It’s like Chicken Little saying that the sky is falling: For years now, channel leaders have warned that hardware margins are fading fast, requiring solution providers to change their business models to survive. But the right path for one company may well be the wrong one for the competitor across town. VSR talked to four top solution providers (and VSR editorial advisory board members) about their own strategies to profit and grow in a changing market.
We’ve seen a lot of solution providers alter their business models over the past few years. How has your business changed?
Will Atkinson: We are offering more services through distribution, so VARs can resell our training and technical services. This allows them to make margin on services while they are off working on the next sale. We are also offering more SaaS products and really emphasizing the importance of recurring revenue as VARs seek to stabilize and grow their businesses.
Brad Holaway: We have seen a gradual increase in services revenues to compensate for reduced margins in hardware/software. At the end of the day, a local business has necessary fixed costs that are unavoidable. It’s interesting to note the recent interest cloud and tablet providers are now showing towards resellers. I think many are beginning to realize that local connections and service to the customer are of great value and are necessary for creating a sustainable business model in the POS space. We always need to be thinking about innovative ways to nurture and leverage that unique asset.
We have participated in creative ways of providing financing through non-traditional sources. Resellers are realizing that there is money to be made in financing. Banks are finding out that they have helped set the stage for non-traditional competition. But the reseller must do their due diligence. Financing is not for the faint of heart.
Jim Stewart: I bought this 40-year-old company one year ago from my father. We were in Indiana and we moved to Illinois. I had to change the culture or I would always be the son of the owner. In a sense I created a new organization. It was the right decision.
I’m very good at implementation and sales but day-to-day operations in services are not in my wheelhouse, which is why we’ve stagnated. Now we’re hiring someone to lead that. We’ve been offering traditional POS and a solution as a service model. The next natural progression is to move to a managed services model, because that’s just money I’m leaving on the table.
There’s been a huge influx of companies moving into our channel—credit card companies, Groupon—and it’s causing a bit of a mess. That’s forced us to go in a direction we should have gone before, and it’s starting to work out for us. We’re a traditional POS reseller. We still get a lot of foot traffic on the POS side that they pay for up front. We’re trying to provide as many services as possible to create sticky points and relationship, so they come to us for any other needs. We’re layering on above store—reporting, credit card processing, gift card processing, loyalty integration, online ordering, onboarding and adding digital surveillance integrated into POS and digital menu boards. My philosophy is we should have at least three revenue streams from our customer, and we’re working on a managed services model for all customers as well.
Rodger Jenkins: We’re implementing services, such as installation, setup, configuration and staging. My objective three years ago was to get to the position where 50 percent of our revenues are coming from professional services, and we’re slowly getting there. We’re earning four to five times what we were five years ago from services.
We were very focused on barcode integration and wireless, and over the last couple of years we’ve added wired networks, switches and configuration/set-up/sales/installation. We realized the cost of sales is going to continue to grow, so now we’ve got a dedicated person for marketing. Our model is not built around the Internet but we’re trying to use it more, as well as working with manufacturers on very targeted programs.
A few years ago we had never had an international installation, and last year we did 13 to 14. We’ll go farther and deeper inside accounts. We’ve partnered with some very good software companies.
Jason Cowan: We’ve been talking for years about losing hardware margins, but I think now we’re at the crux of when that’s happening. We’ve been working for the last two years on adding more services. We started with software-as-a-service, but customers said ‘oh, I have to pay you forever?’ So we changed the scope a bit to rent-to-own, and customers have been much more responsive.
What trends are you watching that could impact the next round of business model changes?
Atkinson: I think the consumerization of some of the devices we see in the channel now will continue to impact the design, functionality, and price point (including available margins) of the products that VARs need to know how to sell and support. I also see a lot of the new channel players in the SaaS/app market either going away or refocusing their businesses on direct sales since their value to VARs is so low. I hope to see VARs building the SaaS model into their businesses more comprehensively than most have so far, and hopefully they are able to do it with true channel partners. I’m interested to see how much of the venture capital money we’re seeing right now stays in the POS space. There is a lot of money pouring in and a huge proliferation of new companies, apps, products, etc. and I don’t know if it’s sustainable.
