2013 INSEAD Blue Ocean Strategy team project Square

Blue Ocean Strategy Square Inc.
Contents
1. Introduction – Square for merchants 1
2. The Red Ocean – Traditional POS Processing 1
2.1 Industry overview 1
2.2 POS Terminal Manufacturers 3
2.3 Payment Processors & Acquiring Banks 3
2.4 Traditional Buyer Experience Cycle / Buyer Utility Map 4
2.5 As-Is Strategy Canvas 6
3. Blue Ocean – the Square Reader 7
3.1 Square’s value proposition and cost advantage 7
3.2 Customers and Non-Customers: How Square addresses their pain points 8
3.3 Six Paths Framework 10
3.4 Square Reader Buyer Utility Map 10
3.5 Square Reader ERRC and Strategy Canvas 12
4. Success and the future of Square 14
4.1 Measuring Square’s success 14
4.2 Responses from competitors 15
4.3 Future implications for Square 16
4.4 Future Sustainability 18
5. Concluding remarks 20
Appendix A – Small Merchants Survey Summary 21
December 2013

Tables
Table 1: POS Stakeholder Description....................................................................................................................................2
Table 2: Square Value Propostion..........................................................................................................................................8
Table 3: Square’s Value Proposition Among Customers/Non-Customers............................................................................10
Table 4: Description of Factors ............................................................................................................................................13
Table 5: Comparison Table of Square and Competitors.......................................................................................................16
Figures
Figure 1: Payment Industry Value Chain................................................................................................................................2
Figure 2: US POS Terminal manufacturers’ financial performance........................................................................................3
Figure 3: US Merchant Acquirer Market Share, 2011............................................................................................................4
Figure 4: Buyer Utility Map (‘BUM’) diagram........................................................................................................................6
Figure 5: As-Is Strategy Canvas for Traditional POS ..............................................................................................................6
Figure 6: Square Reader Buyer Utility Map..........................................................................................................................10
Figure 7: Square Read ERRC Summary.................................................................................................................................12
Figure 8: Square Reader Strategy Canvas............................................................................................................................13
Figure 9: Square Inc-Gross Payment Volume & Total Users ................................................................................................14
Figure 10: Average Annual Growth Rates (2010-2013).......................................................................................................14
Figure 11: Market Capitalization: US Payment Solution Providers......................................................................................15
Figure 12: Buyer Utility Map: Square & Paypal (1)..............................................................................................................17
Figure 13: Buyer Utility Map: Square & PayPal (2)..............................................................................................................18
December 2013

1. Introduction – Square for merchants
Mobile payments company, Square was founded by Twitter creator Jack Dorsey in 2009. Its Square Reader
service premiered in 2010 and vastly simplified credit card payments acceptance as a mobile payment or
merchant aggregator. By aggregating transactions and undertaking batch processing, it lowered overall costs
for businesses and gained negotiating power over the payments industry value chain.
Our unit of analysis is the Square Reader – an elegantly simple, white plastic credit card reader that plugs into
the ubiquitous 3.5mm audio port and which merchants received for free by registering on the Square website.
The Square Register app – also free – compatible with both iOS and Android platforms, turns the mobile device
into a register capable of recording cash and card payments. Credit card transactions cost merchants 2.75%.
Alternatively, merchants can elect for a USD275 monthly charge, although this structure was abolished in 2011.
Relative to traditional point-of-sale (POS) systems with 1.5% to 3.5%
1
fees, Square appears relatively expensive.
However, it enabled transactions as low as $1 and eliminated complex and inflexible contracts that typified
traditional POS systems. On this basis, Square’s value proposition is strongest for merchants with small credit
card transaction volumes or unpredictable revenues, and hence cannot negotiate better terms.
This business model lowered hardware costs, offered a clear cost-advantage for a small merchants and
unparalleled clarity of use. Since Square’s hardware and software were free, and merchants were unbound by
contracts, trial costs were eliminated. A compelling value proposition combined with costless adoption
motivated merchants who accept charge cards to try the service and new ones to adopt Square. Since 2010,
the service has since spread beyond the US into Canada and Japan with over 2mn users and up to USD14bn in
annual processing volumes.
2. The Red Ocean – Traditional POS Processing
2.1 Industry overview
The traditional Point of Sale (‘POS’) value chain involves numerous stakeholders and a complex processing eco-
system. These players charge fees typically ranging from 1.5-3.5% of merchant transactions revenues. The
detail description of the stakeholders of the value chain is indicated in Table 1.
1
Federal Reserve of Philadelphia
December 2013 1

