Software developers (ISVs) who hope to increase the valuation of their business, need to develop, release and market products that facilitate a recurring revenue business model. For both ISVs and Resellers the bottom line is to build a portfolio of customers using products and services that generate recurring revenue. That principle of business valuation has not changed very much over the years. However, the current high level of importance associated with a portfolio of recurring revenue accounts for the POS industry has taken an interesting journey.
Placing a value on a POS business entity has been an ongoing conundrum. Any value associated with “good will” or the value of the brand dissolved years ago. The value of the customer list is at best an educated guess, as some ISVs and Resellers list end-user customers that cannot be validated—some could be lost to competition or closed for business.
Today, many valuations of ISVs and Resellers are based on their recurring revenue and customer retention rates. SaaS and Payment Processing residuals, along with traditional support/maintenance agreements, provide a clearer picture for business valuation. Over the past few years, both ISVs and Resellers have seen the value of developing a strong portfolio of payments customers.
Payment Processing and ISV Consolidation
One of the reasons that the POS and Payments industries have consolidated is that the integration of payment processing with the POS application helps with customer retention. It’s much easier to swap-out a stand-beside non-integrated payment terminal than an entire POS system with integrated payment processing.
While changing payment processing partners is possible with many POS applications, several technology and market-driven changes have made that practice more difficult and potentially costlier for the merchant. The need for EMV or “Chip Card” payment processing has reduced the number of processing partner options supported by each POS application. The cost and time burden for each EMV integration and certification is much more than the traditional magnetic card integrations. Thus ISVs are focusing on a shorter list of processing partners. Also, the financial arrangements between ISVs and Payment Processing partners differ, which will again motivate ISVs to work with processing partners providing the best financial arrangement for their company, channel partners and customer base.
Not to be ignored is the purchase and consolidation of POS companies by Payment Processors. There are not many POS ISVs in our marketplace today who are not owned or closely associated with a specific payments processor.
Evaluation of Recurring Revenue Fees
Payment processing has many cost factors and evaluating the residual split is very important. The interchange fees paid by the card brand banks are set (not controlled by the card brands or merchant service providers), however, the merchant services provider can add their own fees to the cost. Before selecting a partner, POS ISVs and Resellers should evaluate those fees/costs through a detailed side-by-side comparison. It is equally important have a clear understanding of the how their percentage split of the payment residuals is calculated.
Leveraging POS Services and Support
The secret sauce to customer retention can be services and support. Several POS ISVs have been purchased by payment processors for their customer bases and for their reseller channels’ market presence. Yes, Resellers provide value when transitioning their payments portfolio to the payments company that purchased the POS ISV. Equally as important, Resellers provide value through their POS industry and store operations knowledge that can retain customers and bring new business, provide local support, service and feet on the street to quickly follow up on sales leads generated by today’s web and automated marketing resources. The support provided by the payment processor-owned POS ISV is also important, as the Reseller needs a software partner who can continue to maintain the product to meet ever-changing market needs.
Want to increase the valuation of your business? Develop a robust portfolio of customers providing your company with monthly recurring revenue. Support and Maintenance agreements continue to be a good foundation for an ongoing business relationship. Managed Services are a critical need for many large and small businesses; they need your expertise and skills. In addition to POS applications sold as SaaS products there are many additional SaaS products which can be offered to create recurring revenue: Loyalty/Rewards, Above- Store Reporting, Data Security, On-line Ordering and more. These all add value to your customer relationship and enhance your recurring revenue portfolio. Finally, build your payment processing portfolio with a good payment processing partner.