What Is a POS System? An In-Depth Exploration

By: Katherine McDermott on September 26, 2023
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For restaurant owners and retail operators, a point-of-sale system (POS) is one of the most critical tools for day-to-day business operations, as it is the home of every single business transaction. POS systems have come a long way from the days of cash registers; the cloud-based POS software market is expected to grow to $13.24 billion by 2028. [1] However, many small businesses are still using older, more outdated POS systems. Only 19% of businesses use systems less than two years old, signaling that upgrades might be needed to help your store run smoothly. [1]

With the right POS system, you can quickly eliminate tons of manual tasks and data entry, which can lead to reporting errors. Whether you're running a multi-location fashion boutique with heavy inventory needs or a restaurant with menu optimization, learn more about POS systems and what might work best for you.

How does a POS system work, and what purpose does it serve?

A point-of-sale system is the place where your customer pays for a product or service at your store. Every time a purchase happens, a customer is completing a point-of-sale transaction. The latest POS software is much more robust than standard credit card transactions. Now, systems offer mobile integrations, contactless payment options, ecommerce integrations, and more.

A POS system is the central hub of your business; it creates the intersection between sales, inventory management, payment processing, and customer management. A POS system ensures that all your operations are working together smoothly, and it's important to have your software and hardware set up before you need it.

What are the benefits of using a POS system in a retail setting or restaurant?

Implementing any sort of new technology is overwhelming, especially for small teams that are already strapped for bandwidth and resources. However, businesses that prioritized POS implementation increased sales by as much as 200%.

Employee management

In a retail or restaurant setting, chances are you have many hourly workers or regularly clocking in and out. POS systems offer easier time tracking, streamlined scheduling, and detailed employee activity reporting. It allows you to run reports on employee scheduling and ensure you stay on budget.

Inventory management

For hospitality businesses, like restaurants, hotels, or cafés, physical inventory and resources are key in making the day-to-day operations run smoothly. With a POS system, every time a customer orders a meal or buys a souvenir from the gift shop, your inventory systems are automatically updated. This makes it easy to see when bestsellers will be out of stock and helps you stay on budget by purchasing food or materials only when you need them.

Floor management

For retailers and restaurants, a POS system also helps with floor management. Customers can make their own reservations online, and some software even allows you to build a physical map of your restaurant for easier seating and flow. For retailers and restaurants, a POS system also helps with floor management. Managing reservations is easier with POS software, and some software even allows you to build a physical map of your restaurant for easy seating and flow.

Extensive payment options

Consumers are paying for purchases in a variety of different ways, and chances are, if you don't offer some of the latest payment options, you are missing out on business. Apple Pay, Android Pay, Google Pay, and other contactless payment options are typically installed in a new restaurant POS system.

Scalability

Investing in a feature-rich POS system as a small and midsize business can help you better manage your POS system needs as your business grows. Many POS systems can handle thousands of sales as easily as hundreds, allowing businesses to use the same POS system for a long time.

How do cloud-based POS systems differ from traditional on-premise solutions?

There are two main types of POS systems—on-premise and cloud-based. While there is intense excitement around anything and everything cloud-based, on-premise POS is still a valuable option in specific scenarios for certain businesses.

On-premise POS

On-premise systems have been the hardware of choice for many years, and typically, businesses have resorted to costly upfront hardware purchases and extensive installations. On-premise POS systems are still the leading choice for 46% of restaurants, making up 75% of revenue in 2022. [2]

For some businesses, on-premise might still be a valid option. For example, a small thrift shop owner with a single cash register might be a good candidate for a physical POS. The owner can purchase, install, and host the software on their own computer system and do any updates as necessary. They can buy or lease their own POS hardware like cash drawers, card readers, receipt printers, and more.

Cloud-based POS

On the other hand, a franchise restaurant with multiple locations and numerous point-of-sale terminals would benefit from a cloud-based POS. A cloud-based POS would provide centralized payment processing, inventory management, customer loyalty programs, and more. All of the individual POS systems will need their own hardware, such as terminals, cash drawers, and tablets, but all of the inventory and data are synced across all systems. For example, a restaurant that offers delivery through a large app like Uber Eats or DoorDash might want a cloud-based POS that integrates with other tools.

One of the main advantages of a cloud-based POS is its deep integration with other ecommerce and marketing solutions. This is one of the key differentiators over on-premise software, as cloud-based applications can all communicate in real-time with little manual hand-holding. Cloud-based POS systems are flexible and built to work with multiple other systems like a payment processor or gateway, customer management system, email marketing tools, and more. You already have other software that is important to your business, so make sure the POS can integrate with them seamlessly.

Benefits of cloud-based POS

For many businesses, moving to a cloud-based POS can save money, increase productivity, centralize communication, and create a robust hub that integrates with other marketing, inventory, and sales tools.

Hardware components of POS

A POS is made up of a few different pieces of hardware and software, all working together to make a customer's purchase successful.

