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The insights from this blog have been drawn from the Book The Innovation Stack by Jim McKelvey Co-Founder of Square.

Recently we read this book and thought its insights were exceptional for a number of reasons including competitive analysis and the power of pricing decision. It has also helped our understanding of the payments industry.

The Founding Principle

Essentially the founding principle of square is quite simple, it is focusing on empowering the micro and small businesses to get better card processing fees. This chart below from the First Annapolls consulting analysis shows that the Mega Businesses pay 0.03c per transaction ($0.5B / $1,562B) vs small businesses that are paying $1.02c per transaction ($3.6B / $350B). In summary small businesses are paying 34X more than mega businesses and in aggregate they are producing ~50% of the entire card industries revenue.

Squares innovation Stack

1. Simplicity. No one understands the payment industry and Square focused on making the product fair and simple. This started with price, one price, a percentage of the transaction for everyone no hidden fees. Counter positioned to credit card industry. This was a painful process because initially square was losing money on small transactions so needed volume growth.

2. Free Sign Up. Because square needed volume fast they were focused on reducing purchasing friction this resulted in them offering Free joining fees including free hardware. This perpetuated the simplicity and further accelerated growth.

3. Cheap Hardware. In 2009 the cheapest credit card reader was $950 and was the size of a shoe, the original Square reader cost 97c to build it was 979x cheaper than alternatives.

4. No Contracts. Square didn’t lock people into any contracts, they could come and go as they pleased it helped curious people join to try it out. This simplified the customer support in that there were no expensive contracts or conflicts to resolve it helped reduce costs.

5. No Live Support. At the start there was no phone number and minimal customer support options, customers who demanded this level of support presumably signed up with a credit card company. This was a continual conscious decision to focus on keeping costs low and innovate out customer complaints.

6. Beautiful Software. Beautiful software is easy to use, this gave new users confidence in the product it also reduced support requirements. The added benefit of this was users becoming sales and support people helping and educating others.

7. Beautiful Hardware. Square was obsessed with making a noticeable sleek object and even sacrificed functionality for its appearance. It was such a design coup it appeared in Museum of Modern Art. This 97c piece of hardware was then placed in a $2 box to make to appear expensive and enhance customer experience.

8. Fast Settlement. Traditional credit card companies took several days to pay, square bought this down to same day settlement. It helped keep customers happy but also stopped the ‘where’s my money customer calls’.

9. Net Settlement. Because pricing was simple it allowed square to know what to send every merchant all the time often within the day. This allowed the rest of the industry to reconcile settlements much faster which further reduced the need for customer support.

10. Low Price. When square started most small merchants were paying ~4% for their credit card services, the low prices of 2.75% spread quickly which acted like a promotion. A superior product at a lower price is a very powerful promotion tool.

11. No Advertising. Square grew 10% every week for 2 years without advertising. The customers became the sales force by using it more and educating customers/other merchants on its features and simplicity. Everyone gets it.

12. Online Sign up. Entire sign up process is online, no credit checks, no paperwork and the decision was instant. No 40 page contracts and we could sign up millions of people straight away.

13. New Fraud Modelling. Used customer data to enhance fraud modeling which was different than focusing on large credit checks for each new user.

14. Balance sheet accountability. Square took the balance sheet risk of new merchants, this enabled fast sign up without the thorough vetting process that the large financial institutions needed. This led to explosive growth and large volume developing rapidly.

The processing Difficulty effect

The square reader is so small and light that it requires some practice before people learn to use it properly. It is small and sleek which grabs your attention and then because its slightly difficult to get right it grabs your attention even more during this process you are learning the name of the company and probably talking to the merchant or customer about the cost and ease of signing up.

According to the Journal of Experimental Psychology: Learning, Memory and Cognition people tend to remember things better if they go through a struggle to learn them, it is known as the Processing Difficult Effect. This is similar to the infamous IKEA effect which is the frustrating act of assembling your own furniture which causes you to fall in love with the final product this is due to the time to build, effort to collect and energy to assemble.


Square were focused on having a low price not the ‘Lowest’, sometimes they are one and the same, but the distinction lies in the focus. A focus on low prices is absolute, a focus on lowest price is a relative focus. Companies that have a lowest price focus are anchored on the competitors to set their price, companies that have a low price focus are focused on maximizing value. The founders of Square studied some successful businesses including IKEA and Southwest Airlines, both of which are led by entrepreneurs that focused on delivering the highest quality product (On time reliable flights or Fashionable functional furniture) at the lowest possible price often large margins lower than nearest comparisons. When Square started they were almost 40% cheaper than competitors. An audacious entrepreneur sets a low price even when competitors are far more expensive.

When Amazon offered 1.95% processing fees and attempted to attack the Square business, Square did not budge on price, It reinforced the original decision of offering the lowest possible price regardless of competitors. When offering materially lower prices than competitors you are entrenching a moat too wide for competitors to cross in one move. The alternative is to offer a price close to competitors and try to take the extra margin for a while, this would encourage alignment from competitors and make it seem more achievable while you both continually adjust lower. If competitors are required to adjust prices down ~50% most will either ignore or fail.

Hiring Programmers

The square founders discovered that after hiring hundreds of programmers that the best coders are self taught, and formal credentials are only marginally valuable. They need a specific mix of brain power and personality.

Some Notable observations

Salary vs Ownership. Jack Dorsey the founder and CEO of Square paid him self a salary of $3,750 per annum. That is three thousand seven hundred and fifty dollars, he has not changed this since! He also granted himself no options or incentive package. At the time of the IPO he owned 24.4% of the issued capital of Square which is now worth $13B USD. This ratio is almost Infinite.

Revenue Growth. At the time of the IPO in 2014 Square compounded revenue at 100% per annum for the two prior years, on size:

An unwavering focus on the customer. The very first component of the S-1 spoke about the customers journey and explained the relevance through customer use:

Square completed its IPO at $9 per share and traded below this price for some months after its debut. It has now been a 30x from the IPO Price.

Hopefully we can find another business as scaleable and well managed as Square!


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