Archive | August, 2016

What’s So Different About POS in Europe?

29 Aug

Perhaps our favorite outcome from writing these posts is that we get to learn from people that know substantially more than we do. Thus far we’ve mostly discussed payments/POS dynamics in the US markets. Since there is a world outside America, we thought we could learn from someone abroad and write about that.

Nobly is one of the major cloud POS companies serving the European markets – though in Europe cloud is traditionally marketed as EPOS (electronic POS). Others in the European market are Intelligent POS, Orderbird and iKentoo. Nobly’s co-founder,Sebastiaan Bruinsma, spent some time with us to tell us how he sees Europe playing out.

Sebastiaan makes it clear that Europe is a few years behind the US. He says that US cloud POS companies like Revel and Shopkeep might have been Europe’s (or at least the UK’s) initial exposure to the concept of cloud POS. Revel and Shopkeep were founded over five years ago and began penetrating the EU with serious brand dollars two years later. By contrast, the European cloud companies may have started in 2012 but were mostly tinkering with the idea of cloud at those stages.

Just like the market played out in the US, smaller European merchants first embraced the idea of cloud. “Independent merchants were the first to catch on, with larger chains making cloud part of their strategy over the past 24 months,” comments Sebastiaan.

Another notable disparity is this “issue” of features. In the US, legacy systems love to trumpet their features. Features are but operating system nuances cobbled together over decades of customization for one-off merchants.

Sebastiaan says he’s never had to worry about such complaints across the pond. “Our customers have never had issues with the ‘not enough features’ argument that plagues US cloud companies.” Does that mean that Nobly has built a more robust feature set than US cloud companies, or that European merchants prioritize the value of cloud over a scoreboard of features? You decide.

Outside the North America independent restaurants are more common. This is a chart of restaurant traffic from Statista that proves the point.

As markets skew more “mom-and-poppy” they become less comfortable buying solutions from third parties in a foreign, distant land. But that’s not to say that they won’t buy solutions from someone doing inside sales in their homeland. Sebstiaan notes that Nobly, “Rarely does in-person installs. The systems are so simple to set up these days that we can mail our solution to a customer and they can set it up without much trouble.”

“But,” he notes, “having a local office makes a huge difference. Customers here want to validate solutions first-hand, and that means they put a real emphasis on local support.” Accordingly, Nobly was the first POS company to have a direct communication system with merchants. Using live chat, Nobly troubleshoots issues much faster than traditional “24/7 email support” and has become the highest rated POS system on Trustpilot.

But perhaps the biggest difference is payment company involvement.

Unlike the US dynamics, payments companies are doing very little in the POS markets in Europe. Few POS companies are getting any payments referrals today.

Why such a stark difference from the US, where payments companies are going so far as to buy POS assets? Speaking with several payments partners has helped us craft a few theories.

1. Hefty regulation. Europe has put a ceiling on processing fees as part of theIntercahnge Fee Regulation, dampening innovation in the market. The result is fewer new products in the market and a reluctance to move cloud POS.

2. Creation of the Single European Payments Area (SEPA) triggered consolidation. Processors had to heavily invest in new platforms to meet international rules and the only way to survive was with large market share. This could shift focus to market consolidation and not new product development.

3. Merchant acquiring earns 25% of the revenue as issuing does, due to additional requirements of servicing, billing, etc. Thus banks are outsourcing their acquiring business. With less money for acquiring, businesses focus on other efforts.

4. EMV regulation has created a reason to revisit POS hardware domestically. In the EU, EMV has been in-market for 12 years. Acquirers already make good money on their hardware and don’t need to replace it.

5. VAT and high taxes mean merchants prefer cash to traceable cards, leaving little incentive to use a forensic cloud POS.

Sebastiaan shared his own thoughts. “In the US, merchants are actively searching for cloud POS so ISOs and payment partners need a solution to compete. In the UK/EU, non-integrated PDQ (dummy terminals) has been the norm for years. Merchants can comfortably run any POS and separate PDQ.”

Either way, Nobly is serving up customers from the independent merchant to the 500-unit chain. Although Europe may be behind the US POS markets today, I’d bet they both end up in the same spot over the next 5 years: everything is moving to cloud.