Monitor/tablet

A monitor or tablet Houses the product database and supports other functions, such as employee clock-in, inventory management, and daily sales reports. Sleek tablets, like iPads, are especially popular for replacing huge or bulky monitors.

Barcode scanner

Barcode scanners pull product information and add the cost to the checkout total. This helps automate the checkout process, creating a faster and smoother customer experience. Plus, barcode scanners integrate with inventory management systems to automatically adjust stock levels.

Credit card reader

A credit card reader supports credit card compliance and reduces fraud. EMV-compliant is a must-have.

Receipt printer

Receipt printers provide customers with a physical or digital copy of their purchase. Whether it's an email or physical receipt, customers use these printouts to keep track of spending or make a return.

Cash drawer

Even though only 20% of transactions use cash, you still need a cash drawer to store money securely and provide change to customers. [3]

What features should I look for when selecting a POS system?

The ultimate goal of a POS system should be to simplify and streamline your business. Instead of relying on spreadsheets or manual updates, a POS system should automate core parts of your business.

Sales reporting

Sales should be recorded, categorized, and continuously updated in real-time. POS systems should offer clear daily, weekly, and monthly sales reports through detailed reports and high-level snapshots.

Robust sales and revenue reporting also help identify top-selling products, and many POS systems also offer mobile apps, so you can see purchases when you're not physically in the store.

Inventory management

Another basic function of POS systems is inventory management. Inventory should be updated in real-time, reflecting transactions and returns automatically. Inventory management also helps you plan seasonal investments in stocking and restocking and helps manage your cash forecasting. A POS system should allow you to:

  • Scan and count products digitally

  • Manage your stock by creating product variations (size, color, style, and more)

  • Identify pieces of inventory with a unique serial number

  • Track inventory levels across multiple locations

  • Enable seamless inventory ordering, such as automatic reorders of top-selling products

  • Consolidate purchases and orders in one order

Customer relationship management

A robust POS also functions as a customer relationship management (CRM) tool, helping you build strong relationships that lead to repeat business. It also aggregates customer data and trends and allows you to keep track of purchase history. Other features of a CRM include:

  • A customer loyalty program

  • Attaching a sale to a specific customer

  • Capture customer details like name, age, birthday, phone number, and email address for future marketing

  • Integrate with email or SMS marketing tools to maintain customer contact

Employee reporting and management

Automated employee reporting in management through your POS system helps increase efficiency. Instead of manually keeping track of hours, you can have workers swipe a card or punch in a code to clock in or out, making it easy to track their hourly wages down to the minute. Also, if employees work on commission, you can quickly identify the top-performing employees.

What is the future of POS systems?

The global POS software market is expected to hit $20 billion by 2028, mainly driven by the growing demand for cloud-based POS software and mobile, contactless payments. [4] POS systems will only become more paramount as an integrated, comprehensive solution as consumers switch between online and offline buying. Purchasing power will shift to younger generations, who are more likely to shop online, checkout via social media, or use tools like artificial intelligence to make purchasing decisions.

Emerging technologies

As POS solutions become more robust, they will need to incorporate emerging technologies like chatbots, camera vision, sensors, self-checkout, and more. Modern POS systems will most likely eventually integrate with artificial intelligence (AI), aggregating huge amounts of data to develop insights, trend reports, personalized recommendations for buyers, and more. [5] AI can also be integrated to prevent theft with object detection or motion analytics.

Changing consumer behavior

As purchasing power shifts to the younger generations, POS systems will have to adapt to the behavior of millennials and Gen Z. The U.S. has the largest pickup economy in the world, and younger shoppers often use Buy Online Pickup in Store (BOPIS). Also, consumers are increasingly shopping and checking out directly on social media like TikTok or Instagram, so retailers need to ensure their point-of-sale options are available on those sites.

Cross-purchasing attribution will also become more important as consumers buy products via social media, a website, or an app and then come in-store for “click and collect” or BOPIS. An all-in-one solution like POS software keeps track of all purchases, aggregating data and transaction history from various checkout points. Future POS systems will help track, manage, and analyze shopping trends from different sources—all in one spot.

Enhanced security

Like many other emerging technologies and digital systems, cybersecurity will be increasingly important in the future of POS systems. The retail industry is frequently targeted by cybercriminals, with many cyberattacks targeting retail financial information. POS systems are a gold mine of customer credit card details, transaction history, and personal identifiable information. There are multiple attacks on POS systems with increasing frequency in retail, restaurants, and hospitality, so future POS software will have enhanced cybersecurity abilities, fraud detection, firewalls, loss prevention, and more.

Let us help you in your POS software search

Now that you know how important the right POS software is for your business, it's time to begin shopping around. For first-time buyers, especially, navigating the POS market can be difficult. Make sure you're looking at features like sales, reporting, inventory management, customer management, and others that are critical for your specific business.

Once you have a short list of the best POS software for your business, check with your small business owner friends and connections to see if they have recommendations or are extremely satisfied with their solution. Hearing real feedback from your peers helps you make the best-informed buying decision.