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________________________________________________________________________________________________________________ Harvard Business School Senior Lecturer Frank V. Cespedes and independent researcher Michael J. Roberts prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional reference to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. Copyright © 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

F R A N K V . C E S P E D E S

M I C H A E L J . R O B E R T S

Meridian Systems

Robin Eisenstadt finished the sandwich she was eating for lunch with Dana Stevens, vice president of sales at her company, Meridian Systems. “Dana,” she said, “we need to decide how to roll out GingerSnap and examine the implications this introduction may have for our sales strategy and how we deploy our sales force.”

Meridian Systems sold restaurant point-of-sale (POS) systems—the terminals and software that managed menus, created orders and checks, and processed customer payments. Since Eisenstadt had founded Meridian, it had carved out a successful—if small—position in the restaurant POS market. Now, in February 2018, Meridian was about to roll out its tablet-based system, called GingerSnap, a relatively new style of POS system based on an Android tablet or iPad that restaurant servers carried with them and used to take orders and send them to the kitchen, create a bill, and process customer payments. The system ran on a cloud-based app that updated and managed this software-as-a-service (SaaS) product. Eisenstadt and Stevens had several decisions to make:

• First, should Meridian create a separate sales force for GingerSnap? Or should it simply fold it into the existing sales effort and allow Meridian’s existing direct sales force to sell the product? Until now, this sales force had focused solely on the terminal-based system. If Meridian created a separate sales force, it needed to decide if this should be a field/direct sales force or an “inside” sales force that sold over the phone and the web, or perhaps a hybrid of these two approaches.

• Second, how should sales reps be compensated for selling GingerSnap? Would this compensation strategy affect sales of Meridian’s terminal-based product?

• Finally, should the sales effort be focused by type of client—specifically customer size or type of restaurant? The sales force currently did not specialize by either customer size (number of units) or restaurant type (fast food, casual, or fine dining). The existing nonspecialized approach had worked well so far, but the introduction of the new product was leading Eisenstadt and Stevens to revisit this question.

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Restaurant POS Systems

Restaurant POS systems had evolved from simple cash registers that kept track of the sum of checks rung-up and held cash for making change. Computer technology, when applied to the restaurant industry, gave the opportunity to add value to the device in numerous ways:

• The server would enter the ordered menu items into the POS terminal (possibly a mobile terminal, if it was a tablet-based system) and that would simultaneously create items for the customer’s check and send the order to print out in the kitchen for the chef, signaling the preparation of the food.

• The entry of detailed recipes for each menu item into the POS system would allow the food amounts used for a day, a week, or a month’s worth of customer orders to be precisely calculated.

• The entry of data on beginning inventory and received food goods (e.g., 10 pounds of tomatoes and 22 lobsters) would, in combination with the above data, allow for the precise calculation of expected food on hand over any period. When combined with a physical inventory at a period’s end, managers could spot discrepancies, which could indicate pilferage of food, portion sizes that varied from the size called for in the recipe, or a customer’s food order not being entered into the check system.

• The entry of prices for received food (e.g., tomatoes $1.69/pound, lobsters $9.00 each) would allow the value of food on hand for inventory purposes to be calculated. In turn, this would allow the cost of goods sold (COGS) for the period (i.e., beginning inventory + purchases – ending inventory = COGS) to be calculated. A theoretical COGS could also be calculated on the basis of the recipe for each food item offered and the number of those items expected to be sold during a period.

• The terminal could serve as a credit card interface, printing credit card receipts and communicating with credit card networks for card approval and payment processing.

• Some POS systems managed staff scheduling, clocking in and out, and payroll processing.

• These data could provide valuable help in managing restaurant operations. For example, they could indicate which were the highest- and lowest-margin items on the menu, and which were the highest- and lowest-volume items. If the price of tomatoes doubled, they could forecast the effect of the price rise on each menu item that contained tomatoes.

• Finally, some systems also came with the ability to integrate reservations and manage table assignments, and they served as a platform for outbound customer marketing and loyalty program management (e.g., frequent diner cards and gift cards).