About Nobly

Nobly was founded by George Urdea, Royce Fullerton and Sebastiaan Bruinsma. The Nobly system is cloud-based which gives merchants the power to change product features in 100 stores at the press of the button. All key data syncs instantly and updates are carried out with ease. Nobly acts as your store’s Back Office and can help you run nearly every aspect of your enterprise by handling all the time consuming tasks like inventory management and data analytics quickly and reliably, allowing you to concentrate on the day to day running of your business.

What Happens When POS and Payments Companies Say They’ll do Everything

29 Aug

Intuit is one of my favorite brick and mortar conquest stories. The founders not only built a large business (currently valued at $28B), but they had to struggle to make it work – who doesn’t love grit? In Inside Intuit, the company’s unofficial biography, authors Taylor and Schroeder detail the low points founders Scott Cook and Tom Proulx slogged through to make the company work.

One reason for Intuit’s ultimate success was their rapid ability to define who they were, and who they weren’t. Scott and Tom were shrewdly inclined to draw a smaller box around Intuit’s core capabilities, and leave the rest for others to work on.

In 1990 Intuit started work on a small business bookkeeping product codenamed “Snoopy” – remember, Intuit was vigorously struggling against Microsoft during this period so everything was under wraps. As development languished from “feature creep” under Ridgely Evers, a fellow Intuit executive noticed this interesting product called QuickPay from an individual developer named Mike Potter. Potter had effectively hacked the Quicken code to add payroll functions for small businesses.

Intuit decided to license QuickPay instead of building it. The result?

Quickpay, retailing for $59.95, shot onto PC Magazine’s top ten sellers list. The high margins, low marketing costs and rapid sales convinced everyone at Intuit to pursue the buy vs build approach going forward. Sounds logical, right?

Unfortunately most payments and POS companies are not scholars. That something like this played out in such a riveting parallel 25 years ago is totally lost on them.

Want an example?

Womply leverages payments data streams in addition to scraped data from merchant social media pages. Womply has been partnering with leading payments companies to tap merchant payment data and offer merchants better analytics products. These efforts mean the payments company does not need to build and support such products and can instead collect effective profit from the Womply relationship.

How about another?

Swipely (now going by Upserve) has built POS integration agents that extract POS data and create useful analytics for upper-end restaurant merchants in a superior user interface. Since Micros and NCR (and virtually every other legacy POS company) don’t work with third parties, Swipely has partnered with Micros/NCR’s POS resellers to sell their product. Resellers can offer increased value to their clients, earn new revenue for themselves, and know the POS company will never offer a remotely competitive product for the same value.

These two “startups” are proof-positive that payments and POS companies have an impossible time creating useful products outside their core competencies. If that weren’t true, merchants would be seeing products of similar quality directly from their payments/POS providers; but they’re not.

Many payments and POS companies – ironically, just like the merchants they serve – continue to operate under a delusion that ignores financial facts. I’m going to borrow from a very well-constructed argument that can be found here in its entirety.

The first argument is that selling new products (i.e cross sell and upsell) to existing customers is a much cheaper source of new revenue than acquiring new customers. Further, the cost of acquiring new customers is only increasing.

This chart from 2013 Pacific Crest survey data shows that for every $1 in new customer revenue, it takes $0.92 in acquisition costs. By comparison, it only takes $0.17 to acquire a new dollar in revenue from an existing customer. The cost of making $1 more from existing customers is just 19% of the cost of making $1 from new customers.

But these acquisition costs are only increasing as markets get more competitive.

The same survey taken in 2015 shows that it costs $1.18 to acquire $1 in revenue from a new customer, and $0.28 to create $1 of new revenue from an existing customer. This is likely the result of gluts of venture capital, and could be even worse for commoditized businesses like payments and POS. At a minimum it should quantifiably explain payment companies’ entrance into POS: unless a merchant stays with them for a considerable amount of time, they’re losing money on every new merchant acquisition.

The second argument is that upsells and cross sells can combat churn. Churn is the number of customers who leave your service (i.e. stop paying) over time. Startups measure this metric religiously. You can have the world’s best growth but if your customers are dropping off like flies you’re never going to earn a profit.

If the expanding revenue from new customers > the lost revenue from churn, you’ve just produced a glorified negative churn metric.

