What Is a Point of Sale System?
A point of sale (POS) is a combination of software and hardware that a business owner needs to run transactions. The software typically encompasses a myriad of functions, including payment processing and staff, customer, and inventory management. The POS hardware includes an internet-enabled device that can run the POS software, plus transaction tools like a receipt printer and a cash drawer. POS systems can be extremely cheap or very expensive, and all charge a payment processing fee.
A point of sale—commonly referred to by the acronym “POS”—is one of those business-specific terms that can be difficult to grasp. That’s because “point of sale” escapes a simple definition.
Fortunately, you’re in the right place to learn all you need to know about point of sale systems, because we’ve created the ultimate guide to understanding this important aspect of merchant services.
Through this guide, you’ll learn a fundamental POS definition, all of the details on point of sale systems, and even what your best POS system options are.
Point of Sale Definition
Before we start to pick apart the intricacies of what is a point of sale system, let’s first nail down a fundamental definition of point of sale. As we already covered, point of sale is defined as a place where sales are made. Put another way, it is the combination of software and hardware needed to run transactions.
The actual location of the point of sale could be physical or digital. For example, a POS system could located in a brick-and-mortar store, or on an ecommerce website’s payment page. The point of sale located in the brick-and-mortar store will encompass hardware—such as an iPad—with software installed on it that will allow the merchant to run a transaction. On the other hand, the point of sale on the ecommerce platform is software working independent of hardware.
In both cases, the POS system will allow your business to accept card payments and handle a variety of back-office functions. Note that a POS should not be confused with a credit card processing system. A credit card processing system is a component of a point of sale system, but the POS can also handle a variety of functions beyond the processing of credit card payments.
The additional functions that your POS system can handle depend on the POS provider you choose to work with. There are a variety of industry-specific POS purveyors for merchants in retail, restaurants, and ecommerce. Depending on which POS system you end up choosing, you’ll be able to access a wide range of capabilities that can move the needle for your business.
Let’s learn a bit more about all of the functions that one can expect when they use a POS system.
Point of Sale System: Key Components
It’s time to dive into the particulars of how a point of sale works. We’ll start with what POS software can do. As a reminder, the point of sale software is what you use in conjunction with POS hardware to run transactions.
So, what capabilities can you expect with POS software?
When we say your POS needs to be able to run transactions, a big part of that is being able to process payments. After all, what is a business transaction without the exchange of money?
At a minimum, your POS system should be able to accept online payments or be able to read card magstripes. But if you’re serious about growing your business, your POS needs to accommodate a variety of additional payment methods. After all, you wouldn’t want to lose out on a sale because you don’t accept a customer’s preferred method of payment. Let’s run through all of the different types of payments your point of sale system could potentially accept:
If you run an ecommerce business, then your business could be well-served by a POS that simply accepts online payments. As long as you don’t need to run any in-person transactions, a point of sale system that works online—with customers inputting their card info in order to pay for your business’s product or services—could be all you need.
That said, online processing comes with its own specific needs, especially when it comes to security. Be sure that any online point of sale system you opt for offers a secure payment gateway and guaranteed encryption of your customers’ payment information. Otherwise, your business’s and your customers’ financial information could be at risk.
On the other hand, if your business makes transactions in person, then your point of sale system will need to be able to process physical card payments. The most basic and universal in-person payment method is the reading of a credit card magstripe via swipe. Fortunately, almost every type of card reader can take magstripe payments. Some POS providers even offer magstripe readers for free when you sign up.
Along with magstripes, most modern credit cards also come with embedded microchips that provide enhanced security features. While magstripes make cardholder information easy to access and duplicate, chip cards will keep cardholder information secure with a unique code upon transaction. In order to take payment from cards with a chip, your credit card reader will need to accept what is known as EMV payment—a global standard for chip-based debit and credit card transactions.
EMV payments are processed by dipping a credit card into a slot in the card reader and allowing it to read the microchip. Offering EMV payment will provide your customers with peace of mind. Many modern credit card readers come with a dual magstripe and EMV reader.
Finally, accepting contactless payments will make the checkout process that much more convenient for your customers. That’s because many consumers are moving their payment information into virtual credit card apps like Google Pay and Apple Pay. These apps allow customers to provide payment information by holding their mobile device to a near-field communication (NFC) reader. NFC readers are becoming an increasingly common feature on credit card readers, but will typically cost extra.
