If you’ve ever trawled the exhibition halls at retail or restaurant technology trade shows you’ll experience deja vu.
Because seemingly every vendor does, well, everything.
You might be thinking how on earth it could be possible for a vendor to do loyalty, and online ordering, and POS, and labor management, and reporting, and back of house, and…
The answer to your observation is actually incredibly simple
Retailers and restaurants don’t pay dick for solutions.
No, really.
Look at the landscape and count the number of public companies that exclusively serve the industry.
Now remove the companies that make money on 1) payments processing, or by 2) renting the retailer’s customer back to them in a demand side platform.
Insanely short list for an industry that counts trillions in top line US sales.
Let us know if this conversation sounds familiar.
Vendor: Hey merchant, I have a solution that delivers $1,000 in monthly ROI. How about you pay me a reasonable 20% of that value?
Merchant: How did you come up with 20%?
Vendor: Well, you know, if you look at Google, Facebook, or literally any conventional SaaS business, the implied ratio is 3:1 ROI to investment. Google and Facebook might try to average 4-5x, which is why I quoted you 20%. Don’t you pay 25% commission to DoorDash and Uber?
Merchant: Yea well I can’t afford that. I need at least a 1,000,000:1 ratio.
Vendor: Dude, what? I just looked at your payment statements and your’e paying $1,000 in monthly margin. What’s the ROI there?
Merchant: Hmm, how do you spell ROI?
Makes sense.
Here’s a real-world example.
Long before the CEO at Toast was pillaging SMB restaurants he was a VP at Acquia, a software company helping retailers from content management to marketing, with now-hot tools like CDP.
Acquia was founded in 2007 and has raised about $175M. Despite all that work Acquia earns about $200M in annual revenues so it might be worth $2B depending on multiples and CAGR.
Not bad, but for a company that’s raised $175M over 15 years that’s a loser business from any investor’s eyes; Vista bought them for $1B in 2019 and would need them to be worth $3B by 2024 for 25% IRR.
Good, but not great.
Toast, on the other hand, was founded in 2012 and will close 2022 with $2.6B in gross revenues.
That’s 10x the revenue in 2/3rd the amount of time, or 16.7x more efficient by juicing SMBs on payments.
Now you see why all the other also-ran retail vendors have to build everything in the hopes of getting retailers to pay them more than $0.08 a year?
There’s no real money coming in their business otherwise, because it’s all going to the payment companies.
And by the way, these non-payment vendors are building everything on a shoestring budget.
So of course the solutions aren’t very good.
But how can they be for $0.08 a year?
Have you tried buying a house for $0.08?
Renting a house?
Even a cardboard box costs more than that.
But somehow, without fail, retailers will demand the solution work like a Ferrari, with perpetual uptime, every conceivable feature, and 24/7 support.
For $0.08 a year…
Which is why institutional investors have learned to avoid companies that try to help retailers: there’s no money in it.
It’s charity work.
It’s all self-fulfilling because retailers refuse to get educated on the costs of their business (cuz, you know, who needs fiduciary responsibility?) then take forever to make decisions.
You realize that the 25-year old founder trying to help you improve your business left a job where he was likely making substantially more than you (because markets outside retail rationally reward value creation) and you’re just over here competing to be the poster child for Dunning-Kruger.
Amazing.
Vendors in retail should at least help themselves and start getting the tax benefits through business reclassification as 501(c)(3)s. Anyone would be foolish to prevent them from taking the tax break: it’s punishing work for crumbs. Alms for the poor, please.
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