The U.S. Restaurant Industry

In 2017 U.S. restaurant industry sales were approximately $736 billion. They had grown slightly over 4% annually for several years. (Exhibit 1 shows industry sales.) The largest segments included the following:

• Full-service restaurants (defined as restaurants where patrons order from their table and pay after eating), with $263 billion in revenues

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• Quick-service restaurants (QSRs, defined as restaurants where patrons pick up their own food and pay when ordering, which accounted for approximately 80% of U.S. restaurant visits in 2017), with $234 billion in sales1

• Hotel restaurants, snack bars, educational and institutional service, and the military

There were approximately 620,000 restaurants in the United States. Of these, 290,000 were chain restaurants and 330,000 were classified as independently owned. 188,000 chain restaurants were QSR franchises. There were approximately 31,000 full-service restaurant franchises. The largest QSRs in the U.S. were McDonald’s, Starbucks, Subway, Burger King, and Wendy’s. These chains had anywhere from 6,500 to 14,500 U.S. locations. The largest chains of full-service restaurants included Olive Garden, Red Lobster, Applebee’s, Outback Steakhouse, and Chili’s Grill & Bar. These chains had 500 to 2,000 units nationwide.2 Within the full-service category, “fine dining” constituted the high-end segment. Casual dining was a lower-end segment that included most other full-service restaurants.

Current Restaurant POS Systems

Worldwide, restaurant POS systems were a $10.2 billion market. The United States accounted for $2.8 billion of this amount in 2017. Full-service restaurants accounted for 40% of this amount; quick- service accounted for 35%; institutional, 10%; and the remaining services comprise the remaining 15%.3 The top half dozen or so players in the restaurant POS space accounted for about half the market and included Aloha POS (a subsidiary of NCR), MICROS, Digital Dining, Clover, Future POS, and POSitouch. After this group, numerous POS companies each accounted for 2–3% of the market. The traditional POS system was a fixed terminal, with a touch-based computer screen that allowed servers to select, by means of a touch screen, the table that had ordered, and then select the menu items that had been ordered for each patron at that table. The terminal sent the order to the kitchen, kept track of all items ordered (e.g., a medium-rare cheeseburger, diet cola, and pecan pie for patron no. 1 at table no. 16) prepared the check, and processed the payment for the check.

The mobile or tablet-based system was relatively new. Wi-Fi and tablets had enabled much of the fixed-terminal technology to migrate to small devices that could be carried by waitstaff. This cut down on the time servers needed to walk back and forth between fixed terminals and allowed them to enter and send orders to the kitchen from the table. Some restaurants had taken the technology a step further and put their menus directly on tablets, allowing customers to order themselves and bypass the server entirely. This was a small subset of restaurants now, but it was expected to grow. Similarly, mobile systems allowed payment processing at the table by the patron. This self-service system was currently in about 10% of restaurants, but it was expected to expand to a significant fraction of restaurants in the “fast-casual” segment. Most tablet-based systems were cloud-based, though this was not a technical necessity, and were sold by subscription.

1 NPD Group, “U.S. Quick Service Restaurant Traffic Growth Stalls in 2016 and Full Service Visits Decline,” press release, February 8, 2017, https://www.npd.com/wps/portal/npd/us/news/press-releases/2017/us-quick-service-restaurant-traffic- growth-stalls-in-2016-and-full-service-visits-decline/. 2 Emmie Martin, Tanza Loudenback, and Kaitlyn Yarborough, “The 20 Best Chain restaurants in America,” Business Insider, July 5, 2016, http://www.businessinsider.com/the-20-best-chain-restaurants-in-america-2016-7, accessed June 4, 2018. 3 Grand View Research, “Restaurant Point of Sale (POS) Terminal Market, Industry Report, 2025,” June 2017, https://www.grandviewresearch.com/industry-analysis/restaurant-point-of-sale-pos-terminal-market; accessed January 5, 2018.

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While terminal-based systems represented 85% of the market (in dollar terms), tablet/cloud-based systems were expected to grow at 14% annually, compared to 8–10% for terminal-based systems. Moreover, according to many observers, “These systems provide a high return on investment by enhancing order accuracy, rationalizing order processing, and improving sales and profitability.”4 The QSR segment accounted for about 31% of the POS market, and it was expected to be the highest-growth segment for POS sales: more than 11% annual growth was forecast.5

The average price for a terminal-based restaurant POS system in 2017 was about $13,500, down from $18,000 in 2012.6 Larger-volume restaurants, which could support a higher level of investment, found that it cost $30,000 to $40,000 for a fully featured, sophisticated POS system. Restaurants then typically paid an additional 10% or so of the purchase price for an annual support contract, which usually covered 24-hour telephone support as well as service visits. Software upgrades would be offered every three years or so for an additional charge, and the hardware might wear our or become obsolete. Historically, restaurants replaced their POS systems every five to seven years (generating sales of approximately 150,000 units per year).7

Toast, TouchBistro, and Breadcrumb were three popular tablet-based competitors. Toast, a venture- backed company founded in Boston in 2012, had raised over $130 million in venture capital. In August 2015 Toast announced that it had signed 1,000 customers in under two years. The website Techcrunch estimated that over $350 million had been invested (by mid-2016) in restaurant POS platforms.8

The tablet-based systems had several advantages. They used standardized hardware—iPads and Android tablets that were produced by the millions, which allowed the cost of the hardware to ride down the cost curves enabled by worldwide economies of scale. Restaurant owners were also attracted to the mobility and other in-store advantages offered by the tablet-based systems.