POS companies should draw an ownership box that looks like this:

Instead, they draw a box like the one below. If you’re having trouble reading everything in there you’re not alone. Visit the websites for Micros or Aloha if you want to see great examples of feature creep.

I honestly have no idea how responsible payments and POS companies ignore these data to their own demise. Intuit, which is nearly 6x the size of Micros, 7x the size of NCR, 2.5x the size of Global Payments and First Data, 3.5x the size of Vantiv, and 8x the size of Square has drawn a very neat box around its core competencies. Intuit is avoiding development expenses and support costs while simultaneously bolstering the quality of its offerings and net new revenues. The only explanation I can come up with is that payments and POS companies must be suffering from bloated politics and egos. Intuit would not approve.

Why POS and Payment companies should be upselling more

29 Aug

It’s no secret that churn is a huge problem in brick and mortar. Depending how you splice the numbers, it’s between 25% and 35% annually. Some of that is avoidable but a large portion is not.

I’ve always held a hypothesis that there exists a way to substantially reduce churn. Unfortunately, I could never find numbers to test my hypothesis. Until recently.

Sammy Abdullah of the DAN Fund has published numbers for public companies. In his analysis he takes a position that successful companies do a lot of upselling to existing accounts, and those efforts are rewarded handsomely.

He breaks out the three benefits of upselling as follows:

  1. Shorter sales cycles! You already have a relationship with the account and know the pertinent contact information. Selling something new to an existing account is mucheasier than finding a new one.
  2.  Churn reduction! By proactively having conversations you’ll learn more about how existing accounts are performing, and possibly find a way to keep accounts from churning.
  3. If you successfully upsell, you are now stickier and could prevent an account from churning. You’ve become a single source for multiple points of value.

Before I dig into Sammy’s data, his rationale should sound familiar if you’ve at all followed POS and payments over the past two years: payments companies are purchasing or reselling POS solutions to their merchants. Why?

It’s much harder to yank out a POS – with all your business data and business processes – than it is to switch payment processors. While POS might have some accretive revenue impact for the processors, it’s mostly about reducing churn and ensuring the processing revenues (where processors make their money) stay where they are. Yes, in theory the payments channel will start to become better educated and offer more value around the POS, but that’s not reality today.

Net retention is defined as revenue at the beginning of a period + new revenue from existing customers – revenue loss. If this is greater than 100%, it means you’re selling more to your existing account than you’re losing in churn. If you look at the companies that are disclosing numbers, you’ll observe that net retention is improving – meaning all these companies are focused on increasing sales per customer.

If we go to the right side of the table we see that a number of these companies are generating significant growth from upselling. Interestingly, those companies that derive a large portion of their growth from upselling have net retention rates > 100%.

In other words, upselling means they’re losing fewer accounts!

There is something to be learned by a growing trend of public software companies: upselling works. Since POS and Payments companies have dangerously high levels of churn, they should be paying attention. But it’s not exactly easy for most of them to fix the problem.

First, as I’ve argued ad nauseum, POS and Payments industries are not high margin businesses. Compare Visa to First Data, or OpenTable to NCR. Whenever you’re in the business of acquiring merchants, margins go to shit. OpenTable does some merchant acquisition, but it’s a differentiated service and the only large reservation platform on the market. So while their profit margins were low in the early years, they now benefit from the margins a software business brings.

There are also plaguing cultural issues. Being good at payments or POS does not a product business make. You need engineers, product managers and people who understand the myriad moving pieces of the technology landscape. It’s really hard to find people of this caliber that want to work at a legacy payment/POS company. Yes, you might entice them with a high salary and the promise of a changing landscape (the latter is more true than it’s ever been), but one week in and they’ll realize the organization is culturally-backwards and quit.

Still don’t believe that POS and payments companies have a hard time with non-core efforts? Here’s a list of failed products these industries would soon forget.