POS Stakeholder Description
Merchants Business owners or persons selling products and/or services
Terminal Manufacturers Designs and manufactures hardware and software for Merchants use in collaboration
with Card Networks and Acquiring Banks
Acquiring Bank Formalizes relationships and contracts with Merchants. Provides POS hardware,
services accounts and manages transaction risks. May also process payments
Payment Processor Handles front-end transactions- POS swipe, Card Network verification, Issuing Bank
authorization and Acquiring Bank settlement
Card Networks Sets standards and rules for payment ecosystem and controls transactions between
Acquiring and Issuing Banks
Issuing Bank Provides banking services to card holders and manages accounts
Assumes FDIC responsibility
Consumer Credit card or debit card holder
Table 1: POS Stakeholder Description
Figure 1: Payment Industry Value Chain
The payment industry is a veritable red ocean dominated by POS hardware providers, with transactions being
routed through acquiring banks and payment processors. Square disrupts the value chain at these three levels.
Issuing Bank Acquiring Bank
Consumer Merchant
Card Network
Terminal Mfg
Source: Adapted from Goldman Sachs Small Mid Cap Forum, Ingenico Investor Presentation, May 9, 2012
* Verifone price list from www.kernalsoftware.com
** Federal Reserve of Philadelphia
Pays
$100
Keeps
$98
Keeps
$0.4
Payment ProcessorPayment Processor
Keeps
$0.1
Keeps
$1.5
Charges Merchants:
One-time hardware*: $150-$950
Transaction fee**:
1.5% to 3.5% (avg 2%)
December 2013 2

2.2 POS Terminal Manufacturers
Ingenico and VeriFone dominate the global POS hardware market with stable market shares. In the US,
VeriFone commands 60% of the market, followed by Ingenico with 11%
2
. While revenues have grown steadily,
net income has not. For instance, VeriFone and NCR both reported net income decreases or losses between
2007 and 2012 (see Figure 2). VeriFone cites that “markets for our system solutions and services are highly
competitive…could result in price reductions, reduced margins…render our solutions obsolete.”
3
Verifone NCR
Figure 2: US POS Terminal manufacturers’ financial performance (source: Financial Times)
2.3 Payment Processors & Acquiring Banks
Payment processors and Acquiring Banks sometime consolidate functions. Bank of America Merchant Services
(BAMS)-a joint venture between Bank of America and First Data- leads the American market in transaction
volume. With the exception of First Data Corp and Global Payments, all Acquirers are banks or bank affiliates.
Market share is fragmented and many players post negative net incomes despite growing revenues
4
. Pro-
consumer legislation further depresses industry profitability. For instance, the Dodd-Frank Act enacted in July
2010 capped debit card interchange fees and lessened restrictions on merchants to switch processing
networks
5
.
2
Nilson Report 2011; Essence International, research on PAX Global (HK), Feb 18, 2013
3
Verifone Systems, form 10-k, 2008
4
Marketline Analysis on First Data
5
New Rules on Electronic Payments Lower Costs for Retailers, Federal Trade Commission, September 2011;
First Data, Form 10-k, 2012. Risk Factors.
December 2013 3

Figure 3: US Merchant Acquirer Market Share, 2011 (Note: Market share is calculated based on number of
transactions handled in the year; Source: Capgemini Analysis, 2012; Nilson Report, March 2012)
2.4 Traditional Buyer Experience Cycle / Buyer Utility Map
Merchants go through a seven-step experience cycle in accepting credit card payments. Examining this process
reveals challenges for merchants.
System Selection
Basic POS systems come with a cash register, barcode scanner, receipt printer, and card reader. More
sophisticated systems can even track inventory and replenish stocks. Even for standalone credit card
processing, merchants must decide among various hardware manufacturers. Contract terms, charges and fees,
and conditions of use complicate this choice.
System Acquisition
In addition to the rent/buy decision, merchants face different pricing structures from different vendors. This
further complicates the merchant decision. Furthermore, terminals can be expensive, ranging from USD150 –
USD1000 and enrolment can take up to 4 weeks.
System Setup
POS systems are generally easy to install with either landline or wireless connectivity. However, programming
and integration can be time-consuming.
Usage (Transaction Fees and Reconciliation)
Credit card transactions cost merchants 1.5-3.5% per transaction depending on transaction volumes and one’s
negotiation skills. Processing failure – for instance due to unreliable internet service – duplicates charges. Some
December 2013 4

