The 2023 RSPA Retail IT Channel KPI Study has recently been released, and it is full of valuable insights for retail IT solutions providers. The industry has largely recovered from the disastrous 2020 lockdowns, and the outlook for the remainder of 2023 looks the brightest since RSPA began conducting the study.
Retail profitability is on the rise and will continue to be. This means increased funds available for retailers to invest in the services VARS, ISVs, and Vendors who power the industry. As a result, RSPA respondents predict growth for their businesses across the board.
Below we will provide a concise analysis of the four main takeaways Star experts took from the report.
Half of VARs Achieved Double-Digit Sales Growth
Despite challenges from inflation and increasing pressure to offer free or discounted POS systems to gain recurring credit card processing revenue, channel partners continued to adapt their business model to achieve more profitability.
For most VARs, the adaptation worked. Only 16.9% of ISVs reported flat or negative growth. Just over 10% of respondents reported sales growth exceeding 40%. These numbers are dramatic improvements from 2020, when nearly 23% reported declining sales and more than a third (36.2%) saw sales flatline.
There was a general mood of optimism among respondents when it came to projections for 2023. The percentage of those forecasting a decline or no change in sales was only 11.7%, with all others predicting an increase of some size.
57.2% of Channel Partners Have Completely or Mostly Transitioned to a Recurring Revenue Model
Merchants are becoming accustomed to the “as a service” model and accepting it as a necessary aspect of the business. Most channel partners have now transitioned a majority of their business to a recurring revenue model. Subscription-based solutions that involve hardware, software, and technical support are more profitable and make it challenging for a merchant to switch to a competitor. The move to a recurring revenue model also enables channel partners to build the value of their business.
The numbers show this growing trend in the industry; in 2020, only 5% of VARs reported their business model relied on SaaS models to generate recurring revenue. Comparatively, in 2022 17.4% reported relying solely on SaaS business models, and in 2023 VARs adaption of this business model is projected to grow to 26.1%. Lastly, it’s vital to note that 0% of VAR/ISVs, reported having no recurring revenue. Everyone is adopting the model to some extent.
85% of VAR/ISV Hybrid Models Post Double-Digit Margins
According to the RSPA study, VARs have never been more profitable. The most successful channel partners are traditional VARs evolving their business offerings to include software and services. Hardware margins have historically been thin and remained so in 2022.
It is no coincidence that VARs profitability has risen in conjunction with the adaptation of a recurring revenue model. VARs combining hardware, software, and services have a stronger value proposition to present to the customer. This results in higher monthly subscription revenue and prominent profit margins.
One-Fifth of VARs Aspire to be Acquired by 2025
There has been tremendous convergence and acquisition in the POS and payments space. The number of mergers and acquisitions will continue to grow in 2023. With high-profit margins and double-digit sales growth, POS and payments solutions providers are attractive take-over targets. We predict we will continue to see investment firms looking to build their merchant portfolios by acquiring established channel partners.
Per the RSPA study, 21.7% of ISV/VAR hybrids “aspire to be acquired.” That is a significant increase from the 10.3% who had the same aspiration last year. This likely has more to do with the financial attractiveness of being acquired rather than a lack of buying interest. Exactly half of the ISV/VAR hybrid respondents stated that they had plans to make an acquisition by 2025.
It should be noted that these numbers do not consider interest from FinTech firms outside the industry. With roughly 3 of every 20 retail IT solution providers effectively on the auction block, the M&A space should provide quite the viewing spectacle in 2023.
There has never been a better time to be an ISV/VAR. Sales are growing at historically high levels, and double-digit profit margins are catching many outside the industry’s eyes. Star Micronics is ready to help its partners maintain operations during transitions, whether it’s an acquisition or setting up new revenue paths. We will remain a reliable source of POS solutions to keep everything running smoothly.