From Early Traction to Today's Sustainable Growth Engine
By combining an elegant integrated payments system with a distinctive conversation-triggering piece of hardware, Square has disrupted the credit card payments establishment while making credit card processing more accessible to small businesses everywhere.
A cursory look at their growth would suggest that they succeeded on the back of an unfair advantage - founder Jack Dorsey’s celebrity status, but a deeper dive reveals a powerful and sustainable growth engine driven through a systems-based approach to product design and eye-catching hardware that fueled interest from anyone who saw it.
The Need for Square
As with most fast growth products, the Square story starts with addressing a widespread need with an effective solution that completely reimagines small business payments. Before Square, it was illegal for non-registered merchants to accept credit card payments. Registering was a costly and difficult process that most small business owners couldn’t afford. These business owners struggled with the reality that while most people carried plastic instead of cash, the costs and complexity of credit card processing made it impractical to accept credit cards.
“Jim McKelvey (co-founder of Square) was in an art fair and couldn’t sell a piece of glass because he couldn’t accept a credit card; so that was $2,000 lost.” – Jack Dorsey
Whether it was a local hot dog stand owner trying to increase profits, a college sorority fundraising for their organization, a philanthropic organization raising money for a good cause, or a politician raising money for their campaign, these groups often had no way of accepting credit card payments and relied solely on people carrying cash, which limited fundraising efforts and sales.
There is not much public information available on the early traction of Square, but Jack Dorsey’s own personal profile (as Twitter cofounder) cannot be understated when it came to attracting early customers and investors. Dorsey created a list titled, “140 Reasons Why Square Will Fail”, which he distributed to potential investors of Square. The list included counterpoints to each objection, which informed investors that he was prepared for any possible obstacle the new startup may face. “140 Reasons Why Square Will Fail” also served as a clever strategy to acquire new interest.
While Dorsey’s celebrity helped gain early tech press and investor notice, Square was designed to unlock credit card payments for the average small business–not the avid TechCrunch reader. To that end, Jack Dorsey’s celebrity is less important to lasting growth, compared to the obvious early benefits. Dorsey also promoted his product through demonstrations held with potential vendors and investors of the company showing just how easy it was to use the product. By following the Apple iTunes/iPod model of developing an integrated hardware and software solution, Square was able to create a system that was easy to use, elegant in its design and completely new and remarkable from the other solutions on the market. By reimagining what it meant to take credit card payments, Square was able to catalyze word of mouth while unlocking untapped markets for new customers. Despite early challenges, including questions about security, Square began to build credibility and momentum through partnerships with industry leaders and glowing reviews from users and reviewers alike. With high profile partnerships from Apple—where the company stocked and sold its reader for $10 in every store—to a strategic investment from Visa, Square showed their audience and the market that they were a serious new entrant with a product that brands they already trusted believed in. This gave Square the bonafides needed to make the leap from techset darling to a must-have for small businesses hungry for a solution to a long-unmet need. Looking back at early traction it’s clear that there were 4 factors that drove growth:
An elegant hardware/software solution that reimagined the payment processing space, similar to Apple’s iTunes/iPod approach to digital music.
A business model that made payments accessible to small businesses who were previously shut out due to price and application process.
Early tech excitement based on Dorsey’s public profile to drive initial awareness.
Strategic partnerships that drove distribution and credibility fueling growth among their target customers.
Breaking Down Today’s Growth Engine
As Square has matured their growth engine has evolved. You don’t reach a $3.25 billion valuation on the back of any one hack. And sustaining growth tends to move away from early traction efforts to a more conventional marketing approach. Square’s growth, however, continues to be driven by the core components of their hardware/software system, and their ability to continually innovate to make payments easier and more accessible for both consumers and small businesses alike. Square’s growth engine can be summarized at a high level by the following four components:
Compelling value proposition proposition and low friction drives trials
Square solves a real problem that relates to the number one priority of their target customers - making more money. And they make it very easy and low risk to get started. Once a user activates an account on squareup.com, the company automatically ships out a free card reader to them within 7-10 business days. Signing up is hassle free and quick with very little friction, which complements the company’s goal to gain as many new users as possible. An account with Square requires no contract, no monthly service fee, and doesn’t require a merchant service fee. As an added bonus, the credit card reader comes with a redemption code that allows new users to redeem $10, which is deposited into their bank account after registering the device. Compare this to the traditional payment processor model which required a detailed application, a phone call audit, and an expensive equipment purchase and/or lease.