merchants incur additional fees for landline or wireless transactions. In the event of processing failure, the
merchant can choose to accept transactions at the risk of default. Upon completion, physical receipts are
signed and kept. Payment is received up to 4 days later.
At the end of a work day, merchants must reconcile cash register transactions against physical receipts.
Additionally, they may undertake bookkeeping on separate desktop software.
Supplements and add-ons
Hardware providers also often provide options for additional add-ons to the base POS hardware. These include
things such as solutions to allow advertising on POS hardware, digital signature pads and NFC / contactless
payment peripherals.
Maintenance and Service
POS hardware can be cumbersome and tedious to maintain. Wired systems take up counter space and can be
unsightly. Wireless systems are bulky and must be charged for use.
Renewal and Disposal
POS hardware last 2-3 years before degradation sets in; card readers become inefficient and the battery life of
wireless units deteriorate.
Based on the buyer experience cycle, the value factors on which the payments industry competes can be
illustrated on the as-is strategy canvas.
The pain points faced by buyers can be summarised in the Buyer Utility Map (‘BUM’) diagram below.
December 2013 5

Figure 4: Buyer Utility Map (‘BUM’) diagram
2.5 As-Is Strategy Canvas
With an analysis of traditional buy experience cycle, the most relevant 11 factors were selected to understand
the performance of traditional POS system. The As- Is strategy canvas is developed and provided below:
Figure 5: As-Is Strategy Canvas for Traditional POS
Low
Traditional
POS
High
December 2013 6

3. Blue Ocean – the Square Reader
3.1 Square’s value proposition and cost advantage
Square breaks out of the payment industry red ocean with the help of JP Morgan as Acquiring bank and Chase
Paymentech as the Payment Processor. A major pain point of traditional POS systems are the multiple layers of
costs and conditions that merchants are exposed to. For instance, hardware contracts typically last 2-3 years
and can be cost prohibitive. One interviewee in a Palo Alto farmer’s market rejected traditional POS citing
rental costs of USD100/month, transaction charges of 2-3% and fixed fees of USD0.25 – 0.50. While not
necessarily representative, local Fontainebleau businesses cited additional connection charges for landline and
wireless processing (refer Appendix A) . Contracts may also stipulate minimum monthly or annual transaction
volumes. Inactivity and PCI data security compliance fees may apply. By some estimates, additional fees and
conditions raise transaction costs for smaller merchants to as high as 4%
6
. By eliminating hidden fees and
conditions, Square creates value for merchants while simultaneously lowering costs. This factor is summed up
in a simple but elegant proposition ‘pay only when you sell’.
In addition, Square differentiates itself in the following ways. Firstly, with both iOS and Android compatibility,
Register offers mobile devices as a new platform. Furthermore, Reader’s 3.5 mm connection makes Reader
ubiquitous. From the lens of network effect economics, a universal installed base raises Square’s value.
Secondly, it offers next business day payment settlement compared with up to 4 days for traditional POS
systems. Fast clearance lowers financing and working capital costs for merchants. Finally, Register also
functions as a transaction register, recording both cash and charge transactions, and generating receipts via
SMS or email. It is easily programmable for price changes, tips and taxes. It includes productivity tools enabling
merchants to easily access payment, deposit and sales histories, and generate customized reports. In this
sense, Register precludes the need for a physical cash register, and replaces desktop productivity software so
as to simultaneously raise value and lower costs.
Square Value
Proposition
Features Raise Values/ Lower Costs
Zero set-up costs Free reader and app Lower costs
Simple transaction fee
structure
2.75% per transaction or USD275 per
month.
Raise value
Clear fixed fees No interchange, chargeback, refund,
inactivity, PCI compliance fees of
traditional POS systems.
Lower costs
Low conditions of use • ‘pay only when you sell’ promise
• No contracts.
• Account closure at any time with no
Raise value
6
http://www.inc.com/audacious-companies/issie-lapowsky/square.html
December 2013 7

