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How Square narrowly avoided getting crushed by Amazon

In this excerpt from Jim McKelvey’s new book, “The Innovation Stack,” the Square cofounder describes how the company was able to fight off Amazon—which copied its iconic card reader and undercut its price.

How Square narrowly avoided getting crushed by Amazon
[Photo: Flickr user Chris Harrison]
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In the summer of 2014, Square was still a simple business: we gave away a cool little white square card reader, charged 2.75 percent for our service, and had a happy collection of small businesses using our product. We were still growing fast. We had no live customer service and barely any advertising budget.

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Then the doorbell rang and Jeff Bezos delivered a severed horse head via free two-day shipping. We discovered that Amazon had copied our hardware (albeit as a black rectangle), had undercut our price by 30 percent, and was offering live customer support. Amazon is a truly terrifying competitor. They are brilliant, efficient and rich. They have teams of the best people and are literally building an army of flying robots. They stuff the mangled remains of their competition into smiling cardboard boxes and move onto the next market.

We needed a response, fast. We began looking for examples of other firms that had beaten back Amazon, but if there were any such businesses, we couldn’t find them. Nobody had ever written a playbook on how to beat the alpha predator, and even if they had, they would still need to sell it on Amazon. We were alone.

Amazon’s strategy involved copying much of what Square offered, combining this with its massive brand and customer base, and then beating us in three areas where it could offer a superior product: the card reader, the customer support, and the cost. Each of these was an area where Square was truly vulnerable.

Amazon’s first attack I took personally: it released a card reader that worked better than the one I had designed. The problem with our reader was its size. The Square readers were so small that credit cards wobbled as they went past the read-head, resulting in a misread. Though by 2014 our hardware team had reengineered my original reader several times, they had never changed the size, so the wobble remained. The solution to this problem, which Amazon and everyone else who copied us did, was to double or triple the width.

I had tested and built a wider reader as well, and it solved the problem of wobbling cards, but at a cost: none of the wide designs looked cool. Our reader was not designed to be the easiest reader on the market to use; it was designed to be the coolest thing you ever saw. There was no way to change the reader to match the function of Amazon’s competing product, Register, without sacrificing one of our core values: beautiful design. We adhered to this principle, even without consciously knowing why this was so important. Amazon was offering a reader that required no effort, but provided no joy. We decided not to change our reader design, without ever articulating why, even though Amazon’s reader worked better.

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Amazon’s next assault was on our customer service, or lack thereof. At the time, Square had no live customer service number that you could call. This was not an oversight; we designed our entire ecosystem around not providing live customer service. We built our software, sign- up, underwriting, and a dozen other systems with the idea that the customer experience would be so simple that occasional email support would suffice.

By 2014, however, Square’s product line was becoming more complicated, and we had already planned to add live customer support as an option. But customer support is not something we could implement overnight. To provide a good live customer service experience takes months of planning, hiring, and training, not to mention finding a place for everyone to sit.

Amazon’s final point of attack was price. It offered credit card processing for a rate of 1.95 percent, whereas Square charged 2.75 percent. We could have matched Amazon’s price and fought a war of attrition, but we were a small, unprofitable start-up and Amazon was a large, unprofitable household name. Fighting it on price might have driven us into bankruptcy.

Board meetings at Square are usually fun. But the day we discussed Amazon, the mood was as somber as an oncologist’s waiting room. Each Square director was given the opportunity to suggest potential countermoves, and after the last idea was considered we reached a remarkable conclusion. In response to an attack from the most deadly company on the planet we would do nothing. Precisely nothing.

Matching Amazon’s price would just bleed us to death. Amazon would love nothing more than to fight us on price, given that it had billions in the bank and we had only recently weaned ourselves off Jack’s credit card. We had already made plans to add live customer support, but couldn’t accelerate that process significantly. We liked the way our reader looked and worked. We couldn’t match Amazon’s size or market share and we didn’t own even one flying robot.

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By the middle of 2014, we had made literally thousands of decisions about what our company would be. We’d made them with our customers and employees in mind. Making each decision had forced us to make other decisions, so everything was interrelated. We couldn’t change one thing and not affect the others. Our Innovation Stack was complete, but we didn’t understand the power it gave us. The only way we could respond to Amazon was to change something we were doing, but everything we were doing was done for a good reason. So, we did nothing.

Nose to Toe

My point is simply this: a start-up fighting any tech giant is like a kid dressed as a soldier fighting an actual soldier. The major tech platforms have advantages in nearly every area that matters: money, talent, customers, brand, lobbying, lawyers, patents, and flying robots. Amazon is arguably the most deadly of the bunch.

Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time by Jim McKelvey

Perhaps our response of “doing nothing” in the face of Amazon’s attack would better be called “doing nothing different.” We were still growing nearly 10 percent every week, which put strains on everything. At that pace, we were overflowing on all sides, from our bandwidth to our bathrooms.

The battle between Square and Amazon lasted just over a year. Strangely, during that whole period, I never saw even one of Amazon’s copycat black readers out in the real world. Were we missing something? Were things a bit too quiet? But life at Square went on as it always had: we built our products, supported our customers, and kept growing.

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Just in time for Halloween in 2015, the doorbell rang again, this time with a treat. Amazon announced that it would discontinue its Register product. To their credit, the people at Amazon were incredibly cool about the way they exited our market. Each of their Register customers received a smiling cardboard box containing a little white Square reader.

This article was adapted from Jim McKelvey’s new book, The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time (Portfolio, 2020).