Toast’s typical customer had 2.5 tablets and paid the company about $2,400 per year. Other competitors offered subscription services starting at $69 per month per tablet. Many of these tablet- based competitors also processed payments, collecting the 2% or so payment-processing fee that all restaurants paid for credit card processing. These fees were not all margin to the tablet-based POS companies, which had to pay other companies for downstream payment processing.

Many restaurant operators, however, were uncomfortable with having their data in the cloud. One restaurateur commented, “With a terminal-based system, you can operate without the internet. With cloud-based tablets, when the internet goes down, you cannot process payments online; we must bring out the old credit card swipers and run the card on a piece of paper with a carbon paper copy, and then run everything through once the internet is back up. It’s a pain, and if you depend on the internet, a few hours of downtime during the dinner rush can cost you thousands of dollars.”

4 Ibid. 5 Ibid. 6 Quorion, “2017 Restaurant POS Survey Report,” January 26, 2017, https://www.quorion.com/blog/pos-systems/2017- restaurant-pos-survey-report/; accessed January 5, 2018. 7 David Jegen, “The Restaurant Table(y) Is Getting Crowded,” Techcrunch, October 22, 2016, https://techcrunch.com/2016/10/22/the-restaurant-tablet-is-getting-crowded/. 8 Bryan Guerra, “The Strategic Pivot: Interdependence vs. Modularity in Restaurant POS Systems,” HBX Business Blog, October 27, 2015, https://hbx.hbs.edu/blog/post/toast-tab-the-difficulty-of-specialization-in-an-interdependent-industry.

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Background—Meridian Systems

Eisenstadt founded Meridian after five years as a product manager with Baird Technologies: “Baird was a startup in the restaurant POS space. It was underfunded, the CEO was not a great leader, and we went bankrupt. But I saw the industry from the inside out and saw a better way. Meridian started with a simple, dedicated terminal system, focusing more on back-of-the-house functionality.”

Many other POS companies were migrating their products and clients to the cloud through tablet- based SaaS systems, but Meridian had stayed focused on terminal-based systems: “Most restaurants are small, mom-and-pop-type businesses. They value the peace of mind that comes with knowing that all their data are on their machine.” Still, Meridian had foreseen the rise of tablet-based POS systems. Eisenstadt explained, “The potential of these systems was clear. We started developing one internally. When Square began to gain traction, that highlighted the potential of these systems for small businesses. Now we have had a tablet-based SaaS system—GingerSnap—in beta for about six months, and it has gone well. We are ready to roll it out as a second product in our line.”

Meridian had been funded with two rounds of venture capital, totaling $22 million, and had been profitable for the previous three years. (See Exhibit 2 for Meridian’s income statement.) The company had invested a large sum in research and development (R&D) to develop GingerSnap, and Eisenstadt observed, “We need to keep our sales expense as a percentage of revenues roughly equal to what it has been in the terminal-based business. We can’t afford to destroy our profitability.”9

Customers and the Buying Process

Meridian’s current customers tended to be larger, full-service restaurants, with a single unit, and very small chains (i.e., those with five or fewer units; small chains were those with 6 to 25 units, and medium-sized chains were those with 26 to 100 units). In many cases, Meridian’s customers were not chains per se, in the sense that all four or five restaurants were the same, but were more likely to be situations where a single owner ran several different restaurant concepts under a group umbrella (e.g., a brick-oven pizzeria, a seafood house, and a steak restaurant).