Square Value
Proposition
Features Raise Values/ Lower Costs
charges or conditions.
• $1 minimum transaction size.
Platform universality Compatible with Apple iOs 5.0, Android
2.2 and higher.
Raise value
Fast settlement Next business day deposit guarantee. Lower costs
Productivity • Register replacement; records both
cash and credit card transactions.
• Payment, deposit, sales review
• Customized reporting
• Easy programming. Computes taxes
and tips.
Raise value and lower costs
Mobility Mobile device platform Raise value and lower costs
Table 2: Square Value Proposition
3.2 Customers and Non-Customers: How Square addresses their pain points
Square’s customers are merchants who currently accept credit cards. They accept its pain points as necessary
conditions to maintain parity with competitors and with customer expectations. While all merchants benefit
from easy setup conditions (e.g. no contracts), those with smaller revenues and transaction volumes, and
consequently high fees have the most to gain. Smaller merchants also benefit from Register’s productivity
tools.
3-tiers of non-customers
Soon-to-be: These merchants operate on the margins of whether or not to accept credit. Like Square’s Red
Ocean customers, they tolerate associated fees and conditions as necessary parts of fulfilling customer
expectations. Cash payments help them avoid fees which trim their bottom line. Paradoxically, this diminishes
credit transactions and relegates them to high fees and disadvantageous terms. Given a choice, they would
readily accept lower fees and fewer conditions.
Square simultaneously raises value and lowers costs for marginal merchants by offering payment processing
with fixed fees and few conditions. Merchants can register for a free Reader, enjoy a ‘pay only when you sell’
structure, and the flexibility to stop use at any time. Next business-day settlement is appealing as well. Soon-
to-be’s tend to be smaller businesses which are most likely to derive value from Register since they tend to
operate disintegrated systems for accounting, inventory management and and cash flow tracking. Register
offers them the ability for full operational integration.
Free hardware, clear fees, transparency and clarity, low usage conditions, and productive complements
address the pain points of soon-to-be non-customers. Free trial costs help to convert soon-to-be’s from the
traditional payment industry to Square.
December 2013 8

Refusing: Refusing non-customers are businesses that do not accept credit card payments because transaction
volumes do not meet minimum amounts or because transaction sizes are small. An interviewee from Pastis
Restaurant in Palo Alto, California cited USD10 as their minimum transaction size. Local French businesses cited
a range of €8 - €15 (refer to Appendix A). Square unlocks non-customer demand with ‘pay only when you sell’
pricing and minimum transaction size of USD1
7
,
The refusing tier relies on cash and to a lesser extent, cheques for payment. For them, even standalone cash
registers are unnecessary, over-engineered, expensive investments. Register creates value for refusing non-
customers eliminating the need for a cash register while providing registry, receipt generation and invoicing
functionality. For example, WTF Espresso and Tea café in Brooklyn uses Register solely to record its cash
transactions and does not accept credit card payment
8
. However, these payment forms have accompanying
risks. Cash is exposed to loss, theft, and counterfeit. Cheques carry default risk. Both require physical deposits.
Their choice to refuse credit cards is driven by structural issues but ultimately results in revenue loss.
Unexplored: Unexplored non-customers are only able to accept cash or cheques because of technological or
infrastructure limitations. Possible categories include (1) mobile businesses which lack infrastructure, for
instance food trucks or mall kiosks, (2) sole proprietorships like consultants, independent contractors, and
artists, and (3) social transactions- for instance, friends who need to settle a restaurant bill with whoever
fronted payment
9
. They experience the same pain points from cash and cheques as the refusing non-customer
tier.
Unexplored non-customers may benefit most from Register since the nature of their transactions precludes
access to invoicing and electronic receipts. Mobile computing platforms provide unexplored non-customers
with infrastructure where none previously existed. Hence, Square’s mobility has the highest value for this non-
customer group. The ‘pay only when you sell’ offering makes Square viable even for sporadic transactions. As
evidence of traction with unexplored customers, the Square Reader was made available through Apple’s retail
channels in 2011
10
.
Across customer and non-customers, Square’s value proposition addresses many pain points, and
simultaneously creates value while lowering costs.
7
(source: https://squareup.com/register#anyone-can-accept) lowering cost of use for this non-customer tier.
8
http://brooklynbased.com/blog/2010/12/09/hip-to-be-square/
9
(sources:http://www.techrepublic.com/blog/apple-in-the-enterprise/its-hip-to-use-the-square-app-to-accept-credit-card-
payments/1140/).
10
source: http://gigaom.com/2011/04/18/square-goes-mainstream-with-apple-store-availability/).
December 2013 9

Non-Customer
Segment / Value
proposition
“Pay only when
you sell” @
2.75%
$1 min.
transaction
Free to sign-up,
free to cancel
Invoicing, receipt
and register
functionality
Next
business-day
settlement
Existing merchants
using traditional POS
systems
Depends Depends X Depends X
Tier 1: Businesses that
marginally accept
credit cards
X X X Depends X
Tier 2: Businesses that
refuse credit cards
X X X X X
Tier 3: Mobile
businesses, sole
proprietorships, and
social transactions
X X X X X
Table 3: Square’s Value Proposition Among Customers/Non-Customers
3.3 Square Reader Buyer Utility Map
The new Buyer Utility Map (‘BUM’) and Buyer Experience Cycle (‘BEC’) that the Square Reader creates is
illustrated below.
Figure 6: Square Reader Buyer Utility Map
December 2013 10

