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Innovation

Square's innovation stack

You know that Jack Dorsey started Square, the payments company. Lesser known is his co-founder, Jim McKelvey. I heard him in a Harvard Business Review podcast that is my go-to when on a long weekend walk to Stern Grove in San Francisco. Stern Grove, a stunning grove with a permanent stage, is legendary for its free summer SF concerts–and when I moved to San Francisco, the glorious experience of everyone coming together to listen to indie musicians was memorable. It remains one of those experiences that make San Francisco so unique.

McKelvey spoke intriguingly about a new concept in his book The Innovation Stack, and I was mesmerized by the clear explanation of business strategy. He wrote that “the problem with solving one problem is that it usually creates a new problem that requires a new solution with its own new problems“. You may fail in creating the product that reaches escape velocity. However, if you succeed in solving all the problems, like Square did in the payments space, you have a collection of both interlocking and independent innovation that was created to solve these problems–this is the Innovation Stack.

Square’s innovation stack helped them survive an onslaught by Amazon with their payment reader called the Register and created a “blue ocean” strategy in a cut-throat but highly fragmented credit card payments processing industry.

This is the amazing beauty of Square:

  1. Simplicity–one price, a percentage of the transaction, at all times and no hidden fees; this was combined with:
  2. Free Sign-up–no fee to get started, even though the customer received a piece of hardware; therefore it had to be cheap to produce, and so:
  3. Cheap Hardware–Square’s reader cost 97 cents, 950 times cheaper than the cheapest portable card reader that cost $950; further:
  4. No Contracts–credit card processors had 3-year contracts, and Square had none; which meant they reduced the need to answer live questions, so:
  5. No Live Support–Square eliminated costs with no live support, just like Gmail made email possible without it; and therefore:
  6. Beautiful Software–with no live support, the software had to be very easy and pleasing to use; and also:
  7. Beautiful Hardware–the square-shaped reader itself was beautiful to look at, and it caused customers to appreciate that beauty and question why:
  8. Fast Settlement–credit card processors took several days to pay, as Square paid the same day, and it could do that because:
  9. Net Settlement–credit card processors had a complex fee scheme, so it took them days to figure out your fees; but Square knew right away; and:
  10. Low Price–merchants typically got charged 4% in fees, Square charged 2.75%, news of which spread virally among small businesses; and:
  11. No Advertising–the viral word-of-mouth referrals got them new customers and they didn’t have to advertise; and:
  12. Online Sign-Up–new customers were quickly onboarded through a paperless experience; lots of customers signed up; and:
  13. New Fraud Modeling–large numbers of users meant high transaction volume and data science was therefore made possible to prevent fraud; and:
  14. Balance Sheet Accountability–Square’s backed its customers with its balance sheet to settle fraud, eliminating high underwriting costs for customers.

This is Square’s Innovation Stack–notice how each element seamlessly supports the next one? This creates a stack of interlocking but independent innovation that is very difficult to copy. Any copycat competitor would have to know the interdependence of the innovations, and you can’t know the interlocking elements without having lived through the experience of building the product and a business.

This is what a startup must master–an Innovation Stack that most competitors can’t copy, even if they think they can! Once you understand the magic of our Innovation stack, you will know how to defend yourself, extend your strengths, and win.

Photo by Hermes Rivera on Unsplash

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