Eisenstadt explained: “We have focused on single units and very small local chains that see our value proposition in terms of the full range of value-added modules and the customizability of our solution. While the average Toast customer might have 2.5 tablets, our existing clients would need 12 or 15 tablets if they were going to run their business on a tablet system—they are significantly larger than the average small restaurant.” Stevens elaborated,

In single unit and smaller chains, most owners are very involved. They network a lot with their local competitors, and they know a lot of people from regional and national conferences. Referrals are very important. Whether it is a POS system or warming ovens, they call around and talk to their counterparts and get advice and recommendations. We have good word of mouth because we provide a customizable product and good service, but we need a high price point to support this approach. We get leads from restaurant conferences, from our web presence, and by referrals from existing customers. With our existing terminals, we can move from a warm lead to close in 60 days or so. The key buying criteria—for our clients—are functionality and follow-on support. We are less successful when the customer wants a bare-bones system and is more price sensitive. For GingerSnap, this will

9 The accounting for subscription services forced companies to recognize revenue when the service was delivered (i.e., each month over the life of the subscription). Compared to an upfront sale, this naturally stretched out revenue and thus, in the early years of a subscription introduction, reduced profitability by moving revenue back in time.

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be different: ease of use and reliability are the key factors for tablet buyers—they expect to be able to “plug and play.”

Another category of full-service restaurants was national or regional chains, where headquarters staff often evaluated products and vendors and standardized their systems and suppliers. Often, headquarters created a preferred list of vendors, and the local units could select from these options. In the case of POS systems, chain restaurants tended to standardize on a single vendor. Stevens said,

The investment in learning and in-house support for these chains can be significant, and the learning curve for a POS system is steep. They do not want to learn multiple systems. The small and medium-sized chains that make up our customer base tend to be higher- end establishments. Most chains build some in-house support. They value our service less and are more price sensitive. When we get involved in this kind of sale, it is usually driven by the VP of operations and/or the head of information systems. There is always a committee of restaurant managers and headquarters staff, including finance, operations, and information systems people. It tends to be a four- or five-month sales cycle. It can be nine months for large chains. References and word of mouth count far less. We expect to target this market with GingerSnap, so that will be a change for us. And once you get over 30 or so restaurant units, the chains tend to be national, or at least super-regional, so that will be another change.

Finally, QSRs tended to be either single unit, mom-and-pop-type restaurants—like a local pizza parlor or sub shop—or large franchised operations. The single-unit QSRs often did not use a POS system, but simply managed the business out of a cash register. Eisenstadt noted, “Selling to smaller restaurants will be new for us, and this should be a simpler, shorter sales cycle, say, 30 to 45 days. In these kinds of units, it is almost always the owner/operator who drives the whole process.”

Most large chains of franchised QSRs like McDonald’s, Pizza Hut, and Subway, were centralized. In many cases, centralized regional or national groups established the specifications and, often, the specific vendors for equipment, including POS equipment. In other situations, franchisees were free to choose, and headquarters’ approval was a “hunting license” that allowed an approved vendor to contact individual franchisees who owned perhaps one restaurant or owned and operated many units.

When buying items like meat and bread, there was often a preference for using local vendors, and franchisees exercised more flexibility. For POS systems, however, owner-operators had less incentive to search out vendors and do their own research. Instead, the franchisor had a large staff of experts who did this work. POS systems needed to integrate with systemwide reporting requirements, and headquarters negotiated hard for better pricing than an individual owner was likely to obtain. Stevens noted, “They really squeeze every nickel and can afford to buy a very basic platform and put a lot of their own development effort into customizing.”

For Meridian’s existing terminal-based POS systems, new restaurant entrants constituted the largest share of growth. Virtually all restaurants of Meridian’s target size already had a POS system. For tablet- based systems, however, there was a significant opportunity to convert small, single-unit restaurants that had until then operated solely out of a cash register.

Beyond the natural replacement cycle, other changes, such as a significant upgrade or refurbishment, a change in ownership, or the opening of a new unit, could initiate a search for a POS system. Most restaurants used the same vendor, largely because of familiarity with the software; a change would require significant training for staff. On the other hand, buyers evaluated alternatives, if only to keep their existing vendors honest. Many customers were dissatisfied with their existing

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vendor owing to support or technical issues, or because a POS system did not integrate with other systems (e.g., accounting).

Meridian’s Existing Sales Approach

Meridian sold its product with a direct sales force in three offices: Boston (eastern region), Chicago (central) and San Diego (western). Exhibit 3 shows the organization chart for the sales force. A regional sales manager (RSM), who had responsibility for hiring, training, developing, and firing in her region, led each office. RSMs also carried a quota, as did other sales reps. Each region had several senior-level reps, called sales directors (SDs). (RSMs and SDs were collectively referred to as reps.) SDs followed up on warm leads, made sales presentations, and closed sales. Each region also employed sales associates (SAs), who made cold calls in person and by phone and email, developed sales presentations, set up appointments for more senior-level sales reps, and followed up after a sale. Of the sales force, only RSM and SDs were eligible for commission-based compensation.

