Vending machine business has been the symbol of self-service retail for decades now. They are everywhere. Round the clock, these machines let people buy the products they want without human assistance. How are they able to do this? This article explains everything you need to know about how vending machines work.
What Is a Vending Machine?
A vending machine dispenses products to customers automatically without the assistance of retail staff after the customer selects the product they want to buy and pays the indicated price.
The first recorded vending machine sold holy water in first-century Roman Egypt. Today, the range of products offered in machines is greater than ever. Besides the standard drinks and snacks, robotic technology now makes it possible for some custom smart vending machines to prepare foods such as pizza, ice cream, and burgers and serve them at the desired temperature.
Vending machines traditionally allowed customers to pay for products by depositing coins and bills. With advancements in technology, modern vending machines accept credit/debit cards and mobile or online payment services in addition to cash.
With more extensive product offerings and convenient means of payment, vending machines’ share of the retail market is expanding every year. Most commonly found machines are snack vending machines, beverage machine, toy vending machines, drink machines, Corporate offices and retail stores are increasingly installing vending machines in their spaces to ease access to products and improve general aesthetics.
The vending machine business is growing every year as well as vending machine options. Grand View Research valued the global retail vending market at $51.91 billion in 2021 and projected a compound annual growth rate (CAGR) of 10.7% through 2030.
How Does a Vending Machines Work / Read Money?
Vending machine payment systems are so smart they can tell dollar bills apart and even give exact change. Machines read money based on the unique physical properties of the bills and coins, including their anti-counterfeit security features.
How Vending Machines Read Coins
Coins are made in different sizes and with different metals depending on their denominations. The payment systems utilize light sensors to tell the exact size of a coin. To tell the type of metal a coin is made of, machines use electromagnets.
The physical properties of coins that most machines check are:
- The thickness of the coin
- The diameter of the coin
- The number of ridges/reeds on the coin’s edge
These bits of information can help say, a snack vending machine determine, whether a reeded coin is a quarter or a dime. A quarter has a diameter of 0.955 inches, is 1.75mm thick, and has 119 reeds on its edge. A dime, on the other hand, has a diameter of 0.075 inches, is 1.35 mm thick, and has 118 reeds on its edge.
How Vending Machines Read Notes
Paper currency has unique physical patterns to differentiate bills of various denominations. Modern vending machines are programmed to accept bills that match these patterns.
The first vending machines that could identify paper money used a magnetic head to read the magnetic ink in the paper currencies inserted to identify their properties. Every dollar bill denomination had a unique signature that separated it from other bills. When a vending machine couldn’t identify the unique signature, for instance, when it’s distorted with wear and tear or dust, it rejected the bill.
Modern vending machines do the same thing but with more advanced technology. Today, most machines have cameras or photocells to optically scan a bill. Just as a shopkeeper would hold a bill up to the light to inspect if it is real, the vending machine illuminates the note and the camera inspects it for various markers and features to identify its denomination and whether or not it is real.
The markers (properties) against which the vending machine matches the bills to validate them are preprogrammed into the machine. This explains why some snack vending machines cannot accept newly redesigned notes even though they are legitimate. Every time a bill is redesigned significantly, the program has to be updated to accept the new notes.
How Does a Vending Machine Know If a Bill Is Real?
A vending machine business risks losing money if their vending machine cannot flag fake notes. How does a vending machine verify if a bill is real?
The same process used to validate a note’s denomination is also used to verify its authenticity. The first point of reference for authenticity is the magnetic properties of the bill. Most old vending machines only inspect the magnetic particles. More than a few vending machines now employ additional features to arrest counterfeit bills. The other features they can detect include
- The type of paper the bill is printed on
- The type of high-iron ink used to print the bill
- How the bill casts shadows when it is illuminated
- The conductivity of the bill when an electric current is passed through it
If a vending machine cannot verify if a bill is real or not, it will instantly reject it. Newer modern vending machines have more tech features and can help a vendor catch sophisticated counterfeit money that can fool old vending machines and the naked eye.
What Happens If You Put $100 in a Vending Machine?
Most vending machines are programmed to accept up to $20 bills. If you put a $100 note in such a vending machine, it will reject it.
