Can’t Buy Me (POS) Love – Sustainable Competitive Advantage In Point of Sale
The Godfather of sustainable competitive advantage is Michael Porter.
Porter is a professor at The Institute for Strategy and Competitiveness, based at the Harvard Business School.
He published the seminal works Competitive Strategy in 1980, and Competitive Advantage in 1985. They remain required reading for those who want create and sustain a competitive advantage. According to Porter “there are two basic types of competitive advantage a firm can possess: low cost, or differentiation.”
The issue of pursing a low cost strategy is barely worthy of discussion, a) there will always be someone who can provide a similar product for less money, and b) POS software needs to be mission critical. Low cost providers do not survive long in this industry, so let’s move on.
First, a look at some factors that are not sustainable competitive advantages;
The ‘First mover’ advantage
– Hardly an advantage in POS right now. There’s a customer learning curve and a technology acceptance curve that works against you, and then later on, switching costs are very low. Looking at the chart of some leading companies in point of sale
from yesterday, and you can see that no cloud POS company has even a 1% market share. There’s wide spread opportunity for all players. No one’s a first mover anymore. Also, pioneers in POS, as the saying goes, ‘are often found face down in the trail, with arrows in their back’.
EMV / PCI compliance as a hurdle – It is a bit tricky right now, but it is definitely not a sustainable competitive advantage for long. There are a gaggle of products emerging to solve authorization issues for small POS software companies at little or no upfront cost and those products support multiple payment methods. With a handful on the market already, this issue will be moot by 2016.
Scalability – Nope. From a support perspective a company will always need X technicians per Y clients. It doesn’t take long to find out when you need that second and third technician, so companies hit that mark very quickly. Ditto for programmers and QA personnel- the need for programming and quality assurance never, ever ends (the more clients you serve, the more diverse the needs, and the harder the upgrades become.
From a sales perspective, if your software is browser based, and downloadable, then you scale instantly. Ten million customers can be yours overnight. (If was going to happen for POS, it would have. It’s not going to happen. Paypal and Square are there – but those are not POS systems.)
POS customers are largely acquired one at a time. Maybe sometimes you find a chain of stores – but those sales can take a long time and you need a direct sales force for top companies – and their requirements are specific – so those sales require customization.
Get your POS product in a franchise? Great – that’s a plus. But is it mandatory for the franchisee to use your system? No. Any POS system that complies with the franchisor specs is usable – and where franchisors have tried to impose certain systems (often for pecuniary motives), franchisees have long been successful with taking them to court and busting those provisions.
Mega funding $$$
– some folks are counting on lots of venture money to do the hard work of catching customers. Yes, more marketing dollars can help, but only up to a point. As Chris Ciabarra said this week in an interview
, Revel is trying to expand in Europe – they are finding that clients want to see and meet a human being. And that is a slow, labor intensive, and expensive process. There’s a whole market segment of retailers and restauranteurs right here in the United States who want to see a human sales rep as well. That’s where a group of deeply experienced VARs can be of enormous value. Meanwhile, catching sales through PPC and purchasing leads is only one way of doing business and it’s a way that very small companies can use to level the playing field – so if your company has its eye on an IPO, you might have to go fishing for sales in other, more expensive, waters.
So, what are some Sustainable Competitive Advantages in the Point of Sale world?
For starters, having good employees with solid experience is a competitive advantage. By “solid”, I mean that your staff has five to fifteen years experience in POS. That doesn’t have to be all of them, but definitely should be some of them. Retail has business cycles and I’m not talking about recessions. After you’ve been through a couple you will understand. They come every four or five years.
Bad staffing experience for a cloud POS company – I’m not calling anybody out by name, but at a recent national trade show a certain cloud POS company had 6 to 7 young cubs staffing their booth. I walked up to the booth hoping for a demo. They were all looking at their smartphones or flirting with each other (or both) and I could not get anyone’s attention to get a demo. I walked on. Why spend $30,000 to do an important annual show if you’re going to staff it like that?