All in all, offering NFC, EMV, and magstripe payments guarantees you will be able to accommodate your customers no matter their payment method.
The next thing you’ll want in your POS system is the ability to make transactions easier for you, your employees, and your customers. While there will be many facets to making sure your transaction processes are easier for all parties involved, there are few features in particular that your point of sale should really be able to help out with:
Ideally, your business’s point of sale should be able to provide your customer with receipts in whatever form they prefer. Do they prefer a digital receipt? They should be able to choose between a texted or an emailed receipt. Or maybe they prefer a paper receipt—in which case, your POS system should be able to print one quickly.
Your point of sale should also make tipping a cinch with an easy-to-use tipping experience. This is a must for businesses in the service industry. The most user-friendly tipping interfaces will come with suggested tipping and pre-calculated percentages, along with a customized tipping option.
Trust us—your employees will thank you for this one.
Navigable Inventory Database
Even before the actual transaction, your employees or you will need to ring your customers up. In this crucial step, your point of sale shouldn’t slow down the process—having a point of sale system with an easily navigable inventory catalog for quickly ringing up customers will seriously speed up your checkout process.
Another feature that is becoming increasingly standard on point of sale systems is the ability to access valuable insights based on transactions that you’ve run through your POS. You should be able to see updated sales figures in real time, and run reports on your cost of labor, product profitability, individual employee performance, and more. The best POS systems will also let you create custom reports based on parameters you set.
Reporting tools allow you to understand the strengths and weaknesses of your business, and adjust your strategy accordingly.
A POS is something both you and your employees will use. Therefore, it should have features that will make managing your employees much easier. If your business relies on a team of employees to keep things moving from day to day, you’ll save some serious time with the following point of sale features:
Clock-In, Clock-Out Capabilities
With many top-tier point of sale systems, your employees will be able to clock in and clock out through the POS. This will keep you from having to collect and reconcile hours, and allow your employees the autonomy they need to do their jobs well. The best POS systems also allow you to create work schedules within the POS system.
Commission and Tip Reconciliation
When you enter employees into your POS system, they are typically given a unique identification number. They will use this ID number when they clock in and out, and when they process a transaction. Your POS system should track which IDs are responsible for which transactions, and automatically assign tips and commissions to that employee as needed.
Your point of sale should help you automate and optimize how you manage your business’s inventory. By nature of processing the outward flow of your business’s inventory, point of sale systems—the best ones, anyway—keep track of where your inventory currently stands.
Depending on your POS system, this can be accomplished in multiple ways. Let’s take a look at the two most common inventory management features in POS systems:
Most POS systems allow you to set reminders when certain inventory stocks are running low. This way, you can place an order before stock runs out and remove that item from your catalog until new stock arrives.
Some point of sale systems will go a step further—they’ll allow you to make inventory orders within their software. With this feature, if your business receives a reminder to refill a stock of inventory, you’ll simply have to press a few buttons within your POS to do so. Keep in mind that first you’ll have to onboard your vendors into your POS system.
Customer Relationship Management (CRM)
With POS systems that offer this feature, you’ll be able to track transaction history, take notes, and potentially even contact customers, all through your point of sale. If your business relies heavily on return business, then opting for a point of sale that offers this feature could seriously up your customer return rate.
Furthermore, some POS providers offer add-ons that work with your CRM database to improve customer retention. For example, Square offers a customer loyalty program where customers earn redeemable points on sales. Other popular CRM integrations include gift card programs and email marketing services.
Point of Sale System: Hardware
Now that we’ve covered what POS software can do, let’s turn our eye to POS hardware. Although ecommerce merchants only need POS software to run transactions, any merchant who wants to accept in-person transactions will need some form of POS hardware. What you need and how much of it you need depends on your specific business situation. Here are all the different products that can be considered a piece of POS hardware:
- Internet-enabled device (iPad, Tablet, Laptop, smart phone)
- Credit card reader
- Receipt printer
- Kitchen printer
- Cash drawer
- Barcode scanner
- Barcode printer
- Terminal stand or enclosure
- Kitchen display system
- Scale (for weighted items)
- Customer display screen
Again, your business likely won’t need all of these items. Retail merchants, for example, can operate with an internet-enabled device, terminal stand, credit card reader, receipt printer, and cash drawer. Restauranteurs, on the other hand, may also want to spring for the kitchen printer and kitchen display screen. If you sell on the go, you can get by with a mobile credit card dongle that attaches to your smart phone and allows you to process payment via your POS app.