Finally, each region employed a sales tech (ST), who detailed the technical specifications for systems, answered technical questions, and performed post-sales support. Installing a sophisticated POS system required significant upfront investment to get the most out of the technology: recipes had to be entered, and an initial template for all menu items, ingredients and pricing, and starting inventory levels, needed to be developed and entered. Meridian had a network of independent consultants who could perform these tasks when the restaurants did not undertake them.

Boston was both a headquarters (HQ) and regional office. Besides the usual complement of regional sales staff, HQ staff included Stevens, VP of sales, and certain corporate support staff.

Confronting a Changing Landscape

As Eisenstadt reviewed plans for the upcoming year, she saw several issues that affected how Meridian was currently deploying its sales force:

GingerSnap has forced us to reconsider our sales force deployment and compensation strategy. It is similar in functionality to the existing terminal-based offering, but different both in form factor and in being cloud-based. The pricing is also different. The terminal sale is a big upfront investment. GingerSnap is a monthly subscription and a smaller upfront charge for the hardware. Our existing sales force might give the new product short shrift because the dollars will look smaller to them. If we develop a dedicated sales force, we can have a completely different compensation model. If the same sales force sells both products, we may need a compensation structure that doesn’t bias reps against the tablet-based system.

We need to get this working right out of the box. The next two years will be critical for penetrating the tablet-based market. This is our window—if we miss it, I fear we will never catch up to the competitors who already have a head start on us.

See Exhibit 4 for an overview of the buying process with Meridian’s existing clients, and as it was expected to play out for two types of tablet buyers—single units and very small chains, and the larger, medium-sized chains.

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Meridian’s Existing Compensation Structure

Meridian currently paid its reps on the basis of on-target comp (OTC), the total compensation that a well-performing rep could be expected to earn in a year. OTC had two components—a base salary and variable compensation that was based on the commissionable sales times the commission rate. For instance, if an SD had an OTC of $155,000, base salary was $80,000 per year and the target variable incentive compensation was $75,000. Reps had a quarterly quota, and they were paid a percentage of their quarterly variable compensation as a function of the attained percentage of quota. This system functioned like a commission-based system, and the effective commission rate was approximately 3.75% of sales. In the existing compensation model for the terminal product, quotas were based on— and reps were paid on—hardware sales only, not the value of annual recurring maintenance, support, and service. See Exhibit 5 for details of this plan as it had played out during 2017 for one of Meridian’s regions. (See Exhibit 6 for background on product pricing.) Eisenstadt commented,

The average sale of the terminal-based product is $36,500 per restaurant, and our average client runs 2.4 restaurants. We pay a rep at quota about $155,000 per year, so we attract good people. With GingerSnap, the upfront fees are low, and it is a subscription service. These restaurants are smaller than the restaurants we sell our terminal-based systems to. The average first-year revenue (per restaurant) to Meridian is about $2,000 up- front and $500 per month. With the same comp structure and number of restaurants per sale, that equates to a much lower variable compensation for the rep. We could change the incentive structure to equalize the expected compensation, but then the product becomes less attractive for us. We also want to sell to larger chains, which will help the economics. But our ability to succeed with larger chains is an unknown. We are more confident in our sweet spot of single or two to three units, where we have a reputation. For a medium or large chain, the effort to sell GingerSnap is about the same as that for a terminal-based system.

Sales Force Deployment

Meridian’s sale force was currently deployed on a geographic basis: reps focused on restaurants headquartered in their respective geographic regions. Most current clients were single units or very small chains, not larger chains spread across Meridian’s sales regions. Stevens observed,

Large, fast-food restaurant chains aren’t a sweet spot for us, but larger chains of more casual dining restaurants are a good target for GingerSnap. As they consider swapping out legacy systems for a tablet-based system, they should see that our product delivers a lot of value. One beta customer is a chain of 29 family-style Italian restaurants in the Midwest. It has been pleased with our system. We hope to be able to land a lot more clients like that, in addition to the single-unit operators and very small chains. An inside sales force could be effective with the single-unit and small-chain segment, where we are usually dealing with a single owner-operator.

There were varying views about whether Meridian should create a separate sales force focused on GingerSnap—or fold it into the existing sales effort. Stevens noted, “Building a standalone sales force is expensive, and it isn’t clear what advantages it brings. Reps should be able to learn the particulars about the GingerSnap product relatively quickly. And when they reach out to a potential new account, they won’t necessarily know which product the customer wants. So it will pay to have both arrows in their quiver.”