  • Heartland built Prosper POS, a homegrown effort that took 3 years and $7M but ultimately failed.
  • Heartland, making a strategic play in a POS world it didn’t quite grasp, acquired Leaf POS for $20M. The investment was written off within a year.
  • First Data built Offerwise, a card linked offering platform. It flopped for a number of reasons, including lack of POS integrations and proper merchant onboarding for the rebates.
  • First Data launched eGift social to move gift cards over Facebook. Facebook was not involved, integration was never complete and the customer journey a nightmare.
  • Perka, a loyalty app acquired by First Data, was never able to make meaningful penetration as the payment behemoth couldn’t convince merchants it knew much outside of payments.
  • In the same vein as Heartland, First Data private labeled Microsoft Dynamics POSin 2007 and sold it downmarket. They had a 100,000 unit sales projection but purchased it all back, killing the POS effort in 2009.
  • NCR built Guest Manager, a reservation system, that has largely failed with paltry penetration numbers and no consumer platform.
  • NCR’s Radiant bought CIM, an accounting tool for college seating. The product was a loss leader for market penetration but NCR stopped product development and the product fell too far behind to be relevant.

That doesn’t mean that the payments world always looks likes this. We believe POS companies achieve higher levels of profitability in time with data availability, and based on the nature of the data business POS and payments companies will see a natural merging (more rationale on a coming post). These two charts help provide a visual for how POS companies spend their money now.

Margin: <10%

As POS matures, it will create more free cash flow for itself. How it invests this money remains to be seen. It could start developing the very products it needs to upsell, but there’s always a risk of “not invented here” that limits the business to subpar, non-core products. If POS companies go the way that young technology companies go, you’d expect an expense chart like the following.

Margin 35%

How does this happen? Let’s walk through it:

  1. Compliance costs increase as a percentage of overall expenses but the net dollar amount stays the same. ISVs are not spending more on compliance than they are today
  2. POS becomes commoditized so there are fewer people needed to hammer on features. Since third parties will be making many of the useful features, development shrinks
  3. As you let people go, operations and overhead shrink as well
  4. Most of the expense growth comes from sales. The dealer channels dry up as merchants start buying commoditized POS products directly on the internet or from payment referrals. This line item expense now assumes significant spend on search engine optimization, email marketing and possible referral fees
  5. Services expenses fall since the POS gets easier to support remotely. Internet-enabled systems allow for remote diagnosis and repairs

And the margin grows more than three times as the ISV starts earning significant revenue from the third parties that they’re relying on for feature enhancements.

Today though, no POS company is truly operating as a data company. That’s because we’re still in this transitory period. If POS and payments companies want to reduce churn and create significant revenues on additional, non-core products, they should source those products from a best-of-breed provider. I’ll leave it to them to figure out where to turn, but the reason for doing looks more compelling than ever thanks to Sammy’s work.

Why the POS Industry Will Consolidate

10 Aug

The worst kept secret is that POS has become commoditized. The cost and time to bring a POS solution to market is rapidly approaching a relative zero. There are the cloud entrants, the payments entrants, and the retailer’s nephew at Carnegie Mellon who needs to do something for his master’s program.

In the years since POS arrived, the market has grown into an absolute spattering of solutions. I’ll admit I’m not nearly as intelligent on the retail side of the market as I am in restaurants, but there are nearly 200 known restaurant POS softwares in the US. I venture there are hundreds – if not thousands – of others that are so obscure nobody has bothered to track them. And given that retail is much more stratified than food service, there are most assuredly thousands of retail POS softwares.

With so much fragmentation, one has to wonder if the market will ever see anything close to an 80/20. Constant churn (25% a year in SMB-world) means there are always new entrants looking for solutions; vast segmentation – from small pizza shops to large pet stores – mean fragmentation abounds.

But we don’t think that will last much longer.

The POS is becoming a connected device, as much as legacy POS vendors refuse to acknowledge this reality. Viewed a different way, it’s been said that POS – and really brick and mortar – is having its internet moment. Yes, it’s over two decades late to the party, but it’s finally showing up.

As a connected device, POS will follow the trends of other connected devices before it and consolidate. This happens to all commoditized business over time, really: he with the most of the commodity can suppress prices and force competitors out of business. For connected devices, it just happens faster.

The below chart from Statista that makes the point patently clear.

What started as a frothy mobile phone market has (relatively) quickly consolidated into the hands of two major players: Apple and Google. But the learning here isn’t that commoditized industries consolidate over time; rather, it’s why the POS industry is following suit.