3.4 Six Paths Framework
How does Square redefine market boundaries for payment acceptance? The 6-paths framework reveals that
Square reconstructed market boundaries by looking across alternate industries, at different chains of buyers,
with complementary services, by creating emotive appeal, and by capitalizing on irreversible trends.
Path 1- Alternative industries: Square broke out of the red ocean of the payments industry by viewing their
mission as payment acceptance; it competes against cash, cheques, and less mainstream forms like Paypal.
Each has associated pains. Credit cards entail complicated and sometimes expensive fees with onerous
conditions. Businesses must finance operations while payments clear. Cash offers immediate liquidity but at
the risk of counterfeit, loss and theft. Cheque payments face default risk. Additionally, both cash and cheques
require merchants to undertake physical deposits.
Square addresses the pain points associated with each payment form. Its ‘pay only when you sell’ structure and
simple transaction fee eliminates merchant conditions, and next day clearance reduces financing costs.
Simultaneously, it eliminates cash handling and bank trips.
Path 3- Chain of buyers: The decision to accept credit card payments is a managerial one, which in turn driven
by net revenue generation against costs of ownership. Square increases this net benefit for all non-customer,
but more so for refusing and unexplored tiers. It further creates value in other ways. First, smart device
ubiquity and Register lowers hardware, maintenance and replacement costs. Second, platform mobility offers
productivity gains by giving all in-store personnel the ability to process transactions. Finally, Register allows
businesses to easily change prices. Square user, Bridey Recker of WTF Espresso and Tea, a Brooklyn coffee
house says that “with a big POS there’s a whole list of keycoding and it could take you 30 minutes to change a
price”
11
.
The image of mobile payment systems and smart device use is very much in vogue. As such, the adoption of
Square can intrinsically appeal to employees. In this sense, users act as influencers by advocating for adoption.
Path 4- Complementary product and Service offerings: The Buyer Experience Cycle shows that merchants
perform numerous steps following a credit card payment. Integrated POS systems are expensive causing many
businesses settle for standalone terminals. They run separate software to track transactions on desktop
systems. Receipt tabulation is performed manually as well. Reader and Register offers an integrated process,
albeit with relatively low capacity limitations.
Path 5- Creating functional appeal: Payment processing is a functional service. Square managed to create a hip
image through mobile devices. Its association with founder, Jack Dorsey may have helped as well. Early
11
http://brooklynbased.com/blog/2010/12/09/hip-to-be-square/) With Square, it takes 30 seconds
December 2013 11

adopters tend to be small businesses and young entrepreneurs who identify with this savvy and hip image.
WTF’s Recker speaks of “the interest that customers have in it when they come in...the automatic response is
‘Wow!’”.
Path 6- Predicting trends: Square capitalized on an irreversible, predictable, and decisive trend- the
ascendency of mobile devices and built a payment system around them.
3.5 Square Reader ERRC and Strategy Canvas
Considering the performance and service providing of Square Reader, Square has eliminated, reduced, raised
and created factors which are either more important or less critical to the customers. The detail modified
factors are provided below in Figure 7. And the new Strategy Canvas after modification is presented in Figure
8, with the description of the factors in Table 4.
Figure 7: Square Reader ERRC Summary
Eliminate
• Contract complication
• Setup cost
Raise
• Transaction cost
• Business analytics
• Settlement speed
• Transparency of fees
• Mobility
Reduce
• Condition of use
• Perception of security
Create
• Fun & image
• Productivity