Holaway: The backlash of all the consumer tablet entries into our space is a huge trend. Some will survive, but most will not. Resellers are now being contacted by disgruntled customers who are looking for help. We need to be there to help, both the customers and the tablet/cloud vendors. Some amazing and profitable business relationships will develop over the next several years. I look for the silver lining of disruptive technology. Threats and opportunities always come wrapped in the same package.
Big data will become a big deal when our industry figures out how to make it valuable and help retailers extract the relevant information in real time that impacts their bottom line. We all have big ideas what that relevant information will look like, but none of us really knows (even though we think we do) what the future of big data holds. We are making educated guesses. It will be interesting to see what shows up in the next three to five years.
Stewart: Mobility, including BYOD—that’s the one I’m worried about. Margins are going to bottom out very quickly, and if you’re not layering on additional services, it’s going affect you very adversely. I’ve surveyed customers, and at this point some people are very adamant about mobile devices. They’re inundated so much with the free POS and the zero-upfront costs that that’s what they’re looking for. It’s not form factor at this point, it’s paying for their systems. We’re fairly fortunate in the Midwest that people still want to own their own products, so I’ve done very well with the traditional model. But when people are starting up new businesses we have the opportunity to offer them a different model.
Cowan: We’re still in the midst of tablet, cloud, credit card processing integration. I don’t know if we’re going to see another big shift for a while, but all of those concepts do take into consideration the monthly reoccurring revenue model as opposed to a traditional sale. We have one cloud-based product and we’re looking at another. All the new entrants don’t have the feature sets that some of the more established systems have, but the more established systems haven’t really identified an easily accessible cloud system. So there’s going to be a convergence. We’re paying very close attention to that.
What resources do you find most helpful identifying emerging market trends and changing your business?
Atkinson: I spend a lot of time asking our VARs questions about what their customers are asking for, and what the real impact ‘on the street’ is of some of the things that generate a lot of hype and noise in the media and at tradeshows. I also spend a lot of time working with some of our trusted hardware and payments vendors to get an idea of what they are working on and how it will impact our narrow slice of the industry. There’s a lot of hype around certain trends or products that may well be justified, but that doesn’t mean it will necessarily impact our specific market. We have to be aware of new trends and threats to our position while being ever cognizant of our VARs and our current customers’ needs.
Holaway: Resources, such as RSPA and industry publications, trusted advisors, fellow resellers and vendors. If you are going to be a reseller in this industry, you have to be engaged. If you stay engaged and ask a lot of questions, you should not miss anything critical.
Jenkins: One of the best things I do is be involved in VAR councils and partner advisory councils. I’ve made some very good friends and we talk a lot. It’s the single best way to get information. We also get a sneak preview of what manufacturers are thinking. Their job is to listen to us and be two years ahead of the market. It’s a pretty easy decision for me.
Cowan: We do lots of listening, to colleagues, reading industry journals, listening to our customers.
What technologies are you most excited about?
Atkinson: We’re excited about the new range of Windows tablets that are coming out because they enable VARs to compete on price with Apple, but they can sell them in conjunction with traditional devices and technology that they know how to support. It’s a way to get into mobility without completely changing their product mindset. Personally I’m excited about new trends in payments, but on the security side. We’re working hard on taking our software completely out of the scope of PCI, simplifying not only our lives, but those of our VARs and our merchants. It’s not particularly sexy, but it’s a big deal in our space.
Holaway: In my opinion, cloud computing holds the most promise. Retailers are not technologists. Taking servers off premises is a huge benefit, especially in the full service restaurant space. The reality remains that the depth of sophistication of POS, especially in the table service restaurant space, remains an obstacle for cloud apps. I know that the tablet providers will disagree, but I think many underestimate the deep business intelligence that has been built into client/server POS systems over the past two decades. That business value is not trivial to day-to-day operation of a full service restaurant. But the cloud apps will get better, and the traditional POS providers are not sitting idle. Both will get better and converge.
Stewart: iPad solutions. Due to bandwidth issues I don’t really want to bring anything else on. We’re looking for the one with the best business model that’s going to stick around. We’ve been looking extensively to find the one that’s most reseller-friendly.
Cowan: I’ve been toying with a loyalty system for a while with a local developer. It uses a customer-facing marketing screen. It’s something different to have the customer interact with the screen. The system has very good adoption rates.