Bringing SMB Point-of-Sale Systems to the Cloud

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The-Cash-RegisterOver the past 18 months, we’ve seen a steady convergence around the importance of point-of-sale (POS) systems as companies building connected payments, lead generation, and loyalty products look to ground these services in the source code of a small business. Closed legacy systems (which can run a small retailer from $3,000 to $50,000) have stymied the process, leaving start-ups and established players to navigate cumbersome partnering processes or build new technology altogether.

As on-site broadband connectivity reaches ubiquity among local retailers and the cost of cloud services continues to drop, however, the door is opening for software-as-a-service (SaaS) POS and customer-resource management (CRM) solutions to provide flexible and adaptive alternatives at a fraction of the price. More than just an inexpensive version of its predecessor, SaaS POS, or ePos, has the ability to expose everything in a small business’s operation — from transactions and inventory to employee time sheets — to innovative data analysis.

“It’s similar to the cellphone industry in that until an open platform like an Apple or Android came along, there weren’t a tremendous explosion of mobile apps,” said Scott Wolfgang, VP of strategic investments at Hearst Interactive Media, during a panel with other investors at the Street Fight Summit earlier this month. “As local businesses adopt open point-of-sale systems, that’s going to be a key thing to occur before you can see a significant increase in mobile apps that work for mobile businesses and purchasers.”

Firms like Micros that dominate the POS market today offer closed set-top modules that can run a small retailer $3,000 or more. Some legacy players like NCR have adapted, rolling out cloud-based solutions aimed at independent retailers who traditionally would be beneath the market.

But it’s the strategic and structural change that many legacy players struggle (or chose not) to grasp, says Jason Richelson, founder of Shopkeep, a SaaS POS solution that last year attracted more than $12 million in venture funding.

The legacy firms are “so entrenched in [the traditional] model, especially Micros, that it’s very difficult to change to a cloud-based system,” Richelson told Street Fight. “They don’t want to hear it because they want to continue selling a $3,000 machine.”

Richelson started working on Shopkeep in 2009 after trying to find a suitable point-of-sale system to serve his growing retail business in Brooklyn, N.Y. Following a year and a half of testing in beta, Shopkeep went live in August as an iPad-based solution and now is available in Apple’s app store. The service’s price starts at $50 a month (excluding hardware costs) and it offers many of the same features as the legacy providers do, namely inventory, payment processing (internally and through partners), and employee management.

The challenge for Richelson and other SaaS POS players lies in building a strong enough foundation internally to make a valuable product today while developing a framework through which other partners can drive value with it tomorrow. Using Salesforce as a model, Richelson said, Shopkeep plans to gain market share by first building a fully functional product, then opening the platform to partners through an AppExchange-like service once it has achieved the necessary scale.

Leaf, another cloud-based POS company that has created its own tablet in-house, is taking a slightly more open approach by scaling its solution as a platform from the start. The Boston-based start-up offers businesses basic POS functionality while leaving additional services to third parties via a forthcoming app store, which it plans to launch soon.

“You’re looking at a huge walled garden [in small business POS and CRM], and we’re throwing it down,” said Aron Schwarzkopf, Leaf’s founder and CEO. “Once you open that, the POS, the entire experience in-store, from marketing to loyalty to discovery, becomes much more seamless.”

Both Shopkeep and Leaf have grown rapidly over the past 12 months, largely thanks to the explosion of Square. While Square is a major competitor for the pure-play ePos firms like Shopkeep and Leaf, Richelson saud he doesn’t want to see the payments company go anywhere. “Square’s been phenomenal for us as far as all the marketing they’re doing and all the education,” he said.

To a certain extent, Square has done for cloud-based point-of-sale what Groupon did for the daily deal. It has created a market for the entire ePOS industry through deep merchant education and sustained publicity.

Making a comparison between Groupon and Square may strike some as unsettling, but the two businesses share more than one might initially think. Consider this: Both were high-profile start-ups that pioneered a market through a two-sided model, in relying on consumer and merchant buy-in. Both sold a product that was easily replicable — daily deals and payments, respectively — and tend to put downward pressure on SMBs’ margins. And after a couple of years, we’re hearing the same criticism endemic to the two-sided model used by both companies, namely that the companies’ consumer initiatives have limited the value for merchants.

“Square is not merchant focused; Square is consumer focused,” Richelson said. “Square is using free POS and free credit-card processing as a hook to capture credit card numbers and email addresses of customers.”

The introduction of SaaS POS has broad implications, not only for payment firms like Square but also for a host of other loyalty and lead generation start-ups that have worked to tie into the point of sale over the past 18 months. It brings scalable access to real-time data on nearly every inch of local retailers’ operations, not only accelerating existing sectors like loyalty and rewards but opening new opportunities for key services like live inventory search. But most of all, it has the potential to bring  the small business sector an efficiency and access never before imaginable.

Steven Jacobs is deputy editor of Street Fight.