At its core, what is a mobile phone? It’s a way to conveniently enable communication. Some communication is handled by the manufacturer – like the ability to make a call, or perhaps send text messages. More advanced forms of communication can be handled by third parties via integration to the phone’s operating system. In a win-win, Apple and Google don’t have to develop every feature set; consumers acquire the best and newest communication features; third parties gain access to new customers; and Apple and Google get to sell more phones by trumpeting advanced communication features (i.e. apps) available on their devices.

At the risk of strategic oversimplification, Apple and Google are leading the mobile phone market because they’ve spent considerable time fostering an ecosystem of partners built on symbiotic relationships. Consequently, consumers have come to expect a robust ecosystem that enhances the phone’s value.

As POS systems become more open, the same phenomena will catalyze consolidation. Let’s walk through an example:

We’ve already discussed online ordering becoming a significant part of a merchant’s revenues. Some estimates put that number as high as 30% in the next five years.

Now, in the mind of a legacy POS company, all that matters are “features”. They believe that the merchant will ignore the opportunity to drive 30% of their revenues with an open POS system in favor of a POS system that adds a custom, 30-second printing delay between pressing the send button on their register and their kitchen printer. Not only that, but the merchant will pay MORE for that privilege.

News flash: for tens of thousands in potential monthly revenues, that merchant will figure out how to deal with his feature request for a 30-second delay-print function.

Merchants that already use a POS system might find it harder to replace their clunky, expensive legacy machine since they’re so invested in their current solution. But the math says that, over four years, the market will have a complete turnover. And at every new business opening there’s an opportunity for that merchant to acquire a system that enables communication with the outside world, driving the merchant’s chances at success through marketing, analytics and a proverbial laundry list of solutions that closed, legacy systems cannot offer.

And this is the phenomenon that will drive consolidation: third party ecosystem connectivity, just as it occurred within the mobile phone industry. But those third parties will not work with everyone building a POS. For instance, if you’re a vendor trying to sell something to Wal-Mart, you need a universal product code (UPC); if you don’t have one, Wal-Mart and other retailers won’t take you seriously. Third parties are not going to work with POS systems that have proven inflexible or undersized.

As it becomes more widely-acknowledged that POS is a commoditized product, it’s the value of those third party integrations that will separate the systems – not core POS features. When a future merchant is being sold a POS, expect questions like, “Does this connect me to Google? What about Uber? Apple? Can I get analytics from IBM’s Watson? How are Yelp reviews gathered? Is there automated marketing? Who’s running that?”

In summary, you have two forces creating POS consolidation:

1) The third parties, who add the value to POS in a commoditized world, are going to be picky with whom they work. Meaning those unchosen POS companies will be on the outside looking in.

2) The merchants, who are already discovering the value of third party solutions, will be expecting third party ”features” to be standard attributes of their next POS purchase. Trust me, I’ve heard plenty of people lamenting deals lost on these dynamics already.

The POS industry is not paving some new road through fields of destiny: it’s simply following the path of industries before it. What I share, then, is not voodoo prognostication but observations and learnings from historical events applied to today’s POS market. Now you’re welcome to disagree all you want, just don’t do it from your Apple or Google device.

Note: I don’t accept random Linkedin connections. You can write me at Jordan [at] whatsbusy [dot] com if you need to reach me – thanks!

Are These the Most Important Takeaways from RSPA’s RetailNow?

10 Aug

Last week RSPA held its annual RetailNow conference in Dallas, Texas. In terms of brick and mortar technology, it’s probably THE conference to attend. It has a healthy mix of technology providers and their distribution channels. Lacking would be the end merchants themselves, though there are shows for that (and I truthfully lament anyone going direct).

Throughout the show I heard several rumblings, and now that the show’s over I can objectively attest that my own observations confirmed industry gossip.

The first observation is that there is no coming generation of POS reseller (VAR). There are a very small number of family dealerships that are transitioning ownership to the next-generation family member, but there are many more that could not find someone to take the reins. One VAR professed the amount of cajoling he lathered upon his son only to be rebuffed.

Tom Elliot of, who places people in the POS industry, confirmed these observations at a broader scale. “It is financial…” Tom sees many of the next generation coming into the industry through payments and starting their own Independent Sales Organizations (ISOs). Which leads me to my next RetailNow observation.

