How Low Will POS Prices Fall?

23 May

I’ve made it clear in earlier publications that the POS industry is going through a major overhaul. Costs have dropped by 75% and ongoing services are also substantially cheaper. All in all this is great news for merchants.

The question now becomes: how low will POS prices fall? There are two areas that should be examined to arrive at a reasonable conclusion. First, we should look at hardware and software costs. Second, and perhaps more importantly, we should examine business models. The latter, I’ll contend, will have profound implications that will ripple throughout the industry. If you thought the introduction of cloud changed things, just wait three years.

POS hardware prices have fallen steeply over the past five years. If we look at an analogue, LCD prices dropped 80% between 2004 and 2008 while production costs dropped 50%. LCD manufacturers experienced a $13B loss in 2012, even as volume was up. Why? In a single word: commoditization. The same can be said for POS hardware.

Software prices are also falling. The costs to develop code shrink as open-source libraries grow and rapid deployment frameworks catch on. Data processing and storage costs have also collapsed with the expansion of cheaper servers and faster connectivity. Cloud POS offers mobile reporting, data backups and a software licensing model far, far below legacy software POS costs. Below is a graphic showing Amazon’s storage prices over time.

I’ve gone ahead and combined the hardware, software and ancillary costs of POS to produce a graph that shows lifetime costs in an apples-to-apples fashion. This means including expensive legacy cloud access tools like MyMicros (at a totally reasonable $1,500/year). I also want to note that legacy payment processing is factored into these historical prices. Payment prices have come down, and legacy POS companies (like Micros) are no longer getting away with their MerchantLink processing scam. All costs are summed for the lifetime of a small merchant, which I assume is 30 months.

I think hardware prices are close to the bottom. Hardware manufacturers are either losing money or breaking even: that’s a pretty good indication that we won’t fall too much farther. There will still be improvements made to production processes and distribution, but I don’t expect anything like the rapid descent we’ve seen the previous five years. Software prices will also continue their gradual decline.

As low as hardware and software costs are, they might evaporate entirely. Software and hardware costs might be entirely underwritten by the provider in a not-too-distant future. A new type of business model is gaining steam, and sophisticated parties are taking a hard look at how to make it work.

Merchants generate data. Lots of it. Data that tells a clever observer who’s making purchases, what they’re buying, and the prices they’re paying. This data has been sufficiently mined in the grocery industry for decades: between Nielsen and IRI, $6B in annual revenue is generated helping manufacturers make heads from tails in grocery purchases.

A lot of commerce happens outside the grocery vertical. Doesn’t it follow that the same kind of data could also generate billions in revenue? Sophisticated parties are seeing how much each merchant’s data might be worth. And if the numbers jive at scale, it’s not impossible to imagine free POS systems in exchange for the data. Nielsen provides consumers free scanners and pays them to generate panel data, and companies like Zenefits are giving away free SaaS product to earn revenue from something other than the freebies.

Don’t think that merchants are being shortchanged. In addition to having a free POS, merchants will start benefiting in ways grocers have for decades. Merchants will start seeing amazing 3rd party solutions built on top of the data, more help from their suppliers and distributors – including more promotional dollars, and increased revenues with online commerce opportunities.

Merchants should celebrate private market innovation. While POS, payments and their respective channels battle over their future business models, merchants continue to win.