Point-of-sale (POS) software explained: What it is, how it works and how to choose one

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  1. Introduction
  2. What is point-of-sale (POS) software?
  3. What is POS software used for?
  4. POS terminal vs POS software
    1. POS terminal
    2. POS software
  5. POS software vs payment gateway
    1. POS software
    2. Payment gateway
  6. How does POS software work?
  7. How to choose POS software

Point-of-sale (POS) software has experienced a major transformation over the years, transitioning from simple cash registers to comprehensive digital platforms. The use of POS systems is not limited to transactions – they also shape the way in which businesses interact with customers and manage daily operations. The global POS software market reached nearly US$12 billion in 2022, according to a report by Grand View Research.

The capabilities of modern POS systems are vast. From managing inventory and generating detailed sales reports to managing customer interactions, these platforms play an integral role in improving business workflows. Their multifunctional nature means that businesses can consolidate various tasks, reducing complexity and boosting efficiency.

As businesses balance evolving customer expectations and efficiency, choosing the right POS system is increasingly important. Here's what you need to know to find the right POS solution for your specific business needs.

What's in this article?

  • What is point-of-sale (POS) software?
  • What is POS software used for?
  • POS terminal vs POS software
  • POS software vs payment gateway
  • How does POS software work?
  • How to choose POS software

What is point-of-sale (POS) software?

Point-of-sale software is a digital solution that allows businesses to conduct and manage sales transactions. This software often works with hardware devices – such as barcode scanners, receipt printers and card readers – to capture and finalise sales.

Mobile and cloud-based technologies enable POS software to operate on various devices, from traditional registers to smartphones and tablets. This flexibility lets businesses serve their customers more effectively and access their sales data from virtually anywhere.

What is POS software used for?

POS software, distinct from the broader category of POS systems, focuses on the digital functionalities required for transaction processing and related business operations. Here's a detailed look at what POS software can do for businesses:

  • Transaction processing
    At its core, POS software is designed to handle the process of sales transactions. This includes ringing up items, calculating totals, applying discounts and processing various payment forms, such as credit cards, debit cards and digital wallets.

  • Inventory management
    One of the primary functionalities of POS software is tracking items as they're sold. This means that businesses can keep track of stock levels in real time, preventing inventory from being out of stock and facilitating prompt reordering schedules.

  • Sales reporting and analytics
    POS software can collect and present data on sales trends, popular products and peak transaction times. These insights allow businesses to make informed decisions about purchasing, staffing and marketing.

  • Customer management
    Keeping track of customer data, including purchase history and preferences, can lead to better customer service and targeted marketing campaigns. Many POS software solutions come with this capability, allowing businesses to cultivate relationships and encourage repeat business.

  • Employee management and tracking
    Beyond sales and inventory, POS software can also keep track of employee performance. Features may include logging hours, calculating commissions and even setting sales targets.

  • Loyalty and promotion features
    To encourage customer retention and repeat business, POS software often has built-in capabilities to manage loyalty programmes, gift cards and special promotions.

  • Tax calculation
    Given the complexity of tax codes, especially for businesses operating across different jurisdictions, POS software calculates and applies appropriate taxes to transactions automatically, such as sales tax or value-added tax (VAT).

  • Order management
    Especially relevant for restaurants or service-based establishments, POS software can manage special orders, table assignments, reservations or even service schedules, ensuring smooth operations and customer satisfaction.

  • Integration capabilities
    Modern POS software often has the capacity to integrate with other software tools or platforms. For instance, it may be possible to sync it with e-commerce services, accounting software or third-party customer relationship management (CRM) systems, to create a cohesive digital environment for businesses.

Overall, POS software acts as the digital brain behind sales operations, not only facilitating smooth transactions, but also providing data and features to improve various aspects of a business.

POS terminal vs POS software

A POS terminal and POS software serve related yet distinct roles in payment processing. Let's break down the differences between the two:

POS terminal

  • Hardware focus: A POS terminal refers primarily to the physical device used in transactions, where payments for goods and services are made. They can be standalone devices or integrated systems.
  • Payment processing: This terminal facilitates payment transactions by reading payment cards, capturing customer signatures or even scanning QR codes for mobile payments, if necessary.
  • Direct interaction: Customers often interact directly with POS terminals, whether they're swiping a card, entering a PIN or tapping a contactless payment card or device.

POS software

  • Software focus: While the terminal is the physical device, the POS software is the digital solution running on that device. It's what powers the terminal's operations and features.
  • Versatility: POS software can be installed on various devices, from traditional registers to modern tablets and smartphones.
  • Broad functionality: This software doesn't just handle transactions. It can also manage inventory, track customer data, analyse sales patterns and even integrate with other business systems.
  • User interaction: Typically, staff or business personnel interact with the software interface to ring up sales, check inventory levels or view sales reports.

As a result, while a POS terminal is largely about the tangible interaction with the customer during a transaction, the POS software goes deeper, providing tools and resources to help businesses manage sales and related operations. Both elements work together: the terminal is the gateway, while the software handles the intelligence and functionality.

POS software vs payment gateway

In the domain of payment processing, two terms that often come up are "POS software" and "payment gateways." While they may appear similar at first glance, they serve distinct functions in the transaction process. Let's differentiate between the two:

POS software

  • Central interface: POS software acts as a digital dashboard where businesses can manage sales transactions. This interface is typically used by shop associates or cashiers to process sales, returns and exchanges.
  • Multifunctional role: Besides just handling transactions, POS software can also handle a variety of tasks, such as managing inventory, monitoring sales trends and keeping track of customer data.
  • Direct business use: It's mainly operated by businesses in a brick-and-mortar environment, enabling them to manage in-person transactions effectively.