December 2013 12

Figure 8: Square Reader Strategy Canvas
Factors Description
Contract complication
Signup with the Acquiring Bank may be complicated with terms and conditions that are
unclear or detrimental for the merchants
Setup cost
Cost of the terminal hardware may range from $150 to $1000 per terminal. This could
be significant component of total cost for small merchants
Conditions of use
Conditions of use includes the enrollment process, which may take weeks to a month
depending on service, and the complication of using the terminals for consumers
Perception of security
Although security is relatively high for traditional POS systems, the perception of the
risk of fraud still troubles consumers
Transaction cost
Transaction based fees may range from 1.5% to 3.5% for traditional POS, while Square
charges 2.75% per transaction
Business analytics
Analytics as it relates to customer purchasing behaviors. This data is stored and
potentially used for business analytics for better consumer shopping experience and
services (e.g. targeted marketing)
Settlement speed
Time it takes to settle the transaction. This ranges from hours to a few days. Normally
settlement occurs in 3 days
Transparency of fees
How transparent are the fees: upfront setup costs, transaction based costs, ongoing
maintenance, and others
Mobility The portability of terminals to be moved from one location to another (i.e., on-the-go)
Fun and image The image factor, including how trendy the system or payment standard is today
Productivity
How efficient does the payment system or terminal enables an employee to become
more productive. (e.g., reducing queue time for consumers if every cashier roams
around to receive payments). Also includes the ability to complement "smart wallets"
or other apps and functionality (e.g. tracking spending habits of buyers, track popular
items for merchants).
Table 4: Description of Factors
Low
Reduce Raise Create

Eliminate
Traditional
POS
High
December 2013 13

4. Success and the future of Square
4.1 Measuring Square’s success
Square appears to have executed a successful Blue Ocean move with the Square Reader.
Gross payment volume (GPV)
12
is a good indicator of performance since Square charges a fixed transaction fee.
This has grown in line with active users since 2010, suggesting that user growth is a primary driver. The graph
below charts these metrics since Square’s launch in 2010.
Figure 9: Square Inc-Gross Payment Volume & Total Users
On both metrics, Square’s growth far outpaces growth in retail sales and credit card payment volumes,
suggesting successful conversion of existing customers and adoption by non-customers.
Figure 10: Average Annual Growth Rates (2010-2013)
12
While initially reported as a daily figure, more recent announcements have moved to talking on an annualised volume
basis. We have converted figures to make them comparable.
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-
10
20
30
40
50
60
70
GPV (est) - LHS
Users (est) - RHS
Square Inc.: Gross Payment Volume & Total Users
$M per day Million users
5%
8%
16%
207%
394%
1% 10% 100% 1000%
US Retail Sales
US Credit Card Payments
US e-Commerce Sales
Square Inc. Users
Square Inc. GPV
Average annual growth rates (2010-2013, log-scale)
December 2013 14

Since comparable metrics for incumbents are unavailable, market values are a reasonable proxy. Venture
capital backing in recent years validates Square’s traction in the payments industry and has boosted its value.
After three years, its market capitalization is comparable to established POS hardware providers, VeriFone and
NCR, which each have over 25 years of history.
Figure 11: Market Capitalization: US Payment Solution Providers
4.2 Responses from competitors
Square’s disruption of the payment ecosystem has not gone unnoticed, and in response competitors have
launched products intended to gain a share of the Blue Ocean opportunity. The most formidable is PayPal
which itself revolutionized online payment as an aggregator. PayPal hopes to utilize network effects through its
100mn users with the remarkably similar PayPal Here reader that closely matches the functionality of Square at
a lower 2.7% transaction fee. Furthermore, it has improved the product and service offering in some areas (see
comparison Table 5 below):
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-13
Apr-13
Jun-13
Aug-13
Oct-13
Dec-13
Verifone
NCR
Heartland
Square (est)
Square (forecast)
Market Capitalization: US payment solution providers
$B
December 2013 15

Table 5: Comparison Table of Square and Competitors
4.3 Future implications for Square
Square’s Blue Ocean has become more ‘red’ as a result of increased competition and imitation. The Buyer
Experience Cycle (‘BEC’) and Buyer Utility Map (‘BUM’) of the Square Reader and PayPal Here shows that both
products basically address the same customer pain points.
Given Square has first mover advantage in a business that is characterized by network effects (e.g. merchant
referrals) and critical scale dynamics (e.g. fixed costs for software development regardless of merchant base), a
valid course of action may be to ‘compete’ in a traditional sense.
On the other hand, striving to remain in a Blue Oceans environment is also a valid option, and unoccupied
areas on the BUM offer opportunities for value innovation in uncontested space as illustrated in the Figure 12
below.
December 2013 16

