What Is a POS System and How it Works: Everything You Need to Know

A point of sale system used to be a cash register that simply recorded the day’s sales and organized the bills into sections. With today’s technology, however, these systems provide so much more.

Nonetheless, with new tools and technology comes a learning curve with software and terminology. So, let’s cover some basics: What is a POS system? What are the main components? What are POS transactions?

This blog will answer each of these questions and more. Read on to learn more.

What Is a POS System?

A POS or point of sale typically refers to the area or machine where a transaction occurs.

You might also see it called the point of purchase or the checkout area. It’s the last step in the customer shopping experience and should be convenient and aesthetically pleasing and leave each shopper satisfied.

A POS system is, more specifically, the tools that facilitate each transaction. The point of sale system serves as the heart of all business operations. It processes purchases, handles inventory management, and is the point of most communication between shoppers and employees.

A modern retail POS system offers businesses many operational features using both hardware and software.

How Does a POS System Work?

POS systems have many functions that help optimize retail workflows. Here’s how they work:

1. Transaction Initiation:
   • The cashier or customer selects items for purchase
   • Items are scanned or manually entered into the POS system
2. Item Recognition and Pricing:
   • POS system identifies each item based on its barcode or entered SKU
   • Prices are retrieved from the system’s database or programmed into the system
3. Calculation of Total Cost:
   • The POS system calculates the total cost based on the prices of selected items
   • It may apply for discounts, taxes, or promotions as programmed
4. Payment Processing:
   • The customer chooses a payment method (cash, credit card, debit card, etc.)
   • POS system processes the payment securely, often integrating with payment gateways or card readers
5. Receipt Generation:
   • The system generates a receipt detailing the purchased items, prices, taxes, and payment method
   • Receipts can be printed, emailed, or sent via text based on customer preference
6. Inventory Management:
   • The POS system updates inventory levels in real-time as items are sold
   • It can provide alerts for low stock and generate purchase orders for replenishment
7. Reporting and Analytics:
   • The POS system compiles transaction data for reporting and analysis purposes
   • Business owners can track sales, trends, and performance metrics to inform decision-making
8. Customer Management:
   • The purchase information is stored for that customer’s profile
   • This information can be used for future suggestive selling, targeted marketing efforts, and loyalty and rewards.

A POS system streamlines the entire sales process, from item selection to payment and beyond, while providing valuable business management insights.

POS Software

Modern POS software typically offers the following:

• User Interface:
  • Intuitive interface for easy navigation and operation by cashiers
  • Clear layout for item selection, payment processing, and other functions
• Inventory Management:
  • Track stock levels in real-time
  • Receive alerts for low stock and generate purchase orders
  • Organize inventory by categories, attributes, or SKUs for efficient management
• Sales Reporting and Analytics:
  • Generate reports on sales performance, trends, and inventory turnover
  • Analyze data to identify best-selling items, peak sales periods, and customer preferences
  • Facilitate informed decision-making for pricing, promotions, and inventory management
• Transaction Processing:
  • Process various payment methods, including cash, credit/debit, mobile, and gift cards
  • Calculate totals, apply discounts and taxes, and handle refunds accurately
  • Ensure secure payment processing and compliance with payment industry standards
• Customer Relationship Management (CRM):
  • Capture customer information and purchase history for targeted marketing campaigns
  • Loyalty program integration to reward repeat customers and encourage retention
  • Personalize customer experiences through tailored promotions and offers
• Integration Capabilities:
  • Integrate with other business systems such as accounting software, eCommerce, and loyalty programs
  • Seamless data flow between different systems for streamlined operations and accurate reporting
• Customization Options:
  • Tailor settings, menus, and workflows to suit specific business needs
  • Configure tax rates, discounts, and pricing rules according to regional requirements or promotional strategies
• Security Features:
  • Implement user authentication and permission levels to control access to sensitive functions
  • Encrypt sensitive data such as payment information for retail loss prevention. Safeguard against retail fraud or theft
  • Regular updates and patches to address security vulnerabilities and ensure compliance with industry regulations
• Cloud-Based Deployment:
  • Access the POS system remotely from any location with internet connectivity
  • Cloud-based POS systems enable scalability to accommodate business growth without hardware limitations
  • Automatic backups and data synchronization across devices for data integrity and disaster recovery

POS Hardware

The right POS hardware is essential to facilitating a speedy checkout. Popular components include:

