80% of Toast's Revenue from Payments Underscores Vertical SaaS Opportunity

A recent social media post by vertical SaaS expert Luke Sophinos has highlighted a significant, often overlooked, revenue stream for vertical Software-as-a-Service (vSaaS) companies: payment processing. Sophinos asserted that vSaaS businesses not integrating payment processing could be "leaving 40-60% of potential revenue on the table," emphasizing that this segment can even surpass core software subscription income. He cited restaurant technology giant Toast as a prime example of this model.

"If your vSaaS doesn't process payments, you're leaving 40-60% of potential revenue on the table. Not exaggerating. Payment processing can be bigger than your SaaS revenue. Toast makes more from payments than software subscriptions," Sophinos stated in his tweet.

Sophinos, a recognized founder, operator, and investor in the vertical software space, advocates for embedded payments as a critical strategy for vSaaS growth. He explains that integrating payments allows for Total Addressable Market (TAM) expansion, improved customer retention by becoming a more integral part of a client's workflow, and offers a "free" product that can significantly scale revenue without direct monthly fees. His insights suggest that owning the transaction layer is key to building a venture-scale vertical SaaS business.

Financial reports for Toast, a leading restaurant management platform, corroborate Sophinos's claim regarding the dominance of payment processing revenue. In recent periods, Toast's revenue from financial technology solutions, which primarily includes payment processing fees, has consistently constituted the vast majority of its total revenue, often exceeding 80%. For instance, in 2021, payment processing made up 82% of its revenue, while software subscriptions accounted for only 10%. More recently, in Q1 2023, 82% of Toast's revenue came from processing transactions.

This model, where payment processing revenue dwarfs software subscriptions, illustrates a growing trend within the vSaaS sector. Companies are increasingly leveraging their deep industry integration to offer embedded financial services, transforming from pure software providers to comprehensive ecosystem orchestrators. While software subscriptions offer higher margins, the sheer volume of transactions processed by these platforms means that even lower-margin payment services generate substantial top-line revenue and contribute significantly to overall profitability.

The strategic shift towards embedded payments presents both opportunities and challenges for vSaaS companies. It allows them to capture a larger share of their customers' spending and creates significant switching costs, making their platforms stickier. However, it also introduces complexities related to regulatory compliance, payment infrastructure management, and competition from traditional payment processors, necessitating careful execution to maximize this lucrative revenue stream.