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Point of Sale Systems Explained: What is a POS System?

Diversified Payments pointing at POS screen after starting a new business.
Diversified Payments pointing at POS screen.

If you’re starting a business, you’re probably thinking about investing in a point of sale (POS) system. However, if you’ve only ever been on the other side of the counter during a point-of-sale transaction, you probably have many questions about what POS systems are, how they work, and whether your business needs one or not.

We put together this educational overview about what is a POS system so you can learn the basics of how they work, get some insider information on the real value, and help you decide what type of POS system is the right choice for your business.

Simplifying Point of Sale Systems

Simply put, a POS system is made up of hardware and software that works together to process sales and payment transactions at the point of purchase. It performs all the basic cash registers functions like ringing up items by department, tracking sales, adding taxes, and creating receipts.

However, to understand how a POS system works, it’s probably more equitable to compare it to a PC rather than a cash register. With a computer, you install the type of software (or app) you need — for example Microsoft Word to create documents — locally on the hardware or use web-based applications like Gmail for email that you access over the internet.

A POS system works in much the same way. Point of sale software is installed on POS hardware, and it’s powered by either a local server or internet connection. Additionally, like the complexity of a computer, it can do all these other business-related activities like tracking inventory, help you manage vendors and employee labor costs, and so much more — we’re about to discuss.

Are you ready to dive into the details?

Types of POS Systems

When it comes to finding a POS system to help run your business, it’s not one size fits all. Different types of businesses operate differently from one another. They manage customer service, the sales process, and their back offices in a variety of ways.

Therefore, to get the most value from a POS system, consider using one that’s designed for your specific type of business and operational process.

Retail POS Systems

On the surface, retail POS systems may seem relatively straightforward:

  1. A customer brings products they want to purchase to the checkout counter

  2. The sales associate scans the products’ barcodes, which adds all the items to the order, calculates sales tax, and provides the total amount due

  3. The customer pays with either cash or credit card (or debit card), and the transaction is complete

Easy, right? From a customer’s perspective, yes, it’s effortless — but that’s kind of the point. From the standpoint of business owners, it’s all the data collection and tracking beneath the surface that matters most.

When searching for the right retail POS system for your business, make sure it includes:

  • Advanced inventory management capabilities including an inventory matrix that takes sizes, colors, models, or styles of items into account

  • A customer relationship management (CRM) so you can create personalized email marketing campaigns

  • Layaway services and features to help customers afford those big-ticket items

  • Split tenders so customers can pay multiple ways for one sale

  • Set up and track employee commissions to motivate your team to sell more

Restaurant POS Systems

Compared to retail point of sale systems, bar and

restaurant POS systems are a horse of a different color when it comes to operational procedures at the point of purchase.

Depending on the type of restaurant you’re opening — a fine-dining establishment, the neighborhood dive bar, or a fast-casual eatery —you’ll need a point-of-sale system designed for your specific niche in the food and beverage industry.

Quick-Service Restaurants

When it comes to quick-service restaurant POS systems, the order and transaction process is similar to their retail counterparts.

  1. A customer walks up to the counter and places their order

  2. The employee rings up the order in the POS system

  3. The customer pays for their order

What you don’t see is what happens behind the scenes. Once an order is placed, the POS system communicates the information to the back-of-house prep stations via a kitchen printer or kitchen display system (KDS). This real-time communication is what helps ensure quick and accurate service.

Some must-have features for a QSR POS are:

  • Product prep station assignment so food orders go to the appropriate prep station

  • Include options for online ordering or delivery management for additional revenue streams

  • An option to add a self-service kiosk to help keep lines moving during peak hours

  • A digital menu board featuring images or video of your mouth-watering menu to encourage customers to spend more

  • Should your business expand, you’ll want the ability to manage multiple locations from one central portal

Full Service Restaurants and Bars

From servers inputting orders at the front-of-house to printing those tickets in the kitchen for the chef to prepare, your restaurant POS system is the core of your day-to-day operations.

If you’re in the market for a restaurant POS, some must-have features you’ll want it to include are:

  • Table management for every seat in the house

  • The ability to take and manage reservations

  • Easily split checks by item, amount, or guest

  • The ability to transfer checks to another server or bartender

  • Include options for online ordering or delivery management for additional revenue streams

  • Have an option to use EMV/NFC-enabled pay-at-the-table technology to increase operational efficiency and reduce chargebacks

  • Product prep station assignment so food orders go to the kitchen and drink orders go to the bar

  • Pre-authorize credit cards to ensure no one walks out on their bar tab

  • Food and liquor inventory management system

Salon POS Systems

Salons and spas are a very hyper-specific niche for POS systems because they offer a combination of services and merchandise; so your POS system needs to be able to manage both.