• Terminals:
  • Primary devices where transactions are processed
  • Typically include a screen, input device (keyboard or touchscreen), and processing unit
  • Can be a stationary countertop or mobile for flexibility in different business settings
• Credit/Debit Card Readers:
  • Devices that read payment cards’ magnetic stripes or chip information
  • Enable secure processing of card payments
  • Often integrated into the POS terminal or available as standalone units
• Display Screens (Customers/Self-Ordering):
  • Customer-facing screens for viewing items, prices, and promotions during checkout
  • Self-ordering screens for customers to select items and customize orders in restaurants or retail environments
  • Enhance customer experience and streamline ordering processes
• Printers:
  • Receipt printers for generating transaction receipts
  • Kitchen printers for printing order tickets in restaurants
  • Barcode printers for printing labels for inventory management
  • Used to provide documentation for transactions and streamline operations
• Scanners:
  • Barcode scanners for quickly scanning item codes during checkout
  • Can be handheld or built into the POS terminal
  • Improve efficiency and accuracy in item entry and inventory management
• Cash Drawers:
  • Secure compartments for storing cash and coins during transactions
  • Connected to the POS terminal and only accessible through authorized actions
  • Essential for cash transactions and cash management
• Keyboards/Touchscreens:
  • Input devices for entering item codes, quantities, or other transaction details
  • Touchscreens offer intuitive interfaces for more straightforward navigation
  • Enable interaction with the POS system for transaction processing
• Customer Displays:
  • Secondary screens facing customers to view transaction details and totals
  • Provide transparency and enhance trust during the checkout process
  • Can display promotional messages or advertisements to engage customers

Costs of a POS System

Costs associated with a POS system can vary based on several factors, including the type of business, scale of operations, and specific requirements. Here’s an overview of the typical costs broken down into hardware, software, and payment processors:

Hardware Costs

• Initial hardware investment includes terminals, tablets, barcode scanners, receipt printers, and cash drawers.
• Depending on the brand and features, costs can range from a few hundred to several thousand dollars per terminal.
• Additional expenses may include accessories like stands, mounts, and cables.

Software Costs

• Software costs are typically recurring monthly fees or one-time licenses.
• Subscription-based models (SaaS) usually range from $50 to $200 per month per terminal, depending on the complexity of features and support offered.
• Customizable or enterprise-level solutions may have higher upfront costs or bespoke pricing structures.

Payment Processors and Costs

• Transaction fees are a significant component, typically ranging from 2% to 4% of each transaction’s value.
• Some processors charge additional flat fees per transaction or a monthly service fee.
• Consideration should be given to potential penalties or fees for chargebacks or early contract termination.

While POS systems can streamline operations and improve efficiency, these costs must be factored in to determine the system’s overall affordability and suitability for the business.

POS System vs. Cash Register

Comparing a POS system with a traditional cash register highlights significant differences in functionality and benefits:

Cash Register

• Simplicity: Basic functionality for cash transactions
• Cost-Effectiveness: Initial setup costs are lower than POS systems, making them suitable for some small businesses with more straightforward needs
• Limited Features: Lacks advanced features such as inventory tracking and detailed reporting, limiting insights into business operations
• Manual Processes: Relies on manual entry for transaction details, increasing potential errors and inefficiencies
• No Integration: Typically operates independently, with no integration capabilities with other business systems

Types of businesses that may use a cash register:

1. Street Food Vendors: Street food vendors or chefs starting food trucks often operate in mobile or temporary locations where setting up a complete POS system may not be feasible. These businesses may choose to deal with cash transactions only.
2. Flea Market Stalls: Businesses operating in flea markets or temporary retail spaces may opt for cash registers due to their simplicity and ease of use. These businesses often have short-term leases and limited resources, making a cash register a cost-effective option.
3. Dive Bars: Many laid-back bars focus on serving drinks rather than complex transactions. These establishments may opt for a simple cash register because it is easy to use and requires minimal setup.