Eisenstadt saw it differently:

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The same sales force might work when it comes to single units and very small chains. But to succeed, we need to target chains that are larger than our current customer base and have different needs from those of our terminal-based customers. Larger chains are more cost sensitive and more concerned with simplicity and standardization. The tablet- based system fits these needs, and a dedicated sales force could better sell these benefits. Yet we might have more success selling our existing terminal-based system to larger chains if we tweaked our volume pricing and focused on that segment, where we haven’t pushed. We have considered letting the same sales force sell both products, but putting in a “trigger” so that reps will be paid a lower commission rate on terminal sales unless they hit the trigger for the number of tablet sales they make in a quarter. This would force them to expend some effort on GingerSnap, even if the commission structure doesn’t favor it.

Eisenstadt highlighted another key issue—whether to develop an inside sales team to focus on GingerSnap:

The margins on GingerSnap are lower. We currently use sales associates in each region to make cold calls, as well as to follow up on warm leads from conferences, advertising, and internet inquiries. SAs qualify leads and set up appointments for the sales reps, who make in-person sales calls. We could try to develop a larger, more professional group of SAs to do this work and to carry the sales cycle through to completion in an inside sales model where reps sell remotely and work with prospects by phone, email, and WebEx- type demos and video interactions. It is less expensive and we can hire lower-skilled people at a lower cost.

Stevens estimated the economics of an inside sales approach for GingerSnap:

The fully loaded cost of an SA is currently about $80,000: $40,000 in direct compensation and about $40,000 in overhead and other costs. Our SAs don’t really have an incentive piece to their pay, but if we did go that route with GingerSnap, we’d probably want to add $10,000 or $20,000 to their total compensation to cover the incentive that would be required to get them to sell it. Most of our work selling GingerSnap in beta has been with current customers, so it’s not really a fair test. For sales to single-unit operators and very small chains, GingerSnap is an easier sale than the terminal because it is simpler, and the technical implementation is far easier. The buyer is almost always the single owner-operator we are used to selling to. We could expect a successful SA to carry an annual quota of $500,000 (in upfront purchases), selling about 20 systems per month to hit that quota.

There is no internal support for an inside sales model. Some RSMs and SDs feel threatened by an inside approach or see it as a step down from the current sales approach. They insist that in-person selling by skilled and well-paid reps will give us the best closing percentages. But at what cost per sale?

Finally, Stevens addressed the issue of focusing on the larger chains with GingerSnap:

The single unit and very small chains remain the spot where we are best known. But single units that are a target for GingerSnap will be smaller restaurants than the large one that is buying a terminal-based system. The typical GingerSnap customer will be about half the size—in terms of the revenue per restaurant and the average number of servers— and therefore terminals or tablets required to operate the business. Obviously, selling to

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a chain of 10 to 30 restaurants represents a multiple of margin to us and warrants an increased investment in selling. Our success in beta with GingerSnap at some chains of this size makes me think we should devote some specialized sales effort to this segment.

Having an inside sales force would be a new challenge. A hybrid approach, with an inside sales force for small accounts and a direct sales force for larger ones, is more complicated. Our venture capitalists have been very patient, and we are profitable, although not at the levels we’d like. Our investment in the tablet product has been a drag on earnings, but that is behind us now. If we focus on larger customers, that longer sales cycle will be a further drag on earnings, compared with going for some quick wins. But the tablet-based sector is rapidly growing and shaking out. Can we afford to wait longer than we already have?

Eisenstadt weighed in:

Selling different products with different margin structures to the same market is complicated but necessary. Our margin on the equipment purchase is 50% for the terminal business and 20% for GingerSnap. That reverses on the monthly recurring charges: For Gingersnap, the margins should be about 90%, versus 80% for the terminal product. The other significant difference is churn: the fraction of customers who re-up annually. The equipment purchase ties people in on the terminal side of the business. Our churn there is 2% per year. For GingerSnap, we expect churn to be higher—say, 10% per year.

Should we worry about cannibalizing our terminal-based product if the percentage margins on the SaaS product are higher? What’s the net gain if we swap out our terminals for tablets? Moreover, our best reps want to sell GingerSnap. They say they can succeed and will put their muscle behind it if the comp plan provides the right incentives and rewards.

The future of the industry may be tablet-based POS. We can’t afford to give it short shrift. Once we get our tablet-based product out into the market and have more experience selling it, we might even decide to use our sales force to migrate our installed base to tablets. After all, we have only 2% of the market in the terminal space; our competitors are big. But the tablet market is still unfolding. We can prosper there with the right sales approach.

