Matt Vannini is the founder and CEO of Restaurant Solutions, Inc.
Since 2015, there’s been a proliferation of cloud-based, or SaaS (Software as a Service), point of sale systems and services for the hospitality industry. They’ve come to dominate the conversation when operators are opening, updating, or expanding their organizations. On-premise (or legacy) POS systems are viewed as more expensive, but is that perception true?
There are, of course, pros and cons to any decision, and myriad articles detail the operational advantages and disadvantages of either type of POS system. In this analysis, we break down the soft and hard costs associated with owning each (assuming you’re purchasing them new), and come to a cut-and-dry determination.
Hardware Costs For a Two-Terminal Bundle
|SaaS ($4,200)||On-Premise ($9,300)|
|POS terminals||POS terminals|
|Power supplies||Back-office computer|
|Credit card equipment (depends on system)||Cables|
|Credit card equipment (depends on system)|
- Hardware bundles vary between SaaS and on-premise, as well as within each category. This list comprises averages from a variety of POS systems.
- Legacy (or on-premise) systems require terminal and back-office wiring connections. This creates potential failure points, usually when wiring is run through areas with extreme temperature changes such as the kitchen and the coolers. Modifications to the restaurant may require additional wiring considerations.
- SaaS hardware is often replaced at little to no cost every three years and hot swaps are typically seamless.
Software Costs For a Two-Terminal Bundle
|SaaS ($3,300 annually*)||On-Premise ($8,600**)|
|POS terminal licenses||POS terminal licenses|
|Back office/Cloud license||Back office/Cloud license|
|CC authorization license||CC authorization license|
- All figures represent averages. Multiple sources were used in order to normalize data.
- * $3,300 annually is for each year in perpetuity. Also note several SaaS POS providers will furnish new hardware at three years. Depending on the provider, the hardware may be supplied at no cost or at a significant discount.
- ** $8,600 includes the amortization of costs over three years. Once completed, the operation incurs annual support and maintenance fees ranging from $2,900 to $5,200 per year, depending on peripherals such as handhelds, KDS (kitchen display system), and additional software services like loyalty, reservation, and online ordering systems. Additional drivers include 24/7/365 versus 8 a.m. to 5 p.m. support.
Below are both company-owned software and third-party options that many operations utilize in their day-to-day operations.
|SaaS ($4,200)||On-Premise ($9,300)|
|Gift card/loyalty program||Included with subscription||Third-party, integration dependent|
|Credit card processing||Must use POS company processor||Third-party, integration dependent|
|Reservations/messaging||Third-party||Third-party, integration dependent|
|Online ordering||Included with subscription and available for third-party||Third-party, integration dependent|
|Accounting/payroll||Third-party, cloud API||Third-party, on-premise, no API|
|Above store reporting||Included with subscription and available for third-party||Third-party, integration dependent|
In short, SaaS-based POS systems are very third-party friendly. Many have fantastic software development kits (SDKs) and open application programming interfaces (APIs)—both fancy ways of saying they play well in the sandbox. The result is convenience and reduced operational costs throughout the organization.
Additional Services That May Be Offered When Setting Up or Maintaining Your POS System
|POS setup and installation||Menu design, installation, configuration||Both POS types charge between $2,500 and $6,000|
|POS training||Position based, online library, onsite opening support||SaaS: included in subscription. On-premise: up to $6,000 plus hourly charges.|
|Ongoing support||24/7 and onsite options||SaaS: included in subscription. On-premise: averages $4,000 annually|
Benefits of a Cloud-Based (SaaS) Subscription Model Versus an On-Premise (Legacy) Ownership Model Can Be Summed Up as Such:
In order to maximize profits in an industry perpetually under fiscal duress, an operator must have the latest in hospitality tech in their arsenal. This technology is designed to increase revenue-producing activities and fiscal accountability for the entire organization. Assuming you are starting from scratch, a SaaS subscription-based POS system offers the following benefits over its counterpart:
- Lower barrier to entry: SaaS systems are on average 34 percent less expensive than legacy systems.
- Included modules: SaaS systems offer a more comprehensive range of company-owned software modules.
