Will Restaurant VARs Exploit Toast’s New 99-Cent Fee?

By: Jim Roddy, President & CEO at the RSPA

Toast, viewed by many restaurant VARs and ISVs as their stiffest competition, will add a 99-cent fee to all online orders over $10 beginning in July, according to multiple new reports. (You can read the details in this Nation’s Restaurant News article.)

I was interested to hear how RSPA members are reacting to this news in hopes their insights could guide our community to convert Toast’s money grab into more business for our channel. I reached out to several VARs and ISVs and asked them these three questions:

  • What actions will you take in light of this development to help your business?
  • What actions will you take to help your restaurant clients? And to help your restaurant prospects?
  • What are your thoughts on ISV partners directly charging consumers?

Below are their responses, edited for grammar and length. To ensure their comments would be candid, we promised to keep the names of the executives and their companies anonymous. The views and opinions expressed are those of the individual participants and do not necessarily reflect the position of the RSPA. I’ve highlighted key passages for emphasis.

VAR Executive: We caught this about 30 days ago when a prospect using Toast pointed it out to us. Our first step was to send screenshots to our team chat. When the NRN article was released, we discussed it in our sales meeting and distributed it to our sales and customer success teams as a printable PDF. We also printed out copies of the article and placed them on the lunch table in our office. I observed some interesting conversations at the lunch table with non-sales departments discussing how unfair surcharging online ordering is to consumers. 

My general opinion is that most customers using Toast signed up with them due to it being a generally well-featured low-cost system (i.e. free hardware) but bundled with payments with questionable terms. This business move validates some of our positions that the low-cost option is not always the best option for independently owned restaurants. 

We have many 10+ year customers, and providing fair, transparent pricing is one of our core principles. We will continue to stick to our principles and communicate to our customers and prospects that working with a dealer is the best way to operate your business compared to your vendor operating you.

ISVs charging directly to consumers is a dangerous game to play in the dealer world. My understanding is Toast doesn’t have any more dealers, but if there were dealers, they may start finding alternatives to not lose a customer.

VAR Executive: Prior to this, we’ve been able to argue features or credit card pricing, but this new action by Toast gives us a direct thing to point at that proves that they truly do not consider their customer in their actions and are willing to do whatever it takes to increase their bottom line versus their customer’s bottom line.

We will spend marketing dollars around this. We must educate our customers and prospects on this. If Toast is willing to circumvent you here, where else will they? It is the most direct evidence we’ve been given of the things we’ve been preaching for years now against Toast.

There is a chain of command within the retail tech community, and what Toast has done here is circumvent that. ISVs should not do this.

ISV Executive: Toast has tried to encourage surcharging. That isn’t as attractive anymore as Visa is taking the pork out. They have implemented service fees. It seems like they are looking for ways to increase revenue.

From a Boston Globe article: “The fee move could also help Toast — which has never shown a profit in its decade-plus of existence — reach profitability more quickly. The company processed almost $27 billion of orders — both online and in person — at 85,000 locations of its restaurant customers in the first three months of 2023. And yet it lost $81 million, on $819 million of revenue, in the quarter. But Toast has told Wall Street analysts it could be cash flow positive excluding some expenses for the full year.”

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At $27B in orders, assuming a reasonable percent of orders are online, and an average check of … well no wonder they say they could be cash flow positive “soon.” To say Toast’s business model isn’t working seems laughable given their market share. They are clearly the market leader, have a strong product, and a very compelling model for the merchants.

However, even with the high processing fees and the monthly SaaS costs, they run in the red year after year. This 99-cent fee, which goes right to the bottom line, has to indicate Toast needs a win, needs to show an upturn in margin, etc. I also think this has to be a sign that many restaurant operators must not be buying into ancillary, chargeable options that Toast offers and the base model must not be as profitable as needed.

I cannot imagine we would ever insert ourselves between the merchant and their customers, but then again we do not even insert ourselves between our resellers and their merchants. I believe that “we” are in the B2B world, and while our products may ultimately be utilized by consumers, we are offering them through our resellers and their merchants. If we need to increase costs, then let the reseller and merchant react as they deem appropriate. I think it is a huge overreach to try to eliminate the middle man.

I suspect this will be just another in the long line of blips. Toast has an impressive product, at an aggressive price point, and merchants tend to be myopic. And like surcharging, how many consumers will even realize they are getting “shafted”?

VAR/ISV Hybrid Executive: We have already gotten three or four appointments with potential new clients based on this news. We’re mostly just doing cold outreach from those on LinkedIn, but the team is now going to target the clients we lost to Toast.

VAR Executive: I find this practice deceptive. Just give us real, straightforward pricing. As I understand it, there is no way for the merchant to opt out of this or even absorb the fee by paying it themselves. I believe all costs of business (excluding sales tax, which is a true pass through) should be included in the sales price.

We continue to give our opinion on surcharges and junk fees. 96% of customers do not complain publicly or privately; they just do not return. Companies like Toast and others are trying to normalize this practice.

I have abandoned online shopping carts at a battleship museum, movie tickets, and restaurants because of convenience fees. I still made those purchases just in person where I tied up human resources. Who is it more convenient for – the business that has lowered labor cost through automation or the end user?

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We can use this information to show that we do not force convenience fees or surcharges for our customers. We don’t recommend them, but it is up to the customer to make that decision. Most people hate feeling forced to do anything. We like to run analysis on sales and show highest selling items and “what if” scenarios if we raise the price by $1, what would it look like versus charging a convenience fee or other charge?