In other words, what you need depends on your specific business situation. Most POS providers will list the pieces of POS hardware that their software is compatible with. Many will also sell the hardware you need on their website. If you are buying multiple pieces of hardware, you can often save money by buying them as a bundle.
Point of Sale Systems: Pricing
Now that we’ve combed through the various details of what a POS system is, it’s time to take a look at how much point of sale systems cost. There are three main components to consider:
Payment Processing Fees
Almost every point of sale option that you’ll come across will come with payment processing fees. These fees will be charged to your business based on how many transactions you run, how large each transaction is, and the type of card the customer is paying with. Note that these fees are determined by the payment processor, not by the POS provider (although sometimes the POS provider will make you use their in-house payment processor).
For in-person transactions, the payment processing fee will be a percentage of the payment value being processed. This is known an interchange pricing. For ecommerce transactions, the payment processing fee will be a percentage of the payment value being processed, plus a small flat-rate fee. This is referred to as interchange-plus pricing, and is assessed because online payments are considered to be at higher risk of fraud.
On top of payment processing fees, many point of sale systems will charge your business for using their software. This means that, in order to access the capabilities that point of sale systems boast, you’ll have to pay a fee to access the software that provides them.
More often than not, this fee will be a monthly payment. Sometimes, though, you’ll be able to access the software with a one-off flat payment. Many POS providers also offer multiple software plans, with higher cost plans leading to lower payment processing fees.
Finally, almost every point of sale system comes with a hardware cost. Point of sale hardware is crucial for accepting credit card payments.
Whether it’s something as small as a smartphone plugin, or something as large as an entire countertop register, the hardware for your point of sale system will likely cost your business a one-off lump sum. Keep in mind that the cost varies greatly. Some POS providers will give you a mobile card reader for free, while others will charge you upwards of $1,000 for a POS hardware bundle.
The Best Point of Sale System Options
Now that you know the POS definition—and then some—let’s put this information into practice by learning about the best point of sale systems out there:
Square Point of Sale
Square POS has become one of the most widely used point of sale systems out there—and for good reason.
Through Square POS, you can convert your smart device into a high-powered point of sale. However, what sets Square apart from most POS systems is that it comes with stellar hardware and software options that are completely free.
That’s right—Square offers a magstripe reader and a point of sale app that are both free. To be clear, you’ll still have to pay a payment processing fee to Square to use these features. But that said, this is still one of the most affordable options on the market.
Clover Point of Sale
Another top option for a POS system is Clover. If you want a wide range of options, then a Clover POS system is your best bet.
Clover will offer your business four different hardware options along with three different software plans. This will give you a huge number of combinations of hardware and software to choose from in order to find the very best iteration for your business.
Intuit QuickBooks Point of Sale
As a small business owner, you’re probably familiar with the name QuickBooks. But did you know that Intuit QuickBooks offers a POS system?
With QuickBooks POS, you’ll be able to choose from three options to find the best fit for your business. Whether you opt for the Basic, Pro, or Multi-Store version of QuickBooks point of sale, you’ll simply have to pay for it with a one-off, lump sum payment.
POS Systems: The Bottom Line
Now that we’ve covered all aspects of POS systems, the only question left to answer is what is the best POS system for your small business?
Well, hopefully you now feel equipped to answer that question for yourself. Consider what your business needs to run transactions, how your customers prefer to pay, and how much you are willing to spend. Then do some research into the best POS providers on the market. Our suggestions are a great starting point.
Remember that the ultimate goal of a POS system is to make your life easier. So whichever option you end up going with, make sure they can serve as a partner to your business and work with you as you grow.
Maddie Shepherd is a former Fundera senior staff writer and current contributing writer for Fundera.
Maddie has an extensive knowledge of business credit cards, accounting tools, and merchant services, but specializes in small business financing advice. She has reviewed and analyzed dozens of financial tools and providers, helping business owners make better financial decisions.