POS System

• Versatility: Offers advanced features such as inventory management, sales reporting, and integration with other business systems
• Efficiency: Streamlines operations with barcode scanning, touchscreen interfaces, and automated processes, reducing errors and enhancing productivity
• Customer Insights: Captures valuable purchasing patterns and preferences data, enabling targeted marketing strategies and personalized customer experiences
• Scalability: Adaptable to the needs of growing businesses, with the ability to add terminals and second locations, or integrate additional features as required
• Enhanced Security: Utilizes encryption and compliance measures to protect sensitive transaction data, reducing the risk of fraud

Types of businesses that may use a POS system:

1. Quick Service Restaurants: Fast food establishments deal with high transaction volumes and complex menu items. Entrepreneurs opening a QSR will require sophisticated POS systems to manage orders, process payments, and track inventory in real time.
2. Retail Stores: Many retail businesses have diverse product lines and benefit from POS systems that offer inventory management and sales reporting capabilities. A complete POS system allows for accurate tracking of stock levels, seamless checkout experiences, and data-driven insights.
3. Coffee Shops: Coffee shops often have customizable orders, multiple payment options, and non-stop customer interactions. Thus, a complete coffee shop POS system is essential for managing transactions effectively.

On-Premise/Legacy vs. Cloud-Based Point of Sale Systems

There are two main categorical distinctions when it comes to point of sale. Retailers can choose from either a legacy-style system or a modern cloud-based system. Here are some more details on these options.

Legacy POS

On-premise or legacy POS systems have local servers that process and store all inventory and sales information in-house. Generally, legacy POS systems cost much more money to buy and start. They usually require an IT person to come onsite and install the necessary hardware and software for the POS to operate. 

These legacy systems are often bulky and nonportable and need more professional installation and hardware systems for separate retail locations. They also depend on the user to keep current with software updates and necessary tweaks for their personal business. Eventually, the hardware used with these POS systems will be obsolete, and the company must purchase the next available version. 

Cloud-Based POS

The best modern POS systems are cloud-based. These cloud-based systems run on applications that store information and function through off-site “cloud” servers. 

Cloud-based systems are generally much less expensive to implement. They can be used on the proprietor’s own computer or tablet or provide less costly hardware for purchase or lease. Cloud POS systems use a SaaS (Software as a Service) model, billing companies a monthly subscription fee. 

These cloud-based subscriptions offer many benefits for their clients. First, they automatically update their software, keeping everything running at top performance without businesses needing to monitor them. This includes remote access troubleshooting, which is usually included in the subscription contract, meaning no big fees for sending technicians to your shop!

Another key benefit of cloud-based POS systems is scalability. Since the server is remote and internet-accessed, companies with multiple locations can use the same network to process and store all their inventory, sales, and employee management data in real-time. 

This technology is accessible remotely by business owners to monitor their day-to-day operations from their own mobile devices, keep updated on all inventory and sales reporting, or even by employees to view their sales numbers and/or work schedules. 

What a Modern POS Can Do For You 

The POS is no longer simply a cash register. Functions help with inventory management, loyalty programs, employee payroll, sales tracking, and more. 

One clear advantage of modern solutions such as KORONA POS is that they are easily enhanced with third-party add-ons. By integrating other software applications, your POS system functions smartly and seamlessly across all aspects of running a small or large business operation. 

Implementing a point of sale system offers numerous benefits for businesses of all sizes. Here are some key advantages of the best POS systems:

Tracking Sales

Built-in performance indicators, conversion rates, and product reports provide key data and sales trends. These tools are integrated into Quickbooks Online, They provide various information, including identifying struggling products or measuring performance between different store locations.

In concert with other programs, this information assists business owners in showing seasonal trends and so much more. Analyzing the past can help you predict the future.

Loyalty Programs and CRM 

While POS software facilitates sales, it can simultaneously track who purchases what items and how frequently. Cloud-based systems like KORONA POS can be easily integrated with customer relationship management (CRM) databases such as bLoyal to build reward programs, target specific customers, and reach out to lapsed clientele to get them back in the store. 

Inventory Management

A cloud-based POS system can automatically account for all items within a company’s inventory across multiple brick-and-mortar locations and eCommerce sales. Tracking key performance indicators (KPI) and conducting ABC analysis allows businesses to optimize their efficiency and fully understand their inventory.  Smart tools such as automatic reordering save time and energy for business operators.

Built-in Credit Card Processing

Many cloud-based systems offer pre-integrated credit card processing, eliminating the need for a separate processing solution. This can be a good fit for some businesses, particularly those with very few transactions or looking to save money upfront on hardware costs.

However, it’s always best to do your own research and determine if this option will cost you more than using a separate processor. When the POS and processing solutions are often bundled, the processing rates will be artificially inflated above the market price. Some cloud-based POS systems, though, are called “agnostic” and will allow you to use the most affordable third-party processor you can find. 