POS is becoming payments. Last year there were ~10 processors that exhibited at the show. This year, by my count, there were 25. There may even be another handful that attended silently. Payments companies make substantially more money than POS companies, and one need only follow the money to see how this plays out.

Payments is dipping in the POS waters to reduce churn in its core processing business. They’re now either closely partnering with, buying or building their own POS systems.

If nothing else the sheer scale of the payment sales forces means that more merchants will first learn about POS from a payments provider rather than a traditional POS VAR.

How else do you think First Data’s Clover has grown into more than 40,000 merchants in under 4 years while legacy POS companies are lucky to grow 1,000 merchants per year? If you think the lines are blurring today, wait until data markets come to fruition.

What can we infer from these observations? Nothing that we haven’t discussed previously.

  • POS will be sold online via SEO with help from payment referrals.
  • VARs will become a rare sighting as the money in legacy POS dries up. The ones that survive will focus on larger accounts and consulting services.
  • POS software becomes more stable, allowing remote diagnosis and repair. Hardware can be drop-shipped and delivered in under 24 hours. Merchants that need faster/better support will pay for it but they will only be merchants that are less price sensitive (think revenues > $1M/year).
  • Payments will swallow POS over the next decade, especially when the unit economics of data get proven out. Follow the money!

Note: I don’t accept random Linkedin connections. You can write me at Jordan [at] whatsbusy [dot] com if you need to reach me – thanks!

What Revel’s Talks With IBM Mean for Cloud POS

10 Aug

While attending RSPA I learned that IBM was in talks to acquire Revel. It was a strange coincidence that the story broke at the exact same time Bill DraperBill Bradley and I held our RetailNow session where we openly discussed the impossibility of continued financing for the large, venture-backed cloud POS companies.

So what’s happening?

First, there’s a drastic change in “venture” capital. As I’ve opined before, “venture” has become growth equity (i.e. low-risk money) that’s simply fooling financially-naive founders otherwise. Where “venture” previously invested in small teams with big promise, they now look at mature companies with high profitability and high growth.

Cloud POS companies today are either not growing fast enough or are not profitable enough to continue raising private money. But we should step back to better understand their conundrum.

“Venture” capital requires large exits to make returns for their investors. The rule of thumb is that you need a clear path to reach $100 million in annual revenue in three years from the first day you take venture money or it’s simply not money worth taking. The $100M ARR might sound arbitrary, but it’s the revenue needed to IPO a company in today’s climate. Founders who think they can achieve this scale are frequently lured by increasingly higher valuations proposed by “venture” investors with little attention paid to the downside should expectations not be met.

The “venture” investors are competing against conventional growth equity funds so they’re driving up valuations to get founders excited. But reaching $100M in ARR in three years is basically impossible unless you’re a once-in-a-decade company like Google or Facebook. Therefore, the majority of founders are pretty much signing up to eat crow.

Now as it relates to cloud POS, investors watch for signs that their investments are not going to reach that magical $100M ARR mark. When those signals become clear, the “venture” investors start looking for an exit immediately. This averages out to a holding period of five years per venture investment: those that can reach IPO might be held for 6 or 7 years where the flailing startups are sold quickly.

What we see with the older – and larger – cloud POS companies is a history of big financings but an apparent lack of time to reach expectations. First money at Revel came in May of 2011 and has now totaled $127M. If we do some math we’ll see that Revel is past that five year average holding period. Is Revel earning close to $100M in ARR?

The most likely answer is no, and neither can it raise more private money. The odd timing of its last round of financing in August of 2015 tells us something strange is going on.

Revel isn’t alone in this either. Shopkeep, which has raised $72M since 2012, will find itself in the same boat over the next 18 months. My back-envelope math puts Revel at $40M ARR and Shopkeep at $30M. Caveat: processing revenues could impact these numbers by 50%.

Why IBM would want to buy Revel is a more confusing discussion. IBM is trying to get more into software, services and data, much like GE and every other company that realizes hardware is hosed. No idea why IBM sold its POS assets when it could have easily built data replication to turn that hardware business into a software, services and data opportunity on top of a much larger merchant footprint than Revel represents. What I do know is that 70% of M&A fail to achieve expectations, and should IBM buy Revel it will likely be mothballed to irrelevance. Watch what’s happening with Oracle and Micros and ask their customers and dealer channels if that’s been a good thing.