Figure 12: Buyer Utility Map: Square & PayPal (1)
Square now has an opportunity to create another Blue Ocean by introducing features to attract ‘new’ non-
customers. Example of these non-customers include ‘potential merchants’ who do not currently transact
regularly (e.g. small scale artists, amateur designers), ‘aspirational merchants’ who do not use square (e.g.
potential Square Reader users in the short run, but believe they will soon outgrow it) and perhaps even end-
consumers themselves (e.g. people who need to pay a friend back for lunch).
To attract such non-customers to Square’s functional and practical payment system, one idea is to actually help
create markets. For example, by organizing events to bring together artists or other specific small-scale vendors
(or giving some preferential treatment to companies that do so). Square could use these events as a forum to
push its Square Reader to new customers, as well as simultaneously help to grow those customers’ businesses,
which in turn benefits Square. This would not only impact the ‘productivity’, ‘convenience’ and ‘fun & image’
utility levers, but also have an impact on the ‘Environment & CSR’ of Square as a business.
Another idea is to provide support services for transition from the Square Reader to larger scale payment
processing solutions. Square could help increase the ‘convenience’ utility lever at the disposal stage which
would attract ‘aspirational merchant’ non-customers. For example, by undertaking back office work to enable
seamless transition from Square to a traditional payment processing solution.
A final way to attract new non-customers could be to provide a means for end-consumers to transact with each
other (rather than just with merchants). On this front, Square has recently launched Square Cash, a service
allowing individuals to send small monetary amounts via email. This service is currently not directly related to
Buyer Utility Map: Square & PayPal
(Pain points directly addressed by the two offerings and
other opportunities)
SixUtilitylevers
Simplicity
(incl. fees and
conditions)
Convenience
(incl. mobility,
administrative)
Fun & Image
Environment
& CSR
Productivity
Risk
(incl. security of
transactions)
System
Selection
System
Acquisition
System Setup /
Installation
Usage and
reconciliation
Supplements and
add-ons
Renewal and
Disposal
Maintenance
and Service
December 2013 17

the Square Reader except that it uses the same user account system. A possible example of an extension to the
Square Reader could be a kind of ‘reverse payment system’: a user could swipe a card on their own Square
Reader to send a payment to a contact on their phone.
So though the competition may not be far behind, there are still many opportunities for Square to value
innovate and avoid becoming trapped in a landscape of ‘red ocean’ competition. While beyond the scope of
this paper, a full six paths analysis could be undertaken to flesh out the ideas above and also uncover other
opportunities. Ensuring that the potential non-customer groups targeted are large enough will be a key
challenge here. But illustratively, Square should focus on areas such as those shown in the Figure 13 below if it
is to stay operating in Blue Ocean space.
Figure 13: Buyer Utility Map: Square & PayPal (2)
4.4 Future Sustainability
The way in which PayPal aggressively responded to Square's new business model addresses the fundamental
issue of sustainability for a Blue Ocean Strategic move such as Square's. How can a company like Square sustain
its first mover advantage in an environment as challenging and fast-moving as the technology industry, where
technology catch-up and opportunity for imitations are at their highest? The risk is even higher when the
innovation relates to a new trendy and "hip "movement, which all competitors will fight to join in order to
BUM Map
System
Selection
System
Acquisition
System Setup /
Installation
Usage and
reconciliation
Supplements and
add-ons
Renewal and
Disposal
Maintenance
and Service
Potential
focus area
Potential
focus area
Potential
focus area
SixUtilitylevers
Simplicity
(incl. fees and
conditions)
Convenience
(incl. mobility,
administrative)
Fun & Image
Environment
& CSR
Productivity
Risk
(incl. security of
transactions)
Potential
focus area
Potential
focus area
Potential
focus area
Potential
focus area
Buyer Utility Map: Square & PayPal
(Pain points directly addressed by the two offerings and
other opportunities)
December 2013 18

benefit from the phenomenon. Another risk relates to the uncontrollable external factors (legal, economic,
etc.) which can flip the situation for the first movers. One such example in the case of Square is the Dodd-Frank
Act in July 2012 which significantly decreased the profits for the industry players and changes the rules of the
game.
So how sustainable could we define Square's business model in this (often unpredictable) fast-moving
industry? There are three key building blocks that make the basis for sustainability through Blue Ocean Strategy
in the long run: the value proposition, the product proposition and the people relationship.
In the short run, Square outpaced its ‘red-ocean’ competitors on all three criteria, by proposing a much more
attractive, affordable and practical payment solution for merchants that broke the rules of the more
established players. Concerning the longer run, based on the sparse information available at this time, Square
appears less sustainable. The company is now in a competitive race with PayPal (another innovative company)
in terms of value and product proposition, and it is likely that this race will go on. In the long term, for Square
to extend the life of its Blue Ocean moves it is likely that people relationships will be key. This will potentially
enable larger network effects that make Blue Ocean strategic moves harder to imitate. Indeed, in its early
success, Square has started to build hard-to-imitate intangible assets in the form of relationships with
merchants. The company can continue this way by broadening and strengthening these relationships, and also
moving to building relationships with end-consumers / cardholders as well as indeed its own employees,
through for example:
• Brand identity building around both the security of the transaction and the trendy value proposition, in
association with the on-the-go lifestyle provided by Square's products.
• Better customer service, training, or experience through Square services
Moving forward, there are a number of tangible ways which could be recommended for Square's Board of
Director to investigate, in order to further develop its people relationship:
• Merchant relationship: Launch regular targeted promotions to build installed base of merchants by asking
customers to ask to pay via Square for a discount.
• Cardholders relationship: Issue credit cards that give cardholders ‘Square points’ and develop other
products like Square Wallet, which aggregates all loyalty and discount programs into an app.
• Consumer relationship: Develop services directly for the consumer side, like a "Square Card Case" or “Pay
by Name” using Square.
• Overall: Develop a large suite of products and services for a large number of customer segments, for
Square to play the role of a one-stop-shop that would keep customers retention high and thereby induce
a high switching cost.
December 2013 19

