first might be counting their blessings if they see what becomes of their counterparts using “free” POS.
Greetings,
Overall this is a great article. With a few tweaks, this would be exactly what I’d love printing and getting in the hands of merchants that I know Toast is targeting, as well as those unfortunate to be with Toast.
Having no skin in the game when it comes to POS systems, makes me a good source of solid information. More information from a credible source is what folks like me need.
I work in the Merchant Services Industry, so I’m automatically already working with a handicap.
Leaving an article for a business owner using Toast with a note saying “Please read” could be impactful as well as very appreciated. Business owners do stupid things without realizing it.
I want to educate merchants, but unfortunately, I can’t refer to this or leave it for a restaurant owner who isn’t in. Drat!
I’m a straight shooter with plenty of passion too, but I deal with people, who might be described as dumb, on a daily bases. That word puts up the equivalent of a roadblock on the way to the truth, that they just can’t get past, when it pertains to them.
I could work with this after providing caveats, if words like “mislead” or “suckered into” were used:)
Here’s what I mean by “caveats”-
I know you need numbers to run numbers, but if you’re going to use 2.1% as an overall card cost, you should give a reason why. For example-
Based on an audit of this merchant’s statement while applying a fair processor markup…
Based on this merchant’s interchange and a typical fair processor markup…
Based on this merchant’s location and the types of cards they typically accept…
My concern is that someone reading this will assume they should be paying 2.1 %. Too many people believe in the one size fits all fallacy already, so please be careful. There are plenty of ISO’s who will happily say they can deliver 2.1%, when they know they can’t.
Between “what’s in your wallet” cards, Business/Corporate cards, and unregulated debit, where big banks aren’t prevalent 2.1% won’t happen, even with the fairest of processor markups.
All this being said, I know you want to illustrate the blood bath merchants take, for what it is. Well done. Thank you and carry on!
1.9%-2.3% is “typical” in my market for a restaurant with a $40 average ticket and that card volume, so you’re right in the “typical” ballpark.
I’ve never run numbers verses Toast where there hasn’t been a blood bath. It’s just a matter of the size of the blood bath.
Lastly, PLEASE KEEP HITTING ON LIQUIDATED DAMAGES
It’s important for every Toast customer and prospective Toast customer to understand the whole picture. I run into this problem ALL THE TIME.
Please mention the ultimate in payment processor pure evil. It’s located behind the merchant services enrollment checkbox, when enrolling with Toast. Merchants have no clue as to what evil lies there..
I stopped into a bar/restaurant yesterday whose sales mirrored those of your example to a tee. They’ve been with Toast for six months of the 36 month contract and don’t like it.
Were it not for Toast, they would have been an excellent prospective customer for myself and one of my trusted POS partners.
All I could do is warn the owner of the ramifications of leaving Toast, so nobody talks them into making a MUCH bigger mistake.
I typed .003 into my phone calculator, handed it to the restaurant owner and had him do the math. He said the word twenty (as in thousands of dollars) followed by obscenities.
I told him the conditions of his SaaS agreement and told him to add that number on top. More obscenities followed with the words “I’d go out of business” mixed in.
The fact that business owners don’t just tell me they have Toast and are stuck with Toast always speaks volumes.
Based on the overall affluence of their customer base and the fact that I have restaurant with bar clients in the area, I’d estimate their overall cost at 2.3%.
The $13,000 in annual savings would have more than paid for their new POS system with online ordering, order at the table, and pay at the table. I didn’t tell the restaurant owner this. That would have been beyond cruel and insensitive. I was just thinking it on the way back to my car.
Again, your numbers are right on.
Food for thought friends.
Keep up the good work!
To be fair to Toast, they will match processing rates when you onboard. You can come to Toast with any processor quote and they will match it. I was able to get them to match a 1.6% effective rate not too long ago at a restaurant with average check amounts of $50.
Uneducated customers will always be out there and they will always be taken advantage of.
Thanks Leif. Did you get “free” hardware or a reduction on MSRP of any of their other services? We would be curious to see how your rates change, if so.