A lot of POS revenue woes could be fixed with cross sell and upsell, but “venture” investors – who have no idea how brick and mortar work or they wouldn’t put money here to begin with – are making their companies focus on the wrong things. I’m writing a few posts that detail the immense value in cross selling but don’t have time to squeeze it in here thoughtfully.

What we expect is a liquidity event for Revel in the next 12 months, with Shopkeep sometime in the following 12. It’s doubtful to be an IPO and will more likely be a sale, merger, or implosion of epic proportions.

How these go down will have massive impacts on the industry at-large.

Our calculus says that investors have had their fill of POS for the time being. The lack of growth and apparent struggles of any cloud POS company to reach IPO in a reasonable timeframe has the smarter investors squeamish (though one could argue the really smart investors never put money into brick and mortar to begin with). Any publicized outcome short of IPO will keep money away for a long time.

What this could mean for the POS industry is a (brief) return to increased POS prices. The legacy POS providers have long-argued that cloud POS prices are being suppressed by investors in a race to acquire market share at the expense of margins. No doubt there is some truth to this.

But it’s also wildly foolish. Technology is changing with or without external investment. Investment speeds up the process, sure, but you cannot deny the internet has had great impact. When was the last time you bought a computer at a local store, or used a paper map to route your way?

There is zero reason why brick and mortar should not benefit from the internet

The connectivity the internet brings will drop POS prices for a myriad of reasons: cheaper software, cheaper hardware, better service and support and new business models that create revenue elsewhere. Each one of these could merit its own article. That legacy POS providers refuse to give their customers this value will be harshly punished by the market in time.

When, or if, this comes to pass is a waiting game. Revel and Shopkeep will make it all clear in the next 24 months. Should they fail, Toast and Lightspeed will be the last bastions of first-gen cloud POS. With or without them, however, cloud will still arrive. Change is inevitable; you cannot fight the market.

Note: I don’t accept random Linkedin connections. You can write me at Jordan [at] whatsbusy [dot] com if you need to reach me – thanks!

The Huge Problem With Online Ordering That Nobody Talks About

10 Aug

The convenience engendered by the on-demand economy is here to stay. We’ve seen a small pullback in on-demand financings lately, but as millennials and future generations demand more convenience it’s hard to see the on-demand share of the pie shrinking.

In fact if we look at the general growth curve of on-demand businesses, it’s only going up. BIA/Kelsey estimated that 2015 saw revenues of $18.5B for the local on-demand economy, representing 3.9% of the addressable market. They also project a 13.5% annual growth rate through 2030, which looks like the below chart

This might even be more conservative than reality if we look at Postmates’ (an on-demand delivery provider) growth.

Part of the on-demand economy is driven by online orders: the ability to order something from your desktop or mobile device and have it delivered as needed. Naturally it’s no surprise that funding in restaurant online ordering has also seen the same growth trends over the past few years.

Now comes the rub

In the restaurant (and presumably retail) world of online ordering, the merchant foots the bill for the pleasure. Unlike delivery costs, which are sometimes transparently passed on to the consumer, our low-margin merchant bears the cost of online ordering.

How much is a merchant paying? It ultimately depends on the provider. However, the biggest distinction is whether the online ordering service is simply creating a plug-in to the restaurant’s own website, or if it’s doing demand generation.

In other words, if the online ordering service is also marketing your business on other platforms, you pay more.

I’ve compiled a table of providers and their pricing.

What I want to point out is a worrying trend with new, large entrants Uber and Amazon: namely, their fees are astoundingly high. To me, this is a trend that online ordering providers Grubhub and Seamless started, and it’s horrible for the operator. Let me explain with math.

If you remember the calculus we went through with Groupon, we made it abundantly clear that daily deals were terrible for operators. In summary, it would take a customer visiting 14 times at full price before a merchant would break even on their daily deal promotion.

The exact same thing is happening to merchants again with online ordering, only this time it’s even worse.

