Cloud POS’ only hope?

16 Jun

Cloud POS (point of sale) will be amazingly successful in 10 years. In fact I don’t think any POS system will exist that isn’t cloud – just like we don’t see horse and buggies on the roads today (minus the Amish). Why?

At some point a new generation of business owners emerges. This group of owners may be starting a business anew, or inheriting an existing business from a relative. And this new generation has grown up with technology, data, and an appreciation for the trade off between time and money. And only with the portability of their own data (analytics, marketing et. al.) can the new owners acquire the value they’re used to.

We’ll see generational change where operators are 100% comfortable buying their POS online with no hand-holding or sales reps needed. Just like consumers today can learn what laptop to buy without needing a sales rep to hound them, the owners of tomorrow will feel comfortable learning about POS solutions on their own time. And since POS systems are heading the way of payment processing – becoming a complete commodity – there will be no real differentiators (more on this in a coming post). When the customer is doing self-discovery, the need for sales changes from phone calls and emails to SEO.

But that’s 10 years out. Today’s Cloud POS companies are backed by “venture” capital, and “venture” capital doesn’t wait that long. So what does Cloud need to do today?

Cloud’s business model is predicated on acquiring merchants that can afford additional solutions (bolt-ons) on top of the POS. Remember, Cloud POS companies are not earning material margin on hardware, nor are they margin-positive on their $50/mo software. These fees cover their costs of doing business, and maybe not even that. Service and remote support are all 24/7 and free, so there’s no revenue from this value-add either.

The perfect Cloud POS customer is a multi-million dollar independent or a small chain; large chains demand custom solutions and are consistently laggard adopters. These ideal Cloud customers are conditioned to spending $20K per POS install, and Cloud offers them an instant savings of ~$18,000. The likelihood of Cloud tapping this $18,000 savings at a larger merchant is much more realistic than tapping it from a $150k/year bakery.

Today, these target customers are hard to reach. They have good relationships with their local reseller, and need to be educated on the value of Cloud. In all honesty these accounts are only going to be won on relationships – something that is really tough to accomplish with an outbound, inside sales rep.

So if Cloud needs resellers, then resellers need Cloud, otherwise it’s a lopsided relationship that won’t produce results. Under today’s Cloud model – especially those being advocated by “venture” capitalists – this feels impossible.

A reseller has four revenue streams.

1) Hardware. In the old days this was thousands of dollars in revenue share on $10,000+ hardware.

2) Software. In addition to that pricey chunk of hardware, the reseller would make a revenue share on that pricey software. This could be a few thousand as well.

3) Services. This included initial setup (i.e. menu/inventory programming), training, break/fix repair, software updates, added features and possibly consulting.

4) Credit card residualsMercury upended the model when they started sharing 50% of the processing “profits” with the POS reseller. Since then the payments market has continued to beat itself down on pricing.

What’s Cloud POS been up to?

Cloud has eliminated hardware margins. On average, a new hardware setup costs $1,300. Of that, maybe $300 is margin. Split between the reseller and ISV (independent software vendor), that’s slim pickings.

Cloud has dropped software prices steeply. At $50/mo, or $600/year, that’s far less than the $3,000-$5,000 sticker price of legacy software. Since the average SMB business is solvent for 2.5 years, that’s only $1,500 in expected software revenues over the life of the operator.

Service revenues have been axed to death too. On initial setup, the menu/inventory programming is typically free: it’s become a cost of doing business. Training is handled remotely and comes with a library of tutorial videos operators can peruse at their own convenience. Good interface design has also cut down on the need for in-depth training. If the POS goes down, the Cloud support team knows about it instantly and can remotely solve most issues. This support, plus any software updates, are free for life.

The only revenue stream that’s mostly stayed the same is the credit card processing residuals. How these are split between the Cloud ISV and the reseller are contract-specific, and it’s hard for me to lay out a categorical number.

With all the usual revenue streams drying up, the reseller must get creative to survive. As discussed in earlier posts, this requires the reseller to learn and sell additional products outside the POS. The funny thing about some Cloud companies, though, is that their investors believe the POS company will make and sell every bolt-on themselves.

Sooo how does a reseller make any money selling Cloud POS?

If you need resellers to be successful, but you find no way to earn them enough revenue to survive, how can the model work? Most Cloud POS companies are either delusional, wanting something for nothing from their reseller partners, or committing themselves to a very expensive direct sales model. Those that can tap the value of a reseller channel and provide a way for their resellers to make good money will make the upmarket transition while their competitors churn through VC money trying to figure it out. But as I see it today, that list is very short.