Payment gateway

  • Online transactions: A payment gateway is a service that authorises and processes primarily online payments. Think of it as a digital intermediary between a business and its customers.
  • Security focus: Payment gateways encrypt sensitive information – such as credit card numbers – making sure that data is passed securely between the customer, business and bank.
  • Wide applicability: While POS software is typically used in physical locations, payment gateways are used predominantly in online settings, such as e-commerce stores, subscription-based platforms or online service providers.

Both POS software and payment gateways play roles in payment processes, but they cater to different environments. POS software is more about in-shop, physical transactions and overall sales management. In contrast, payment gateways primarily focus on facilitating online transactions securely, ensuring that both businesses and customers can trust the online process.

How does POS software work?

When a business employs POS software for handling payments, the overarching goal is to facilitate a smooth, secure and efficient experience for both the customer and the business. POS software intricately manages various features and streamlines the transaction process. Here's an in-depth breakdown of how POS software works:

  • Transaction initiation: When a customer is ready to make a purchase, the sales associate enters the items or services into the software – either manually or by scanning barcodes. This input creates a digital record of the sale.

  • Price calculation: The software calculates the total cost, factoring in any applicable discounts, promotions or loyalty points. Taxes are added automatically based on the products or services, as well as the location of the sale.

  • Payment selection: The customer decides on their preferred payment method. POS software can accommodate a variety of methods, including credit and debit cards, digital wallets and even store credit or gift cards.

  • Payment processing: If the chosen method is electronic, the software connects to a payment gateway. This gateway transmits the payment details to the relevant financial institution securely for verification.

  • Authorisation: The payment details are checked against the issuing bank or credit institution. If funds are available and the card is valid, the transaction is authorised.

  • Confirmation: The POS software receives the transaction status. If approved, a confirmation message is displayed. A digital or printed receipt can then be generated.

  • Inventory adjustments: The software adjusts the shop's inventory counts automatically, based on the items sold. This feature provides an up-to-date view of stock levels, flagging items that need to be reordered.

  • Sales data compilation: Each transaction is logged, creating a reservoir of data. This data allows businesses to analyse sales trends, track best-selling items and gauge overall performance.

  • Customer data management: For businesses that capture customer information, the POS software can store and manage these details, helping to create personalised marketing campaigns or loyalty programme benefits.

  • End-of-day reconciliation: At the close of business, the software tallies all transactions, providing a summary of sales, returns and other relevant metrics. This daily report aids in financial tracking and can be used for accounting purposes.

  • Data sync and backup: For cloud-based POS software solutions, transaction data and other relevant metrics are synced to the cloud on a regular basis. This backup ensures data safety and allows access from multiple locations or devices.

Basically, POS software works by integrating a series of processes – from the initiation of a sale to financial reconciliation – into a cohesive system. This facilitates transactions and provides businesses with valuable insights and operational efficiencies.

How to choose POS software

Selecting the right POS software for your business hinges on evaluating the aspects of each option. Here's a guide to assist you in the selection process:

  • Operational requirements
    Begin with identifying the specific requirements of your business. For instance, a retail shop may prioritise swift checkout processes, while a restaurant may lean towards order customisation. Service-oriented businesses may value advanced scheduling features. Being precise about your operational needs will be helpful in narrowing down your choices.

  • Functionality examination
    Document every function that your business undertakes regularly. Which of these can a POS software assist with? While most POS systems will manage payment processing, consider other aspects too, such as loyalty programme integrations, invoicing capabilities, remote payment options, refunds and tipping. Choose a system that aligns closely with the features that your business depends on.

  • Hardware compatibility
    Your choice of POS software should be compatible with the hardware that you already possess or plan to purchase. Whether that's barcode scanners, receipt printers or cash drawers, make sure that the software you choose can be integrated effortlessly with these devices.

  • Software attributes
    The software's characteristics can influence daily operations. For example, some POS solutions operate in the cloud, giving businesses the advantage of accessing real-time data and managing remotely. It's also beneficial to choose a piece of software that is compatible with multiple operating systems for flexibility.

  • Costs assessment
    Financial implications are a major factor. Some POS systems may charge per transaction, while others have monthly fees. Choose a pricing model that aligns with your business model and budget.

  • Customer support assessment
    Downtimes or technical glitches require a prompt resolution. Prioritise POS solutions that offer round-the-clock support across various channels, such as email, chat and phone.

  • Security implications
    Given the sensitive nature of financial transactions, security cannot be compromised. It's important to choose a POS system that protects data using measures such as end-to-end encryption.

  • Future-proofing
    As your business evolves, your POS system should keep pace. Look for solutions that allow for easy software updates and the integration of new features, as well as scalability to accommodate business growth.

  • Opportunity to test
    Experiencing a piece of software first-hand can be valuable. A free trial, live demonstration or detailed documentation will give you a clearer idea of whether a given option fits your business needs.

  • External feedback
    Gather external opinions. Look at what other businesses in your industry are doing and take a look at customer reviews. Feedback like this can offer insights into the system's long-term reliability and performance.

Finding the right POS software requires a blend of introspection, research and evaluation. When you invest time in this process, you're more likely to find a solution that meets and anticipates your business needs.

Learn about Stripe Terminal and how it powers highly customisable point-of-sale functionality.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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