Maybe the most important piece of advice I have for you today —> If you want to do battle for customers in this industry then you start by hiring the right people – because – you don’t take beachheads with Cub scouts – you take beachheads with Marines!
John Giles, CEO of FuturePOS puts it this way: “If I had an unlimited budget, could I start an NFL team and guarantee a Superbowl win next year? Anyone with a little common sense would tell you that it’s impossible. Too many variables that money can’t control. These VC guys are being sold a bill of goods that doesn’t exist, and are swallowing it hook, line, and sinker. A “team” made up of random employees, in a company with 10% turnover per month based on their own numbers is far from the dream team they would have investors believe. It’s taken me 17 years of hand picking the best and brightest to have the talented, capable team that I have today. ”
Building an organization takes YEARS. And incredible staffing. You need to start with a great HR person. Deploying capital by rapidly hiring twenty somethings with no field experience ain’t gonna get you far enough. Ditto with thinking someone is a good employee just because they were laid off at another POS company. Do your homework. Test these new hires with specialized psychological tests, evaluate them. Make super smart hiring decisions. Take less venture money. Move slowly. And if you insist on having cub scouts – then send a Den Mother** to the trade shows. But, better yet, hire some older industry veterans to help season your younger staff. Yeah, it’s a culture clash, but think about your target market – experienced business owners. Do you think they only want to talk to 20 to 30 year olds without deep retail experience?
A recurring revenue stream is an SCA that everyone wants. It’s perhaps a little tricky to build that. Monthly service and support fees are one way. Getting some payment processing fees are another. However, are credit card fees going be reduced once liability is shifted to the merchants? Is that stream going to be intact? I don’t believe so. What the payment companies have built over the last fifty years is just amazing – but I wonder if it is defensible. Computing power is cheap, credit scores are cheap, a proprietary computer communications network is no longer needed, and all the hardware is easily available. Oh, and money for the float is cheap. Why think that there will only be a few major players in this industry forever, when profits are so high? Excess profit invites excess competition*. Don’t bet the company on a revenue stream dependent on basis points from credit card transactions.
Product differentiation is a sustainable advantage. A generic retail software product will not be perceived as useful to the owner of a Firearms store, as a software product written specifically for a Firearms store. That’s not news. The largest group of POS companies is right under everyone’s nose, but they are invisible unless you go looking for them. I’m speaking of the hundreds of companies that produce specialized software for business niches from tires to transmissions. From veterinary software to specialized tent rental software. In a recent study we did, we found that almost all of these software companies are between twenty and thirty years old. They know their niche better than you or I ever will, and they stick to their knitting. They target the top half of their segments and they win most of their bids. Having some differentiated software products in your line up can be a good thing, but be aware that these old companies have software that goes very deep into the corners of their market and a four year old general cloud POS product is going to have a tough time selling against these companies. Many of these companies started about the time the IBM PC came out – in 1983, and some of them started in the late 1970s. Their clients grew up on those systems and they are extremely comfortable with them, even as they migrate to tablets and mobile devices.
Market segmentation – direct vs channel – while the initial push by most young POS companies has been to sell direct, via the Internet, more are coming to realize that retailers and restaurants who want to buy from VARs (value added resellers) constitute a large market segment. While a lot of of sales to low end retailers have been scooped up merely by waving a PPC advertisement in their face, long term viability (and long term profitability) as a POS company requires a high level of quality, value, attention to the customer, branding, marketing.
Nobody is going to own the POS marketplace. You can be a leader in a niche, but there will be no permanent leader in the general category. If you want market share in Restaurant/hospitality – you need to choose a segment of the market and focus heavily on it.
So, now you’ve read my 1,800 words on this. To conclude, money can only do so much and not more. Too much venture money is just going to get wasted. Not enough money and you’ll probably do alright anyway. Don’t focus on market share. Look for sustainable competitive advantages. Hire more people with deep experience.