SQ: 3 lines of revenue

Here’s Sarah Friar describing Square’s 3 sources of revenue:

there is effectively three key models within Square. So, if you look within adjusted revenue, you see a line that is transaction margins. This is actually our net revenue from processing minus all COGS. So, that’s kind of line one of adjusted revenue. So that is any product that we monetize with the payments business model or take rate model. So that could be just our basic managed payment solution, but it can also be our invoices product where we charge 2.9% and $0.30 for every invoice that you send.

I like that business model a lot because it scales. So, it allows a seller to try, not something like they’re having to sign up for anything big, because literally they’re just going to pay per use. But clearly, when that seller gets really big, we get to continue to take of their growth too. So overall, if like everything, I like the transaction based model.

That was the first one. Here’s the second one:

The second user model you see in our adjusted revenue is subscription and services. And so that that is where we account for products like Square Capital where we effectively make money off of the loan that we give to our customers, we clearly – if we give them $100, we get the good charge about 10% to 15% more, so we charge $10 to $15 for that 100. And as they pay back, we make back that increment, that 10 to 15. Now in many cases, the Square Capital, we sell that on to third parties, so we take a percentage of that upfront as we make the sale, as we keep it on our balance sheet which is a small portion of Square Capital and we amortize the revenue over the life of the loan. In that line item, you’ll also see things like Caviar or delivery service and you’ll see products like Square Appointments or our CRM products, or we charge more of a typical software-as-a-service SaaS-based software fee. That’s kind of line item two.

Here’s the 3rd one:

And then the final line item is hardware. You’ll see from our hardware, both revenue but then COGS that we really use hardware more as a marketing expense. So, our goal is to get our hardware out in the world being used as a driver for the first two business models. So, typically we aim to make money, even slightly lose money from a hardware perspective.