Most products in a typical vending machine cost less than $5. If a vending machine accepts a $100 bill for a $3 product, it will have to spit out $97 in change. Notably, most vending machines give out the change in coins no matter the amount of money inserted. Giving out $97 change in $1 coins is not feasible when the coin float for change in a vending machine totals about $120. There aren’t enough $1 coins for change in the machine to process even two such $100 –dollars transactions.
Besides the logistical nightmare of giving out change for $100 bills, some vendors may be unwilling to accept larger bills for other practical reasons, such as
- If someone buys a product using a fake $100 bill, the loss is tremendously big.
- Standard vending machines come programmed to accept specific denominations. You’d need to reprogram it for it to accept $100 bills.
- If the vending machine malfunctions and fails to give the change, the customer will be very frustrated and may even vandalize the machine.
While accepting higher denomination bills can open more product offering avenues for vendors, many are still unwilling to accept such bills because of the changer starvation problem.
Can You Use a Card to Pay at a Vending Machine?
In modern times cashless payments are becoming a norm. Modern vending machines take credit or debit cards as a means of payment. You can use a card to pay at a automated shop the same way you would at checkout at the store.
When paying by card at a vending machine, confirm whether or not the machine accepts your type of card. Most credit cards will go through. Some vending machines won’t take ATM cards even when they have MasterCard and Visa associations. This information will typically be displayed on the vending machine’s card reader.
After you’ve completed the transaction, you should press the “End” button on the card reader to end the session to ensure that your card is not used for additional unauthorized purchases at the vending machine.
To get the money processed by card, the vendor follows the same process other retailers follow. They give their bank an electronic record of the transactions and the bank credits their account accordingly after deducting associated fees. The bank gets the money from the card issuer’s bank via the relevant network, e.g. the MasterCard network.
Besides being able to pay by cash or card, you can also pay for products in modern vending machines using digital wallets.
How to Use Digital Wallets at Vending Machines
With consumers now transacting on their phones more than ever, it makes sense for vending machines to allow customers to pay using the mobile payment apps they’ve grown to love. Consumers recognize that paying using digital wallets is much safer than using credit cards in such situations because the vending machine never gets their card number. Their digital wallet is on their phone, which has a passcode.
To facilitate payments by digital wallets, vending machines employ QR codes. A static QR code sits on the vending machine. All a customer has to do is scan the QR code and complete the transaction by following the prompts on their phone.
Smart vending machines integrate with most of the widely used online/mobile payment methods. Some of the popular payment methods of this nature that are commonly accepted include PayPal, Google Pay, and Apple Pay.
Do You Need a License to Operate Vending Machines
New vending machine businesses need a smart start to their operations. In order to do so you need to get to know the regulations and what you'll be needing to keep your business legal and profitable. To start you off, vending machine operators need a license to vend in the United States. The licenses required vary based on the products offered and the location of the vending machine (state and county).
If your vending machine is retailing food and beverage items, the FDA requires you to get a Food or Beverage Service License. This is a federal license.
Aside from the federal license, there are other federal requirements you may have to comply with. If you own or operate more than 20 vending machines, the FDA requires that you disclose the calorie information of the food vending machine offerings. This calorie information should be conspicuous and placed prominently.
Also, the Americans with Disabilities Act (ADA) requires that all the usability components of your vending machine be between 15 and 48 inches up from the floor. The requirement is for the good of your physically disabled customers who may have trouble reaching buttons and screens beyond this range, especially when using aids such as wheelchairs.
At the state level, many states require that you get a permit for every vending machine you run. These permits are not expensive. In Massachusetts, for instance, an application for such a permit will cost you $10.
Lastly, consider calling your local office at the county/town/city, to confirm if there are any other local licenses you need to operate your vending machine.
It is very unlikely that you get turned down for a license if you are selling branded items that are already available in the market. To ensure everything is above board, all you need to do is:
- Register for an Employer Identification Number (EIN). The IRS will give you this number for free - its purpose is to help you pay relevant taxes to the government.
- Register an LLC. Running your vending machine using an LLC protects you from unexpected civil liabilities.
- Ensure you are ADA-compliant. Being ADA-compliant is moral and not just a compliance box to check.
- Follow nutrition labeling requirements strictly. This is especially important if you run more than 20 machines.