From inventory management to stylist management, here are some features you’ll want your salon POS system to have:

  • Online appointment booking so clients can book 24/7/365

  • A customer relationship management (CRM) so you can track services for clients and create personalized marketing promotions

  • Booth management if your stylists work on a contract basis

What to Look for in a POS System?

Now that you know what industry-specific features to look for in a POS system let’s take a look at some more general characteristics that apply to almost every type of business.

Inventory Management

POS systems can let you replace manual counts with time-saving and accurate automated processes. Some POS solutions can even alert you when stock is running low and provide you with the information you need to issue a purchase order in time, so you never run out of your best-sellers.

Employee Management

You can use POS terminals for employee clock-in and clock-out, requiring that employees authenticate their identity, so you only pay for the time that employees are on the clock. You can also use your POS system to generate employee schedules, saving you the time of manually making and adjusting schedules for changes.

POS Reporting

The real-time reports you can generate from your POS system with just a few clicks can help you keep a close watch on expenses and pinpoint the sources of shrinkage if it occurs. POS reports also allow you to track key performance indicators (KPIs) that show your business is making progress toward the business goals you set.

Third-party Integrations

Take time to find out if a POS system you’re considering integrates with your accounting program, online ordering, customer relationship management, or other business-related applications. Integrated third-party applications means data is automatically shared between programs, so you won’t need to spend extra time keying in information — or correcting data entry mistakes.

How Do POS Systems Work?

Now that you know about the different types of POS systems and what features to look for let’s take a closer look at how the software and hardware come together to make a complete system.

Traditional POS Systems

With traditional or legacy POS systems, all the software and data is stored on a local server at the business. You make an upfront investment for the hardware and specific version of the software — the latter being the catch. When the software company introduces new features and updates (a.k.a a new version), you’ll likely have to pay to upgrade your version to the latest and greatest.

Cloud-Based POS Systems

With cloud-based POS systems, POS software is installed on the POS hardware, and your data is stored on a server in a remote location and in the cloud. Saving your business data in the cloud allows you to access and manage the back office of your POS system via the internet.

Rather than pay a substantial upfront investment for the POS system, you pay a more affordable recurring monthly subscription fee that includes updates at no additional charge.

Hybrid POS Systems

If you don’t want to be utterly dependent on the internet or on-site servers to keep your business up and running, you can choose a hybrid system that uses both the cloud and local servers to make sure you always have access to your POS application and your data.

Mobile POS Systems

Used as a standalone device or as an extension of your countertop POS system, mobile POS systems let you turn an iPad or Android tablet into a point-of-sale device. Mobile POS gives you line-busting capabilities that keep lines short and improve customer experiences.

Types of POS Hardware

We’ve mentioned POS hardware quite a bit up to this point, but now it’s time to explore all the different components and peripherals you’ll need for a complete POS system. Most POS providers create hardware bundles that include all the equipment you’ll need to complete your setup.

Cash Drawer

A cash drawer that you can control with your POS system is crucial for safeguarding your business from shrinkage or loss that can occur when unauthorized people have access to the till.

Receipt Printer

Many customers still prefer paper receipts, so it’s vital to include a reliable printer in your POS system configuration. Receipt printers can also give you an opportunity for an extra touch with customers, for example, to remind them about upcoming promotions or encourage membership in your loyalty program.

Barcode Scanner

Scanning barcodes is a quicker and more accurate way to ring up items. No one wants to wait in line while a cashier keys in prices manually. Barcode technology can also help you manage inventory with greater ease and more accuracy.

Payment Terminal

Your POS system needs to communicate with a payment terminal for authorizations for credit and debit card payments.

Customer Display

Depending on the type of business you own and where it’s located, you may be required by law to have a customer facing display at the point of sale so the consumer can see the cost of the items being rung up.

Modern customer-facing displays have vibrant images and text to help engage customers with offers and special promotions. Many of them are touchscreen and allow you to capture signatures for credit card transactions and let customers input their contact information for your customer loyalty program. Think of it as a mini functional billboard — you can even sell ad space to nearby businesses for additional revenue.

How to Buy a POS System?

Along with the many choices that you’ll have to make about what type of POS system you’ll invest in, you also need to give some thought to how you’ll buy it.

Point of sale systems are sold either directly from the software company that develops the solution, or via third-party resellers that have a relationship with the software company to resell their products. Both avenues have their pros and cons, but the added benefit of using a local reseller is that they can provide you with on-site support and assistance.

In either case, make sure you understand who will provide maintenance and support, repair it when something goes wrong, and if ongoing services will come with an additional charge.

The Wrap Up

Now that you know everything there is to know about what a POS system is, it’s not a decision you should rush. According to Capterra’s Point of Sale Software Systems User Research Report found that most businesses take up to six weeks to choose their point-of-sale solution — and only 1 percent can decide on a solution in less than two weeks. Take the time to experiment with demos, weigh your options, and make a smart, informed decision.


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