The Square phone app can be downloaded for free, turning any phone into a reader. The app is practical and easy-to-navigate. Even for non-tech savvy small business owners, Square is a breeze to use. Square customers who have a hard time using their iPhone have no problem taking a payment.
Wow customers with elegant integrated system
Square delivers on the initial promise of solving small business credit card challenges and then goes on to wow customers with an integrated solution that includes beautiful reporting; much of the system solves needs the customer didn’t even know they had (after nailing the obvious problem). Square’s applications for small businesses make it easy to setup and configure point of sale systems on an iPad, can provide rich insights to help business owners make the most of business opportunities, and help build loyalty through two-way communication between the business app and consumers using Square. This integrated approach to payments goes far beyond just taking payments. Take business intelligence: Square gives small business owners access to data they never had before. What’s the most popular drink on the menu? The busiest day? And other data that lets small business act more like big business. Customer loyalty is another facet of the system. Square’s Wallet allows users to buy from merchants who accept Square without having to physically take anything out of their pockets to pay (the app has all of the customer’s credit card information saved). A customer can simply walk into the store, say his or her name, and the merchant can pull up his or her account profile and picture through geo-fencing technology. This technology detects when a customer is nearby a merchant-enabled store. The app also features the ability to find location nearby that accepts Square and provides customers with information such as contact info, menus, coupons, photos, and reviews of said merchants. All innovations around payments to remove friction and delight their customers—business owners and shoppers.
Beautiful highly visible hardware sparks questions
Square spent the time and resources to make the hardware component of their solution interesting and even beautiful to the eye. Compared to other credit card terminals, it’s a work of art. This visible unique differentiator sparks conversations with customers. People naturally ask “Wow, what is that thing attached to our iPhone?” The experience of signing with your fingers and having the receipt mailed to you is convenient and amazing in itself. It’s completely unlike any other way to pay. The company keeps pushing forward with new technology such as the Square Register application which turns an iPad into a powerful, point-of-sale system. The app supports a traditional cash drawer and has the ability to print physical receipts with a compatible receipt printer—a smart evolution that acknowledges that cash still is an important part of small business commerce. With each innovation in hardware, the striking style and attention to detail and remarkable experience continues the conversation and creates more visibility for the business. For example, the new Square Stand spins completely around so that the customer signs on the same screen that the clerk uses. While efficient, it also creates a novel moment of surprise and delight as something completely unexpected from traditional purchase transactions. This delight creates goodwill, word of mouth, and customer satisfaction both for the store’s customer and Square’s.
Raving fans advocate benefits of solution
Business owners that are asked about Square are happy to rave about the product. It makes them look smart and hip to their customers and their peers. Square’s hardware design elevates the small business brand and provides delightful elements to their own customers’ experiences. This positive word of mouth creates a flywheel of momentum for the business. And the more people that use and interact with the product, the more their ecosystem grows. More small business owners get the reader. Their customers download the Square app to make payments more seamlessly. Those customers tell other business owners to install Square, and the beat goes on. As more people get added to the ecosystem their momentum gets stronger. New partnerships with companies like Starbucks will put Square in front of millions of new users, driving that flywheel ever faster. When compared to Intuit or PayPal, both who recently released credit card adapters for iPhones, the positive word of mouth and delightful experiences that generate it are powerful barriers for competition to overcome.
The Remaining Pieces of Square’s Growth Engine
This article contains a lot of data interpretation and speculation about the engine that is driving growth for Square. Speculation creates debate and dialog, which are two of the main goals for these analyses. Our hope is that this document will will spark a rich discussion where we can further break down the publicly available information to build the definitive understanding of Square’s unique growth engine. With your help, we’ll create the best case history of how Square grew, which will hopefully help future hardware entrepreneurs discover their own growth engine faster, leading to more successes for promising companies. We hope that this analysis will help new hardware startups identify some of the levers that they can test in their own growth strategies. By going beyond the obvious nature of Jack Dorsey’s fame, to a more complete understanding of their systems thinking and credibility building with their target audience, we hope that hardware entrepreneurs will find takeaways and new insights that will fuel their growth.