- Pay state sales taxes where required. If your state requires you to collect sales tax, register with the state and pay taxes accordingly.
The federal government has pretty clear requirements for vending machine operators. Local governments, however, may have different guidelines, including zoning limitations. Consider checking with your local government or another experienced vendor in your area to ensure you are compliant.
Who Can Manage a Vending Machine
Anyone can manage a vending machine business if they can secure a vending machine, snacks and drinks for sale, a location to put it, and the required permits. It also helps if you know how to maintain your vending machines and keep them functional in the long run. You can own a vending business outright or partner with another party who will provide the vending machine or products or both.
You can get into the vending business in two different ways:
- Get a full-service vendor for placing vending machine on your premises. When you are a location business owner, e.g. an office building manager, it may be useful to have a vending machine on your property for the benefit of staff in the building. If you don’t want to spend energy and time managing the venture, a full-service vendor will provide the vending machine, stock it, and do maintenance. In return, they keep all of the revenue.
- Buy a vending machine outright and negotiate with location owners. As an active vending business owner, you will be responsible for stocking and maintaining the machines. Further, most location owners will require that you cede a specific percentage of your revenues as payment for using their locations.
Being a self-service vending machine business, vending is highly scalable. You can own and manage several vending machines at once - like freshly brewed hot drinks machine, snack machine, sell healthy snacks, or any type of modern machines. Indeed, a great number of people in this business in the United States operate “routes” with several machines.
Your success as a manager of a vending machine business will depend largely on two things: your ability to land great high-traffic locations and your ability to stock products with high demand.
Landing Great Vending Locations
Location is one of the most important factors determining the success of vending businesses. Even with a great product selection and excellent pricing, you will make practically no sales if you put your vending machine on a street nobody visits.
Some of the best locations hat will draw customers to your vending machines include:
- Large office complexes with lots of staff
- Large manufacturing or processing facilities with lots of staff
- Construction sites
- Storefronts on main streets with lots of foot traffic
- Streets lined with restaurants
- University campuses
- Waiting areas of service establishments e.g. hospital waiting lounge
- Apartment communities and complexes
- Fitness centers, especially for healthy drinks
- Senior care homes
- Car dealerships
To land a great vending location, you will need to get out there and talk to property owners and managers. Lots of great vending locations already exist in your city and you need to find the business owner. Some of these locations may already have machines but the machines are old. You can easily convince these location owners to replace the old machines and offer vending machines that are modern and in tip-top shape.
Identifying these great vending locations will take some work. To hasten the process, you can take advantage of our vending locator service. We’ll save you lots of hours by giving you an up-to-date list of all the prime potential vending locations in your area and their contact information. With such a good list, all you will have to do is make phone calls to the properties or pay them a visit in person.
Stocking Products with High Demand
Vending customers respond well to mass-market brands they already know and trust. If you are a beginner, you can play it safe by retailing the brands you already know yourself or the brands your competitors sell.
When selling snacks and drinks, it helps to stock items that go together as customers tend to buy products in combinations. You can source most of the food products you will need for such an endeavor from local brick-and-mortar stores, online bulk suppliers, wholesalers, and cash & carry suppliers.
If you’d rather outsource the job of finding hot products to a third party, working with a broker is the smart move. Brokers work with several vendors and have hard data on which products sell the best in the said area. They can share information on which products to sell and in which combinations. If you feel more like rolling up sleeves yourself and finding best machine-location fit, you can do so by heading over to our vending machine ideas piece.
Working with a broker may also make sense if you don’t have the time to source products yourself. Brokers buy products in bulk from wholesalers and distribute them to individual vending machine operators. Because of the volume of purchases, they may get bulk discounts and pass the savings to you.
Final Thoughts
The self-service retail sector is a growing market. Vending machines, even though they are further along in their product life cycle, will ride this wave and record new interesting innovations. The last decade has seen many changes in how we run a vending machine business.
We’ve seen innovative robotic vending machines that can make a hot pizza from scratch and smart vending machines that accept contactless payments. Is it possible that we’ve not even scratched the surface of the many ways a vending machine could work?
If you want to join this growing industry, the first step is securing a great location. We are the internet’s premier vending locator service. On average, a vendor who uses our service secures three or more locations within 30 days. Learn more about our service here.
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