Toast has a super power that upmarket POS competitors don’t.
Nobody ever said it was ethical, but it’s going to make Toast untouchable upmarket.
Ready?
Use SMBs as their personal balance sheet to win on price upmarket.
Toast (and a few other cloud POS companies) have eaten the entirety of the SMB POS market from incumbent POS companies.
Micros.
Aloha.
Whatever the hell remains from the Shift4 and Heartland POS rollups.
All these guys have either actively shed their SMB portfolios or are lying to the market about where they’re competitive.
That leaves the upmarket segments of merchants as yet-untapped by Toast.
Why?
Upmarket merchants:
- Require more features
- Literally depreciate their POS systems over 30-40 years and are rarely in a buying cycle
- Can’t spell ROI thus rationally expediting a POS purchase is untenable
- Must retrain thousands of employees and swap many more connected systems (labor, accounting, payroll, etc.) in any POS changeover
- Delude themselves into thinking they’re smarter than SMBs because their company has a website
- Can convince themselves building a POS in-house is a good idea
And just like the Dodo is still a pea-brained bird, albeit larger, upmarket merchants believe their vendors need to lose money serving them.
And merchants are always getting the best deal, just ask ’em.
It’s like some giant game where the players aren’t sophisticated enough to understand the consequences, let alone know they’re players in a game.
Restaurant 1: I’m getting my POS for $100 a year.
Restaurant 2: Oh yea? I’m getting mine for free!
Person with IQ > 75: Um, you realize that you’re willing to put your entire business at-risk because your vendors can’t support themselves financially?
Restaurant 1: I know! Isn’t it great? I heard that my vendor just had an abortion because she couldn’t afford to have any more kids!
Restaurant 2: Well my vendor gave himself a vasectomy with a butter knife because getting an abortion at some point down the road would be too expensive!
Person with IQ > 75: How good can you possibly expect the product or service to be if your vendors don’t make any money? Think about this… would you expect a free car to reliably get you to work? Would the cheapest home be the best one for your family? You going to choose the lowest priced doctor for your open heart surgery, too?
Restaurant 1: I did think about it. That’s why I chose Toast. It was so cheap. I really worked the salesman down on price. Man I’m so awesome. Nobody gets a better deal that me. It’s hard being this smart.
Restaurant 2: Nuh uh, I’m smarter than you. That’s why I got my POS for FREE. I’m not even paying $100 a year. I really ground Toast down. Nobody ever gets the better of me because I’m smarter than everyone.
Person with IQ > 75: Fantastic. So tell me what you think about Toast’s latest 10-Q?
Restaurant 1: How do you spell ten-cue?
Restaurant 2: Every restaurant knows that Toast doesn’t make money because restaurants are such good negotiators so I don’t even need to pay attention to your comment.
For everyone with an IQ over 75, here’s how this will play out.
Toast’s SMB merchants are at Toast’s whim. Toast can extract price whenever they want through the payment stream.
This is, above all, the danger of bundling payments with your POS, and it is inevitable that your POS provider takes price on payments.
Inevitable.
Because retail merchants are “the smartest”, the POS company knows that they cannot transparently charge the merchant more for software without some reprisals.
So instead, the POS company avoids the friction of taking price directly by increasing their revenues through the payment stream.
Sometimes they increase costs under the cover of darkness (hello legacy payment bros) and sometimes they are so confident that they just lay their d*cks right on the dinner table.
Flop.
In the latter case, the merchant has a choice.
One, they grab utensils and start to eat the d*ck.
Two, they say “no thank you” and pass the plate of d*ck to their customers.
Sometimes the customer will be offended at the plate of d*ck, and sometimes the customer will consume the d*ck and be none the wiser.
It often depends on the size of the d*ck and how big the d*ck is relative to the total meal the customers is expecting to eat.
But what you have to love is that every hapless citizen is being offered d*ck at one point or another because, you know, #paymentsvalue.
Just going about your day when, wham! D*ck to the side of the face.
Now, slamming your junk on the table is a move best attempted with SMB merchants.
Why?
It’s not that SMB merchants are any smarter, per se, but it’s that they lack the resources to fight back.
The risk of unfurling your d*ck at the table of a larger merchant is that the larger merchant might actually know someone who will recognize the signs of sexual assault.
Not guaranteed, of course, but definitely a much higher probability.
Woah, woah, woah! Get this d*ck off my table now!
I will take a picture of this d*ck and I will write a reporter I know at the Wall Street Journal!
You’ll be hearing from my attorneys unless this d*ck goes back in its pants immediately!
Possible reaction from upmarket merchants when d*cks come flying out
Regardless, Toast will be getting all their payment fees from their SMBs one way or another.
And this becomes a balance sheet that Toast will wield to convince those upmarket merchants that “they are the smartest and nobody gets a better deal than they do”.
How does Toast make money on upmarket merchants if they’re winning on price alone since merchants can’t rationally assess value?
In the near term the d*ck is under the dinner table.
It’s still out of its pants, but it’s also out of view.
Under the table, the merchant doesn’t know what’s happening. They just feel their feet getting wetter and warmer, but have no idea why.
But Toast sure-as-shit knows what’s going on.
Here’s a graphic to explain.
Toast will make their money upmarket by charging third party solutions that larger merchants need to run their businesses.
These best-of-breed providers are being abused by merchants and are barely able to make ends meet.
Yet unlike Toast, third party solution providers don’t have a way to extract price for delivering their solution.
But that’s not Toast’s problem.
Toast will demand that these third party providers remit to Toast non-trivial integration fees.
In this way Toast can make several thousands of dollars a year in EBTIDA per upmarket merchant location without having to build and support the third party software in the short term.
(Eventually, we posit, Toast’s integration fees will become so onerous that it will be uneconomic for third parties to support Toast merchants, and Toast will either push down third party valuations and acquire these vendors for cheap, or just full-on build a competitive offering and push the vendor out altogether. Classic Toast ethics.)
In the long run, however, Toast’s d*ck is back on the menu.
We expect Toast to do what Lightspeed most recently executed and start charging gateway fees for larger merchants that bring their own processors.
That’s not to say that there aren’t real costs in supporting multiple payment providers, and that unifying to a single provider is technically easiest.
It just also happens to be the most risky for the merchant.
But again, that’s not a Toast problem.
We wouldn’t be surprised if Toast determined that a 75 bps gateway fee was necessary for larger merchants who bring their own payment provider.
What’s that? You don’t think that’s fair? And it’s a pain in the ass to move POS systems?
Well, in that case just use Toast payments at a reasonable 75 bps of margin.
Because Toast will be getting 150 bps of payments margin on their SMB customers through gluttonous servings of d*ck, and you’re not special.
It’s not Toast’s fault that you’re trying to do things like prevent your brand from the kind of publicity that comes with handing d*ck out to children on holidays.
That’s a you problem.
Maybe you don’t deserve Toast POS.
What?
If you hold your nose and serve Tiny Tim some d*ck the POS is “free”?
How can you resist.
You’re the world’s best-ever super genius negotiator, after all.
Take some d*ck with your rickets, Timmy.
Toast has ten-cues to beat.
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