- Integration partners: SaaS systems offer a wider selection of best-in-class integration partners ranging from accounting and payroll providers to online-ordering and delivery-service partners.
- Lower cost long-term: The overall annual ownership cost is 23 percent lower for the first 36 months. The remaining lifetime ownership cost remains lower due to the tangible savings provided through the benefits mentioned above.
Benefits of a Legacy POS System Over a SaaS POS System Include the Following:
- Potential credit card fees: Some SaaS systems (including Toast, the current industry leader) require their clients to use their exclusive credit card processing platform. Many, if not all, legacy systems allow the user to utilize a third-party processor. Lack of competition decreases the ability for the operator to control credit card processing fees. If you can’t negotiate a better deal, you’re ultimately faced with replacing the entire system. With legacy systems, you’ll typically have the option to switch processors. However, it should be noted that even with legacy systems, using a third-party credit card processor may carry integration limitations and service fees from the POS company.
- More on credit card fees: RSI compared credit card effective rates from clients who switched from a legacy to a SaaS-based POS system that required a change of credit card processor. (Effective rates are essentially the average fees charged to the operator resulting from the usage of various types of credit cards and, in some cases, ticket averages. For example, American Express carries a 3.5 percent fee, whereas a Capital One card can range from 1.98 to 2.4 percent.) The analysis compared rates from more than 250 independent restaurants over a six-month period. While rates fluctuated slightly, there wasn’t overwhelming evidence of rate creeping by SaaS system providers. However, we did see several examples of rate creeping when we analyzed third-party processors. (These are processors that are not owned by the POS company.) This makes sense, as many third-party processors do not own their processing platforms and thus have less control over their margins.
- Data security: Unlike SaaS systems, only the back-office computer is required to connect to the internet. This reduces the number of potential access points for intrusions.
I’ll Leave You With This: There’s an Old Saying in the Restaurant Business
“What are the two pieces of equipment an operation should never own? The ice machine and dishwasher.” Why? Because both are so prone to breaking that it’s ultimately cheaper to give the leasing company the ownership of its catalog as security for always having ice and clean flatware. I believe you can now add your POS system to this list. It’s just not worth it to own the system for the following reasons:
- Compliance initiatives and industry evolution: Both types of systems require constant software improvements. What’s hot today may be ice cold tomorrow. A SaaS provider has a far greater ability to develop and deploy upgrades to its software than a legacy system, which in many cases requires on-site software maintenance.
- Hardware refresh: Restaurants put the “hard” in hardware. Kitchens and busy dining rooms lead to broken hardware. It’s far more economical to bake in the cost of hardware replacement versus running the hardware into the ground and having to pony up the cash for potential upgrades because the new hardware isn’t compatible with the system. This was the central issue with NCR when it asked its clients to pay $4,500 per site on average to upgrade software from a noncompliant EMV (credit card encryption). SaaS companies capitalized on how easy it was to replace NCR with their POS systems because of the freedom from wiring and hardware refreshes every few years. SaaS-based systems win on all fronts, the most notable of which is cash flow.
- Reseller channel versus company direct: Most SaaS systems are owned and serviced by the same company. Yes, they may have one or two resellers, but the servicing is centrally dispatched. Legacy systems use a reseller network to sell (and usually support) their systems. This creates widely disparate implementation and support experiences. Also, many resellers must sell multiple systems and have multiple partners in order to remain competitive. This is a failure in the establishment of the POS industry, not the fault of the reseller.
Here’s a fun fact: Based on the last 20 years of performing accounting, bookkeeping, and tax services for restaurants across the country, we’ve found the number one reason new restaurants fail is lack of capital during the first 180 days of operations. We recommend you always have a current break even and budget. Clients who have both have EBITDA (earnings before interest, taxes, depreciation, and amortization) nine to 13 percent higher than those who don’t.
Normalizing expenses is one practice of high-functioning organizations, and preventative maintenance is one of the best ways to avoid massive cash depletions. Paying for POS system emergencies and hardware ownership works directly against this principle. The peace of mind that comes from knowing that you’re not on call for POS support allows you to focus on your guest, your team, and your bottom line.
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