VAR Executive: For us, it shines a light on our business practices and reenforces our core values as the “heart” of our business. We recently ran into a similar issue with [a software] where they gave a 30-day notice to us and our customers that were using their product to change to their credit card processing or suffer from ridiculous fees leveed at the merchant. These types of behaviors force us to be more aware of the partnerships we choose to get into with our vendors in both vetting and quite frankly, firing them.

For leads that we are working with who haven’t made a decision yet as to what POS they will use, we’ll mention this fee and the bigger implications it has for doing business with Toast. We’ll also ask them to consider the other pros and cons of working with them.

For existing customers, we’ll use this as a teachable moment to illustrate the importance of working with a company that puts its core values, like honesty and integrity, above profits. Also, if they are considering moving to Toast, we ask them to question what kind of relationship would they have with them. Do they simply value the tech and its capabilities? Or do they want a real partner in their success?

To push something directly down to a merchant’s customer is a big mistake, even if they gave the merchant an option to increase their credit card fees instead. Merchants need to have control over the customer experience. For an ISV to directly charge consumers looks like one very slippery slope.

ISV Executive: That fee is way too high! And unnecessary too! How does this new fee benefit their merchants (who already pay high monthly fees) and those merchants’ faithful customers? The answer, based on Toast’s own admission, is that it doesn’t. This is a benefit to Toast profits only, and frankly it seems greedy!

There are companies (ours comes to mind) who use a similar business model to reduce the financial burden of subscription fees for merchants while improving the consumer experience. Win-win is how we like it.

VAR/ISV Executive: Toast cannot continue to provide what they do at the price they’ve been doing it. Everyone has to make money at some point. Maybe that time has come.

There are merchants solely using Toast due to low-cost online ordering. The question will be how many of those merchants are really willing to spend money with a professional organization who has support fees?

VAR Executive: We will be informing our prospects and educating our customers where appropriate. We are determining if it makes sense to blog about this to our current customer base. One concern I have is that as a VAR I don’t have control over my vendor who could add this fee (or something like it) at any time as well. I know it’s harder to do when the ISV is not a PayFac (payment facilitator), but it is still out of my control. Glass houses and throwing stones …

I don’t agree with ISVs directly charging consumers. (Software vendor) has the same model, and although it’s lucrative for the ISV, the consumer doesn’t have any control over where they spend their money. It makes the consumer/vendor relationship tricky.

I also think for us making any change to our business so soon after it has been announced by Toast is a mistake. It’s better to see how it plays out. If there are more objectors like the one quoted in the NRN article, it may not stand.

VAR Executive: When our clients tell us they’re going to switch to Toast, most of the time they have already had an aggressive salesperson make them sign paperwork in advance. No matter what we attempt to educate out of the client, their minds are already made. To date, we’ve only been able to save a handful of merchants, and it’s usually because we explain to them how they can (and will) “turn up the juice” one day, which is what we’re starting to see right now.

This is really Toast’s first sign of showing their teeth. They’ve built this wonderful silo for restaurants who literally use Toast or Toast-adjacent services for every facet of their business. They have carte blanche to do this and other things. I think this gives us ammunition to show clients what they’re capable of doing instead of telling them that they have a “risk” of one day paying 10% of gross revenue to operate their business.

I’ve seen some of the calls to action concerning B2B sales versus B2C sales. But, depending on your ISV partner, “your customers” are not “your customers”; they’re your ISV’s customer. They get billed from the ISV, they get their merchant services from the ISV, etc., and frankly I’m scared to death that our partners will try to pull the same trick and we’re completely powerless to change it.

My Final Thought: I was recently reading about “good profits” vs. “bad profits” in The Ultimate Question by Fred Reichheld. He says good profits come from providing a valuable service and charging fairly for it. Bad profits come from sneaky fees and penalties that anger customers. On a spreadsheet, a dollar of good profits appears the same as a dollar of bad profits but, over time, the bad profits will sink you. Bad profits raise revenue but at the expense of the customer experience.

Most VARs are allergic to bad profits because they are close to their customers who are deathly allergic to the tactics that lead to bad profits. When you’re on the front lines of customer service, when you see merchants face-to-face in their restaurant, you are more likely to act in their best interest – because you care about them and/or because you don’t want to feel the heat radiating from them while they douse you with withering criticism. But if you work on the eighth floor of an office building hundreds of miles away and have no customer contact, burdening someone else with a not-quite-a-dollar fee doesn’t seem so bad.

If VARs aggressively follow the advice provided here by their peers, perhaps they can start stealing some of that market share from Toast one merchant at a time.

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Jim Roddy is the President and CEO of the Retail Solutions Providers Association (RSPA). He has been active in the retail IT channel since 1998, including 11 years as the President of Business Solutions Magazine, six years as an RSPA board member, one term as RSPA Chairman of the Board, and several years as a business coach for VARs, ISVs, and MSPs. Jim has been recognized as one of the world’s Top Retail Influencers by RETHINK Retail, a Leading CannaTech Influencer by The CannaTech Group, and is regularly requested to speak at industry conferences on SMB best practices. He is author of two books – The Walk-On Method To Career & Business Success and Hire Like You Just Beat Cancer – and is host of the award-winning RSPA Trusted Advisor podcast. For more information, contact JRoddy@GoRSPA.org.