It's rare that a smaller brand can go up against a big company like Amazon and win. But that's what Square did when Amazon launched an almost identical card reader for a fraction of Square's price.

Without undercutting the price of its biggest competitor, Square still went on to completely disrupt the digital payments and finance industry and earn 4.68 billion in revenue in Q2 2021.

Why? Its co-founder, Jim McKelvey attributes Square's success to its "innovation stack."

In HubSpot's first episode of The Shake Up, Alexis Gay and Brianne Kimmel sat down with McKelvey to learn about how Square navigated its competition with Amazon and dive more into his book, The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time.

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How to Beat Competition Like Square Beat Amazon

Below, you'll find just a few highlights from McKelvey as well as the podcast where you can listen to the full conversation.

What's an innovation stack?

[20:13] Alexis Gay: Before we dive in a little bit, can you tell us what is the innovation stack?

[20:20] McKelvey: The innovation stack is this thing that I discovered while I was trying to answer a question that was plaguing me, which is how Square survived an attack by Amazon. … The Square was attacked by Amazon when we were a startup.

At the time, every company that had been attacked by Amazon, whether they were a startup or not died. There was a 100% mortality rate or it had been absorbed into Amazon, which I would also consider. … death or worse.

We were looking at this very dire situation and we did some kind of crazy stuff and it worked and, and then after it worked, I thought, “Why  did it?” And I couldn't answer that question.

… I'm a sort of nerdy engineer and I went on this research quest looking for other companies that had lived through similar situations. So I studied historical businesses. ... Technology was not the major force, but there was this thing that kept showing up in my research and it was a thing that I labeled an innovation stack. And it's just this very simple idea that invention is not one or two things. It's usually this messy conglomeration of 10, 20, 30, 40 things.

Amazon takes on Square

[23:02] McKelvey: [In a board meeting], Jack [Dorsey] was dressed in all black and he announced that Amazon had copied our product and was going to undercut our price, which is what they always do. And he told the board what was happening -- and we have very intelligent people on the board and we have a lot of experienced folks -- and we were stopped.

… We started iterating through the questions of, "What could we do?" One of the most basic ones was Amazon was undercutting our price. We could lower our price and match Amazon. And then here's the thing. Those are priced to be as low as it could be and still serve our customers.

We didn't actually even do anything. That was different, which was the amazing thing. We wanted to do something because if you're being attacked, the hardest thing you can do is to not react or maybe not overreact.

[24:56] McKelvey: It was terrifying. And this made it even more interesting when we won for me to answer the question, "Why?" What the heck happened because I was so happy we won, but then I was like, "Why did we win?"

Square Beats Amazon

[27:02] Gay: So Jim, let's talk a little bit about Halloween in 2015. You got some pretty big news on that day. Can you tell us a little bit, well, first actually, let me ask you this: Were you dressing in costume?

[27:16] McKelvey: I was dressed as the Joker. My wife was dressed as Catwoman and my son was dressed as Batman. The best treat I got that night was Amazon announcing that they were going to discontinue their competitor to Square. And not only that, they were going to mail one of the little white square readers. The thing that I designed.

Why Building an Innovation Stack is Uncomfortable

[34:43] McKelvey: The big insight of the book is that the process of innovation is fundamentally different and it feels different and here's how it feels. What I tell my readers, or potential readers is, “Look, the reason you read the innovation stack is that at some point in your life, you are going to run up against the edge of human knowledge.”

… When you're in the process of building an innovation stack, it is so darn uncomfortable. So I want people to have recognition. So first of all, recognize the boundaries. That's hugely helpful. Secondly, understand when it's appropriate to copy and when you need to.

[36:28] McKelvey: If you step across that line between the known and the unknown, it's going to get unpleasant. It will not kill you. It might be really wonderful on the other side eventually, but … your focus is to figure out something that nobody else has figured out.

… How many pieces do you have to come up with before you've got an innovation stack that actually works? And by the way, there's no guarantee that you're ever going to reach that limit, but you do. And if you do. The world changes. Like it's just amazingly powerful if you build [an innovation stack].

To hear the full interview, listen to the podcast embedded above, or click here for a full list of episodes.

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Originally published Aug 17, 2021 9:18:00 AM, updated August 18 2021