Archive | January, 2016

Are POS VARs Going Extinct?!

28 Jan

One of the niceties about being Switzerland in the worlds of Point of Sale (POS), Payments and data, is that we get to see a little bit of everything. Who’s working with who, who abhors who, and all other levels of gossip that would make a sorority girl ecstatic.

What’s become increasingly clear over the past six months is the rapid evolution – or regression, depending on your perspective – of the dealer network in the POS business. If you’ve found yourself reading this article without knowing what I’m talking about, I’ll provide a quick background.

When POS companies want to get their product into the hands of customers, they have traditionally established a channel of dealers or value added resellers (VARs). VARs are sometimes limited to specific territories or verticals; in other cases it’s the Wild West. The VARs earned their living selling pricey hardware and software – sometimes in the literal tens of thousands – upfront, and offering hourly services on the backend.

This is where things get interesting. For about $1,200 upfront and $50 per month, today’s merchant can acquire a new cloud POS system (note: I use the word “cloud” loosely because in reality the system may have a local data server and sync to the cloud to back up data; some people will get offended if I do not caveat this). Some in the industry will argue that cloud POS is immature and lacks necessary features to be a “real” POS. There is some truth to this, but I must be forgetting how incumbent POS systems had all the appropriate features on day one. Let’s all just admit that the feature issue will cease to be a legitimate problem in 12-18 months for competent cloud POS companies.

The new pricing model does not leave any room for a channel to earn money on the upfront hardware and software. In some cases we’ve even seen the hardware and software sold at a substantial loss to the POS company just to earn the merchant’s business. Whether this is sustainable after venture capital leaves the industry is up for debate. Moving on…

The service model VARs previously relied upon is also slowly eroding. Cloud systems are fundamentally easier to service. Did your tablet break? Run to Best Buy and pick up a new one. Software glitching? Let a support representative log in remotely and diagnose the problem. System crash? If the POS isn’t sending data to the cloud the support rep can get working on the issue before a traditional support rep would even know there was a problem.

Some readers will want to nuance the above scenarios to death. I get it: the new cloud model can’t solve EVERY problem remotely. But when it can’t, there are great third party service providers, like Boomtown, that are stepping in. Pricing is transparent, service convenient, and better yet, because Boomtown is operating across thousands of installations, they’re collecting data to uncover how to fix problems faster.

At this point it should be clear that a VAR’s traditional revenue stream is fading. With tens of thousands of VARs across the myriad of POS products in market, what does this mean?

Candidly it means that most VARs won’t survive. A 20+ year-old distribution model is being radically transformed. Businesses that were built on a model of expensive hardware and pricey support are not structured to thrive in a lean environment. As merchant demographics change in favor of younger, tech-savvy solutions, it’s more harrowing. Taking it one step further, the path to survival requires skills and knowledge that the majority of VARs neglected to acquire while they were gobbling (relatively) fat margins on their legacy business models: sales.

It sounds counterintuitive, that a dealer channel predicated on selling POS would be so bad at sales, but that is indeed the case. If there’s no margin peddling POS anymore, a VAR must learn to sell products that compliment the POS. This is not unlike the payments industry, where payments processors beat each other up selling a commoditized service to the detriment of margin for the entire industry (Square and First Data, anyone?). Now they’ve expanded into data services andacquired POS businesses seeking growth.

VARs must become knowledgeable on the industry as a whole and apply what that means to the end merchants. This entails understanding and selling mobile and ecommerce; data and analytics; guest management and loyalty. VARs that can do this successfully need not worry about their POS overlord selling these products directly to the end customer. Those that can’t? Godspeed.

The “Butts in Seats” Fallacy

25 Jan

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In 2008 the US economy crashed. People were freaking out… especially brick and mortar business owners. As sales dipped, local merchants flirted with the most dangerous marketing device ever created: the daily deal. The daily deal, while innocuous on the surface, was probably the most detrimental action any business owner could have taken. Think about the math behind it: a third party sells your product, which normally costs $100, for $50. THEN, the third party takes half of that ($25). The business owner earns $25 for a $100 worth of product. Keep in mind the average business owner eeks a 5% margin on average. In order to reach breakeven on the marketing, the customer who bought that $50 daily deal would need to return – at full price- a staggering 14 times! You start to think about how many times the average person eats out per month, the kinds of customers who are interested in 50% off, and these metrics look ever worse for business owners.

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So how could a business owner overlook this straightforward analysis and execute a daily deal? Simple! Business owners commonly fall for the “butts in seats” fallacy. The “butts in seats”, or BS as we like to say, is a notion that as long as someone comes through the door, it’s good for business. We disagree with this fervently. Yes, that customer will result in quick revenue. But if that customer is not served properly, they will cause a massive drop in revenue over time.

Imagine you convince a new customer to come to your business and you serve them a foul tasting dish. That customer will tell all of her friends how horrible your food is. Or perhaps this new customer orders and doesn’t see the server again for an hour. Again, the patron is leaving with a negative impression of your business. Or you attract a customer at such a ridiculously low price point that they cannot associate your wares with your full asking price.

The long and short of it is that success is not built over night (unless you get incredibly lucky like Facebook). Even Google’s founders tried to sell the company to Yahoo for less than $1M. It takes consistent, methodical and disciplined action to grow. If you look at the histories of large retailers they didn’t go from $0 to $1B in a month… which is what a lot of the “butts in seats” vaporware promises.

That is not to say that marketing efforts do not work. Quite the contrary! Smart marketing takes into account the true value of customers, the cost of the campaign, and an understanding of your profit margins to know when campaigns should be above water. Yield management technologies employed by hotels and airlines have perfect this beautifully, and there’s no reason those learnings cannot be harnessed for brick and mortar merchants.

Business owners need to critically reexamine the “butts in seats” philosophy. What good is a gaggle of new customers if you are not profitably serving the customers you already keep? In larger business, you’re going to have a hard time selling the CEO on a bigger budget if your current operations are not performing well. “But we just need more butts in seats” will get a lot of groans in the board room…

How SMBs Beat Enterprise to the Best Tools

6 Jan

Every other day it seems I read about a startup disrupting or democratizing something. In essence, these startups aim to change the status quo (hopefully for the better) by providing people and businesses with products and services that they might not otherwise have had. Where the flattening of this curve really takes place is in the long tail, where expensive things like cloud infrastructure and data analytics are becoming cheaper and more accessible.

While the decrease of price is generally a positive, there’s something else that’s not being talked about: speed. When a startup builds a product, they need to prove it will sell. Fast. Small businesses are filled with entrepreneurs, risk takers, and visionaries. They are quick to test something, and even quicker to give you feedback. And for a fair price, they’ll pay you.

Larger enterprise accounts are the pretty girl at the dance. They want you to customize features. They want to hear from 10 other large customers. They think they already know everything, that’s why they’re big and you’re small. Every communication is lined with the subtlety of, “… maybe we’ll just build it ourselves.” Of course the person at the top of the ladder is likely not the person who had to churn out 80 hour weeks building the business, but that doesn’t matter. They are in control.

This is why we continue to see some of the newest, coolest products entering the market from the bottom up, especially in retail. We predict that this trend will aggressively continue with the growth of cloud and data availability, and smaller chains and independents will have better tools than their enterprise counterparts in 2016. Knowing what we do about the systems and tools some of the large enterprise retailers/restaurants use, this is a low hurdle to jump.