For the exclusive use of s. wu, 2018.

This document is authorized for use only by shihong wu in BA3103 Fall 2108 Nelson Coursepack taught by LUKE NELSON, Temple University Japan Campus from Aug 2018 to Jan 2019.

Meridian Systems | 918-533

HARVARD BUSINESS SCHOOL | BRIEFCASES 11

Exhibit 1 Commercial Restaurant Sales by Sector ($ Billion, 2017)

Eating Places (see detail below) 551.8

Bars and Taverns 19.8

Managed Services 53.6

Lodging Places 36.1

Retail, Vending, Recreation, Mobile 75.1

Total 736.3

Eating Places Detail:

Full-Service Restaurants 263.0

Quick-Service Restaurants 233.7

Cafeterias, Buffets 5.7

Snack Bars 40.8

Caterers 8.6

Total 551.8

Source: National Restaurant Association, “2017 State of the Industry” (Washington, DC, 2017), i, 5.

Exhibit 2 Meridian Summary Income Statement ($000)

Revenues 35,817 Cost of Revenues 7,880 Gross Margin 27,937 R&D 5,014 Marketing & Sales 16,118 G&A 3,940 Total Op Exp 25,072 Income before Taxes 2,865 Taxes 630 Income after Taxes 2,235

Source: Company

For the exclusive use of s. wu, 2018.

This document is authorized for use only by shihong wu in BA3103 Fall 2108 Nelson Coursepack taught by LUKE NELSON, Temple University Japan Campus from Aug 2018 to Jan 2019.

918-533 | Meridian Systems

12 BRIEFCASES | HARVARD BUSINESS SCHOOL

Exhibit 3 Meridian’s Sales Force Organization Chart

Exhibit 4 Buying Journey for Typical POS System Buyer

Typical Existing

Terminal Customer

Tablet Customer

Buyer Awareness Owner-operator Small customer Medium-sized chain Owner-operator Corporate finance/MIS

Conferences and conventions

Conferences and conventions

Extensive research by finance/MIS with input from operations

Fellow owners and competitors

Fellow owners and competitors

Referrals Referrals Prior experience with

systems Prior experience with systems

Visits by vendor to corporate

Consideration Online research Online research Extensive demos Visits to fellow owner restaurants

Visits to fellow owner restaurants

Beta testing in small units

Demos at trade shows or onsite by vendor

Demos at trade shows or onsite by vendor

Web demos Web demos Decision Extensive functionality Basic functionality Moderate functionality Reliability Value/price Value/price Reliability Cycle Lead to close 60 days Lead to close 30–45

days Lead to close 6–9 months

For the exclusive use of s. wu, 2018.

This document is authorized for use only by shihong wu in BA3103 Fall 2108 Nelson Coursepack taught by LUKE NELSON, Temple University Japan Campus from Aug 2018 to Jan 2019.

Meridian Systems | 918-533

HARVARD BUSINESS SCHOOL | BRIEFCASES 13

Exhibit 5 Compensation, Western Region, 2017, by Quarter

Role Base Salary Target

Comp

Incentive

Comp at

100% Quota

Quarterly

Quota

Target Quarterly

Incentive Comp

Regional Sales Manager Lawrence 120,000 235,000 115,000 800,000 28,750 Sales Director Hepworth 80,000 155,000 75,000 500,000 18,750 Sales Director Jarvis 80,000 155,000 75,000 500,000 18,750 Sales Director Vance 80,000 155,000 75,000 500,000 18,750 Sales Director Rodriguez 80,000 155,000 75,000 500,000 18,750 Total for Region 440,000 855,000 415,000 2,800,000 103,750 2017 Actual Revenue/Comp by Quarter 1Q 2Q 3Q 4Q Regional Sales Manager Lawrence 800,000 800,000 800,000 800,000 Sales Director Hepworth 500,000 500,000 500,000 500,000 Sales Director Jarvis 500,000 500,000 500,000 500,000 Sales Director Vance 500,000 500,000 500,000 500,000 Sales Director Rodriguez 500,000 500,000 500,000 500,000 Total for Region 2,800,000 2,800,000 2,800,000 2,800,000 Actual Quarterly ACVa

