June 16, 2016

QThru: The Business Model

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

– Gordon Gekko

This is the second in a series of retrospective thoughts on QThru, a mobile self checkout startup that went bust. See my "QThru Series" post for a list of all the topics.

In 2009, the smartphone app market was on fire. Apple's decision to release a native app SDK that developers actually wanted to use unleashed the creativity of the world and new businesses started to emerge. In particular, startups were looking at how an Internet connected computer could be used to process payments. In February that year, Square launched their mobile payment platform for iOS.

QThru initially started in the same digital wallet space. The founding engineers were already working on an Android wallet solution when Aaron Roberts, the soon to be CEO of QThru, discussed changing from a wallet into a mobile point of sale solution. Instead of processing the payments, QThru would maintain the product catalog and shopping cart. When the user checked out, payments would be handled through a third party - BrainTree. The whole platform worked much like any eCommerce platform at the time but the real innovation was the user experience.

Instead of searching for products by name or with a text entry, the QThru app would use the iPhone's camera to scan the barcode. This made finding and adding products to the user's cart far simpler than other web based solutions at the time. To expedite the development, Aaron found and partnered with Scandit for the barcode scanner. Early days on iOS didn't have a native barcode scanning library in the SDK.

Checkout Lines

To monetize the platform, QThru's initial business model was to charge a transaction fee (I believe of 2.5%) to the retailer. Right away the financial leadership of QThru highlighted that the transaction fee didn't cover the fee BrainTree was charging us to process the payment. This led to a fairly steep fee being pitched to retailers. Under the final pricing plan a retailer was:

  • charged a flat monthly fee for having the service active. This ranged between $100 to $500 depending on how many SKUs you wanted to load into the system.
  • charged an installation fee, which included us shipping produce scales and checkout kiosks. While the hardware provided through partners was expensive, QThru also added a markup for the software we loaded.
  • charged a 4% per transaction, $0.25 minimum.

The breakdown here really was a lack of empathy for the retail customer. Our target segment wasn't premium brand retailers, like Apple. Our customers were grocery stores that couldn't justify such a steep cost for letting a customer who just wanted a bottle of Coke and didn't want to wait in line. To make the situation worse, retailers didn't have an option of using their existing payment processor or electing to not by a kiosk.

To make the sales arrangements more contentious with retailers, we insisted that the mobile app remain a QThru branded app and that they simply add their retail locations to our map. Basically, we wanted to hijack their brands in order to build the QThru brand. More than once the VP of engineering asked if this was a wise idea and the idea of providing a SDK or whitelabeled apps was always dismissed without further discussion.

Without any value other than getting a small subset of customers through the line faster, we never did manage to sell this plan to a single retailer. The few contracts we had made a lot of concessions on the price of the service, in some cases giving it away for free.

Seeing that the per transaction/monthly fee model wasn't going to work, our CMO suggested we look at building out a promotion engine so we can sell customer segmentation and targeted ads. The idea here is that Coke could make offers and recommendations to you while shopping in an attempt to convert a Pepsi purchase to a Coke purchase. This is a vastly different platform that what we had developed and would take six months to a year to beta. With this divide and the continued commitment to selling the transaction/monthly fee model, we ran out of money with no progress.

In hindsight, the transaction/monthly fee model would work if we could offer something to the retailer that they didn't have before - like insight into their customer's behaviors. The advertising strategy would have also worked but our product needed to be vastly different, in particular, we'd need to let the retailers build the mobile apps and just provide the SDK. Our business wouldn't be consumer facing but rather retailer facing. I've also come to realize that grocery stores are already in a low margin business and tacking on any fee won't work.

Tags: retrospective qthru startup
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Dan Hable