Online ordering is only growing as a percent of a merchant’s overall sales. The growth in on-demand convenience have analysts prognosticating that as much as 30% of a restaurant’s business will come from online orders in the next five years. According to Bob O’Brien of NPD, “Carry out represents 30% of consumer spend, with delivery comprising another 4% on aggregate.” Using these numbers it’s not hard to fathom how online ordering replaces the entire carry out category, and possibly grows beyond its volume of 30%.

This means, unlike the daily deal promotions, restaurants will have a hard time turning off the online ordering spigot – it’s 30% of their revenue!

Now here’s where the math comes back into play. Restauranteurs and retailers do not make much money. In fact, the relationship mirrors the relationship in credit card processing: the card network (Visa) makes all the money and the reseller (merchant acquirers) make nothing comparatively. A restaurant would be lucky to make 2% profit while their suppliers – InBev, Pernod Ricard, Hormel etc. – have a much higher profit margin (InBev’s profit margin hovers around 60%).

The problem, which should be clearer now, is that a restaurant is LOSING MONEY on every online order where the transaction fee is higher than their margin. And since the merchant is much less likely to turn off their online ordering than they are to continue running loser daily deals, they’re stuck between a rock and a hard place: lose 30% of their revenue immediately or lose the entire business over time.

To give the argument some teeth, let’s take a merchant that earns $1,000,000 in annual revenue with a profit margin of 5% (which is the high end of the spectrum). Assuming online orders account for 30% of their revenue, the below chart details how much money the merchant is losing with online ordering activity, and the impact that’s having to their bottom line.

It’s now obvious just how detrimental online ordering can be to a merchant. Considering most merchants don’t have a 5% profit margin, these numbers can get ugly really fast. To put it into more tangible numbers, this merchant is going to pay upwards of $10,000 per month for the privilege of online ordering.

Unless the rates change, what is a merchant to do?

The answer, we think, is coming soon enough.

The high cost of online ordering middle men stems from a few places.

1) Making merchant order data accurate. Merchants receive orders from a fax, email or tablet. Then the merchant must transpose the order information from the fax, email or tablet into the POS and make sure their menu and pricing is accurate on all the provider websites. More often than not, this means a merchant has to buy a stand-alone tablet to manage orders from a provider. If that merchant wants to use multiple providers, they have to buy and manage multiple tablets. Just imagine being a hostess who’s managing guests on a busy night while having to run five competing tablets to handle your online orders and deliveries.

2. Marketing. Another large expense for the middle men is marketing your business. Seamless and Grubhub spend millions buying TV time and getting consumers to download their application. They must also manage their own consumer applications. All of these costs are passed onto the merchant.

We see these two headaches disappearing with the progress being made by cloud POS.

Cloud POS already has data injection capabilities. Unlike legacy POS, where someone must deploy and maintain a software agent at the merchant’s site to collect and inject data (a process Micros and NCR gleefully charge $50,000 for), cloud POS can easily inject order data. This:

  • Eliminates fat-finger errors in transposing orders from a fax to the POS
  • Automatically updates POS pricing and menu changes
  • Significantly reduces time staff spends inputting data

Chowly, an online ordering POS integration company, has quantified this value already.

Cloud POS can also syndicate online ordering to a multitude of places that do NOT charge high amounts for orders but are still highly marketed. Google. Bing. Amazon. Connected cars. Yelp. The list is very long.

Over time, it will be really hard for a Grubhub to justify a 13.5% cut when the merchant can syndicate their online ordering on Google for far less.

That’s not to say these services are mutually exclusive either. A merchant can keep Grubhub and use their cloud POS provider to syndicate online ordering. Each time an order comes from Grubhub the merchant pays 13.5%, and each time it comes from their POS network they pay far less. This way the merchant doesn’t lose Grubhub orders by shutting them off completely, but slowly watches their Grubhub demand shift to other ordering platforms – all while paying less each time.

Cloud POS companies will naturally takes cuts of each transaction – creating new revenues for themselves – but this will be far less than the amounts charged by other online ordering providers since big costs (data consistency and marketing) are being eliminated.

Who knows what online ordering fees will look like in five years, but they will be a lot lower than they are today. That’s good for the merchant, their cloud POS provider, and the consumer. It’s only bad news if your business model revolves around gouging merchants today.