Regional Sales Manager Lawrence 820,000 750,000 840,000 880,000 Sales Director Hepworth 460,000 480,000 420,000 508,000 Sales Director Jarvis 445,000 440,000 502,000 520,000 Sales Director Vance 377,000 390,000 350,000 310,000 Sales Director Rodriguez 445,000 525,000 505,000 560,000 Total for Region 2,547,000 2,585,000 2,617,000 2,778,000 Incentive Comp Calculation

Quarterly Target Incentive Comp at 100% Quota Attainment

Regional Sales Manager Lawrence 28,750 28,750 28,750 28,750 Sales Director Hepworth 18,750 18,750 18,750 18,750 Sales Director Jarvis 18,750 18,750 18,750 18,750 Sales Director Vance 18,750 18,750 18,750 18,750 Sales Director Rodriguez 18,750 18,750 18,750 18,750 Total for Region 103,750 103,750 103,750 103,750 Actual ACV as a % of Quota

Regional Sales Manager Lawrence 102.5% 93.8% 105.0% 110.0% Sales Director Hepworth 92.0% 96.0% 84.0% 101.6% Sales Director Jarvis 89.0% 88.0% 100.4% 104.0% Sales Director Vance 75.4% 78.0% 70.0% 62.0% Sales Director Rodriguez 89.0% 105.0% 101.0% 112.0% Total for Region 90.8% 92.3% 93.3% 99.1% Actual Incentive Comp Paid

Regional Sales Manager Lawrence 29,469 26,953 30,188 31,625 Sales Director Hepworth 17,250 18,000 15,750 19,050 Sales Director Jarvis 16,688 16,600 18,825 19,500 Sales Director Vance 14,138 14,625 13,125 11,625 Sales Director Rodriguez 16,688 19,688 18,938 21,000 Total for Region 94,231 95,766 96,825 102,800

a Revenues are calculated in terms of ACV (annual contract value) of the account for the first year of the contract.

For the exclusive use of s. wu, 2018.

This document is authorized for use only by shihong wu in BA3103 Fall 2108 Nelson Coursepack taught by LUKE NELSON, Temple University Japan Campus from Aug 2018 to Jan 2019.

918-533 | Meridian Systems

14 BRIEFCASES | HARVARD BUSINESS SCHOOL

Exhibit 6 Meridian Pricing Comparison: Terminal-Based System versus GingerSnap

Pricing is for an “apples-to-apples” comparison of a large ($2.5 million annual revenues) restaurant with a full complement of 14 servers during a busy shift

Terminal-Based GingerSnap

Terminals, with Touchscreens, Cash Drawer, Credit Card Reader, Bill & Receipt Printer

4 at $3,750 each = $15,000 Tablets 18 at $50/month Gift Card Package $25/month Loyalty Package $25/month

Kitchen Printers 5 at $500 each = $2,500 Inventory Package $25/month Software License $5,000 Staffing Package $25/month Inventory Module $2,000 Receipt Printer 4 at $300 each Gift Card Module $2,000 Kitchen Printer 4 at $300 each Loyalty Program Module $2,000 Wireless Hub 1 at $1000 Staffing/Payroll Module $2,000 Ethernet Switch 1 at $600 Wiring/Installation $6,000 Total $4,000 + 1,000/month Total $36,500

Maintenance/Software Support 2,250/year Extended Warranty/Hardware Service Contract

2,850/year

Note 1: Even though 14 was the full complement of servers, 18 tablets were required for backup, in case of misplacement, loss, not of charge, and so on.

Note 2: The above is an apples-to-apples comparison for restaurants of a similar scale. Meridian believed that its customers for GingerSnap would be somewhat smaller restaurants, perhaps half the size (in revenues) and requiring half the investment in terminals or tablets.

For the exclusive use of s. wu, 2018.

This document is authorized for use only by shihong wu in BA3103 Fall 2108 Nelson Coursepack taught by LUKE NELSON, Temple University Japan Campus from Aug 2018 to Jan 2019.

Restaurant POS SystemsThe U.S. Restaurant IndustryCurrent Restaurant POS SystemsBackground—Meridian SystemsCustomers and the Buying ProcessMeridian’s Existing Sales ApproachConfronting a Changing LandscapeMeridian’s Existing Compensation StructureSales Force DeploymentExhibit 1 Commercial Restaurant Sales by Sector ($ Billion, 2017)Exhibit 2 Meridian Summary Income Statement ($000)Exhibit 3 Meridian’s Sales Force Organization ChartExhibit 4 Buying Journey for Typical POS System BuyerExhibit 5 Compensation, Western Region, 2017, by QuarterExhibit 6 Meridian Pricing Comparison: Terminal-Based System versus GingerSnap
 
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