Employee Management

The same POS screen used to execute sales can also allow people to clock in and out. Employee data collection can easily track sales and efficiency for specific workers.

Multiple custom security features are available. Managers may check records of void or sale cancellations to protect the cash register and tapered permission levels to tailor the access of individual workers. 

Benefits of a POS System

POS systems offer a ton of benefits to retail businesses. Here are some of the most essential:

• Enhanced Efficiency: Streamlines sales processes, reducing checkout times and minimizing errors
• Inventory Management: Enables real-time tracking of stock levels for more timely reordering and reducing instances of stockouts or overstocking
• Detailed Reporting: Generates comprehensive reports on sales, inventory, and customer behavior to aid businesses with merchandising and marketing
• Customer Insights: Captures valuable purchasing patterns and preferences data to provide targeted marketing campaigns and personalized customer experiences
• Integration Capabilities: Seamlessly integrates with other business systems such as accounting software, eCommerce platforms, and customer relationship management (CRM) tools
• Improved Security: Safeguarding sensitive customer information and reducing the risk of fraud through encryption and compliance with Payment Card Industry Data Security Standard (PCI DSS) regulations

Look Out For These When Shopping for a Point of Sale

Choosing a point of sale system is a huge investment. POS technology is central to operating a business. Plus, it is a significant expense.

Thus, retailers must perform thorough research before deciding on a solution. Here are some pointers to keep in mind:

Long Contracts and Initiation Charges 

Before deciding on your POS, make sure you shop around and gather as much information about the features, full yearly and future costs, any contracts or additional fees, and how their customer support system works.

Some systems have greater start-up and installation fees, while others work on a month-to-month subscription as a service setup. 

Point of Sale Credit Card Processing Fees

Be sure to compare and scrutinize processing fees when looking for a POS provider. Credit card processing is one of the biggest and most important expenses for small businesses. The difference between a 2.25% and 2.75% processing fee can add up to tens of thousands of dollars in sales over the course of a year.

Be careful with POS solutions that bundle credit card processing, as they usually have higher rates and won’t allow you to shop around for the best available rates. A credit card agnostic POS system like KORONA POS will allow you to use the best rate you can find.

Customer Support for Your POS 

Another important factor to consider when choosing your POS company is the kind of customer support they offer. Can you get in touch with a knowledgeable representative quickly and easily if you run into software issues?

Do they offer assistance during your working hours? You can even do a test run by calling the help number companies offer to see what kind of support you get. Ask questions!

Software Product Demos and Free Trials

Finally, see if you can try it out! Many POS companies offer trial periods for businesses to try their product and win them over. If a system will work for you, it should be intuitive, tailored to your needs, and streamlined.

When choosing your POS, go ahead and do a trial run to see if it works for you. This will allow you to get a feel for how the system operates, whether the features are right for your business, and whether the customer service meets your standards. 

FAQs: What is a POS?

• How Is a POS Purchase or POS Transaction Completed?

A point of sale (POS) purchase or transaction is typically initiated by the customer presenting their chosen items to the cashier at the checkout counter. The cashier then scans each item’s barcode or manually enters the item’s details into the POS system. Finally, the customer pays for their selected items using a payment method accepted by the store, such as cash, credit/debit card, or mobile payment and receives a receipt confirming the transaction.

• What Types of Payments Should Your Point of Sale Accept?

First, business owners must accept EMV cards. These cards use chips to provide more secure transactions. The chips carry dynamic bank information, meaning the codes are encrypted and change often.

For nearly all types of businesses, accepting EMV cards protects you against possible fraud. U.S. law states that the company, not the bank, is responsible for any swiped fraudulent transaction.

Secondly, mobile payments are now an essential feature of modern POS systems. These types of payments are often done from smartphones. More and more consumers are expecting the convenience of this option.

• What Is the Back-End of Your POS?

Your POS system should include analytics and reporting capabilities, such as ABC analysis, which allow you to make sound business decisions about your product. These capabilities can break down large amounts of data into more accessible takeaways.

The portal to this information is often called the “back-end.” The name comes from legacy systems, which you must go from the back of your store to the central computer. For cloud systems, this means accessing information that is not visible to the cashier or customer.

Final Thoughts

A great point of sale can be an integral part of your business. Knowing what you’re shopping for and what to expect is essential.

To find out more, drop us a line. Our team is here to answer any questions you might still have. Click below to learn more.