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Innovation Stacks evolve, mostly driven by a survival instinct. If you try to do something truly new, you will encounter a series of new problems. The solution to one problem leads to another problem, sometimes several. This problem-solution-problem chain repeats until you end up with a collection of both independent and interlocking inventions. Or you fail.
It comes down to making a single choice: taking on a problem nobody else has ever solved and doing whatever it takes to solve it. The first step is finding a problem that is perfect for you.
The end of a market represents a standoff between the costs to produce a product or service and what people are willing to pay.
In other words, we chose to lose money and take extra risk just to be sure that the user experience was correct. Getting the user experience right was a critical part of Square’s Innovation Stack.
The problem with solving one problem is that it usually creates a new problem that requires a new solution with its own new problems. This problem-solution-problem chain continues until eventually one of two things happens: either you fail to solve a problem and die, or you succeed in solving all the problems with a collection of both interlocking and independent innovation. This successful collection is what I call an Innovation Stack.
Necessity mothers invention. You don’t plan to innovate, you don’t want to innovate, you don’t aspire to innovate, you have to innovate. It begins by putting yourself in a situation where innovation is the only alternative.
Copying and innovation are partners. If you choose to solve a perfect problem and create explosive growth, most of what you do will still be copying, you just won’t copy everything. Copy when you can; invent when you must.
Luck never feels like luck if you were working hard when you happened to get lucky. Successful people like to credit their diligence or intelligence, but maybe they just flipped heads ten times in succession.
I laugh when people copy Google’s management practices. Twenty billion dollars of free cash flow fixes a lot of managerial mistakes. Google may have the best management in the world, but how do you control for the fact that the company can also fund its own space program?
Change and innovation occur at constantly increasing rates. Once we become used to a rate of change, we are already thinking too slowly. Most of this change is beyond our comprehension or control, but not all.
An important part of timing is being ready when the missing elements suddenly appear. I have seen the following pattern in dozens of entrepreneurial companies: the Innovation Stack begins to function, and then the world suddenly changes; but because the Innovation Stack is still evolving, the company can quickly capitalize on this new world order before any other firm can adapt to the new ecosystem.
This is the pattern for explosive growth. An entrepreneurial company has a working Innovation Stack when some external market change happens. The new change supercharges the Innovation Stack, which quickly adapts and creates new synergies. While we cannot precisely model how the interrelationships work, we can see the pattern. We can also see the world-changing results, and feel the pressure of a new temporal burden.
And because these companies are start-ups when they develop their Innovation Stacks, adapting in response to the interrelationships of stacked innovation is relatively easy—small companies are quick to change. So the changes get made, which necessitates other changes, and then the organization changes again. This cycle repeats and repeats, and with each iteration, each element of the Stack adapts to all its neighbors. In other words, you cannot view the elements of an Innovation Stack individually. The innovation evolves as a whole. No single element can be inserted or removed without changing
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Having a low price can paradoxically mean not lowering it in the face of competition. When Amazon undercut our 2.75 percent rate with a rate of 1.95 percent, we did not respond. Our price was set as low as we could manage while still maintaining our business. If we could have been charging less, we would have been. The attacks of even the world’s most feared competitor did not change that calculus. Imagine what would have happened if we had matched Amazon’s price only to raise it back up once Amazon abandoned the market: our customers would never trust Square again.
Customers who trust you are more valuable than customers who love you. Love can be won and lost, but you only get one shot at trust. It is a rarer emotion. Customers who trust your company become your best salespeople. They buy your products without the usual comparison shopping. They eagerly await your latest thing. Sometimes they wait outside your stores for you to open. And they actually feel happy about all of this because they love your firm. Love is a side effect of trust.
When Southwest lowers a price on a route with no competition, or Square adds another free feature, or IKEA drops the price of a chair, these actions are witnessed by thousands of employees and millions of customers.
Low price protects the entrepreneurial company from competition. Keeping prices low even when there is no immediate competition leaves little room for new entrants. By dropping prices to a low point in all markets, the entrepreneur ensures that these copycats have no room for error.
Innovation Stacks that include low price also create a self-reinforcing positive loop. All your customers who refuse to go to your competitors are precious resources. All their feedback goes to you and keeps your Innovation Stack growing. Low price and the trust it builds are two of the main reasons that these customers stick with you. Having a market to yourself is about much more than a captive group of customers who will not or cannot buy elsewhere. The interactions with all those customers is a source of inspiration and innovation and can help you maintain your lead for decades.
Craigslist certainly disrupted classified advertising, one of the main revenue sources for newspapers. The papers responded by reducing their news-gathering operations—firing reporters who collectively watched all our backs. How many more scandals would have been exposed if those now-unemployed reporters were still on the beat?* We can never know. Disruption is not always positive.
Within the confines of an established market the walls look solid and the market finite. Such thinking looks ridiculous in hindsight, but may appear real at the time. Add innovation and entrepreneurship and the wall becomes a horizon.
