Toast POS Pricing – Legacy POS Comparison

After Toast was forced to rethink their dollar ordering fee many are wondering what Toast will do to their guidance.

Can Toast reach profitability? Not cook-the-books EBITDA profitability, but actual profitability?

The investment community is really overthinking this.

Let’s start with this analysis.

The average investment analyst probably has an IQ of 120.

They look at what Toast is doing and translate this to their personal life.

“Wow, if a commoditized vendor added a large fee to a software I use that effectively doubled the cost, I’d likely shop alternatives.”

This is logic.

Restaurant owners are not logical.

Far from it.

They are emotional.

Super emotional.

So much so that their triune brain is on auto-pilot making and decisions for them.

“Are you saying that retailers are essentially upright lizards?”

Yes. Yes we are.

Because we’ve observed them over a decade.

If it looks like a duck, quacks like a duck, and walks like a duck, guess what?

There is no rationality in a retailer’s behavior.

And Toast knows this while investors do not.

So Toast will reach their profitability, which as it stands today means Toast needs to earn another $400M annually.

Toast reported 93,000 locations.

To squeeze $400M means each location would need to pay an additional $4,300 per year.

Toast reported Q2 2023 ARR at $1.1B.

That means Toast merchants would need to pay ~36% more for Toast POS for Toast the company to be a going concern.

The numbers imply that the average Toast merchant is paying nearly $12,000 year per location for Toast (this is SaaS + payments margin).

Adding 36% would mean that the merchant will be paying $16,300 per location for their POS.

Remember in 2010 when literally every cloud POS company’s pitch was:

“Your legacy machines are super expensive. Cloud is way cheaper.”

My, my my: how times have changed.

Here’s the math for how a traditional POS business worked, and how much more expensive Toast really is.

There are two models here: one without payments, and one with. The one with payments assumes market rates of 20 bps of payments margin on $1M of GPV, or roughly 30% of what Toast charges for payments.

This model was refined by a long-time POS industry expert, so it is reliable enough for us to publish.

So what does Toast look like in comparison?

If we take Toast’s current revenues the implied 5-year revenue for Toast is $60,000. This compares with about $50,000 for a POS with payments, although the merchant would own that system free and clear.

Is Toast creating an additional $10,000 of value over those five years?

Absolutely: Toast is offering a ton more products than the legacy systems.

BUT.

That legacy model is spitting out 50% gross margins.

Toast has 21% gross margins.

AND the price of hardware in the legacy model isn’t accurate anymore: the cost to outright buy a POS terminal is < $2,000, accounting for inflation. Assume 3 terminals in the average Toast merchant and there’s a $14,000 difference in the models.

To really make this apples-to-apples, we’d need to increase Toast’s pricing AND reduce the cost of hardware in the original model.

The result is that Toast would need to increase it’s prices by 58%, so that 5-year pricing from Toast goes from $60,000 to $95,000, or an annual price of $19,000 per store.

And that 5-year cost of a legacy system falls to $36,000, or $7,200 per year per store.

Toast is now 2.6x the price of a legacy POS.

Another way to think of this is the SaaS rule of 40. Toast is public and they will be judged – ultimately – by these metrics.

But the law of large numbers and, more importantly, as the market limits of what Toast can penetrate before their churn catches up with them, means that Toast will need to get creative.

When revenue growth stalls in comes profit growth.

And you know how Toast gets profit?

Toast merchants will have to pay even more for their Toast POS.

Toast used to think they could just charge the consumer but that idea came crashing down around them.

How much more will Toast merchants have to pay?

Here’s a table we made with sliding scales based on the rule of 40:

As of Q2 2023 Toast grew revenues 45% with an annualized EBITDA margin of -40% ($98M quarterly loss * 4 divided by their $1B ARR).

Realistically we see Toast’s organic (i.e. not fee-induced) revenue growth slowing to 30% in the next year.

That means the average Toast merchant will need to pay nearly $19,000 per store if Toast is to operate according to the rule of 40 (though they have nearly 4 years of balance sheet to support burning $400M annually.)

If we were Toast here’s how we’d make the math work:

1. Pull out the same $1 ordering fee but allow merchants to eat it. Those that do make your life a lot easier
2. Hide the $1 ordering fee in the payment stream. Don’t even call it a separate fee but lie about interchange rates – Toast has no ethics so this is eminently doable

What Toast absolutely cannot do is transparently increase costs.

Merchants will not like this.

It’s the classic frog in the boiling pot analogy.

You can’t tell the frog you’re going to put it in boiling water (not that the merchant frog would even understand).

Because even Toast has to second guess itself: are we really 2-3x better than the competition?

That’s what a lot of merchants will start asking if Toast makes their pricing transparent.

Toast will argue that they’re providing a lot more value than their legacy POS counterparts, and there’s truth to that.

But it’s also true that Toast is the most expensive POS on the planet.

We’d estimate that at $20,000 a year a merchant could buy a competitive POS for three stores for every one store on Toast.

This is very enticing to Toast’s competitors.

But then again, Toast’s customers can’t add 1 + 1.

Literally.

If think it’s a pejorative then you haven’t spent enough time around retailers.

The short bus exists for a reason.