• Partnerships: Develop long term partnerships with strategic actors in the tech industry such as Apple.
5. Concluding remarks
Square’s journey as a start-up has been an exciting one, and at its heart lies the strategic move of launching the
Square Reader.
The original industry was characterised as one of fierce ‘red ocean’ competition, and limited differentiation
between major incumbent players. In this arena, the Square Reader was revolutionary in terms of providing
credit card processing capability to micro-merchants. It was an example of value innovation that unlocked
exceptional value for Square’s customers and non-customers alike.
It was not long until Square’s successful formula was successfully imitated by rivals (such as PayPal), and Square
today is finding the Blue Ocean it created turning increasingly red. Square could decide to dedicate resources to
compete in a traditional sense, and there may be compelling arguments for why this is actually the best course
of action. However, there are also options for Square to continue to pursue new Blue Oceans and once again
try to make the competition irrelevant. Regardless of which direction is taken, this development highlights that
in the longer term it will likely be the people relationships which are least imitable, and provide highest
potential for sustainability.
The story of the Square Reader shows the lifecycle of a Blue Ocean strategic move, from the initial red ocean
competitive arena into a new Blue Ocean, to the gradual ‘reddening’ again through imitation. It is of course not
clear how the story will end, but it serves as an instructive case on successful Blue Ocean strategy execution.
And, perhaps, it will be important inspiration for future Blue Ocean strategic moves that will shape this industry
and others like it.
December 2013 20

Appendix A – Small Merchants Survey Summary
Merchants Shop (France) Restaurant (France) Doctor (France) Market (France) Market (US) Restaurant (US)
1) Are you using
Square? Have you
heard of it?
No No No No No No No No No No No Yes No
2) If you’re using
the traditional POS,
what is the
processing fee %?
Not
sure
Not
sure
0.5%
Not
sure
Not sure 0.5-0.8% - - 1% Not sure Not sure 2-3% 3-5%
3) % paying by
cheques, cash, or
credit card, debit
cards?
- -
Does not
want to
tell
Not
sure
40%-card 80% card 50% cheque: 50%-cash
Cheque &cash
only
10%-card
Does not
want to
tell
>50%-card
• Before Square:
no card
• After Square: 5-
10%-card
98%-card
4) how happy are
you about the
traditional POS
services?
Yes Yes
Not happy:
expensive
Easy Easy
Easy but
hidden
charge
N/A Yes
Reliable
Happy
Happy Happy but expensive N/A
Happy but
concerned with
internet connection
(5) If cash and
cheque only, why
and what are the
painpoints?
N/A N/A N/A N/A N/A N/A
• Cash: time to bring
to bank
• Cheque: time to
receive money; risk
of customer's empty
account
N/A N/A N/A N/A N/A N/A
1 very easy, 2 easy, 3 ok but can be improved, 4 painful, 5 very pain
1) How was it to
research/select the
credit card terminal
provider? (online
search, go to the
bank?)
N/A
done
by
SNCF
1 N/A N/A 2 N/A N/A 1 1 1 3 1
2) How was it to
acquire the
hardware?
(contracts, terms,
rent/buy…)
N/A N/A 4 N/A N/A 3 N/A N/A 4 4 4 1 1
3) How was it to
install the POS?
(wiring, software,
setup, cost, phone
line?)
N/A N/A 4 N/A N/A 2 N/A N/A 1 1 1 2 2
4) How is it to use
it? (transaction
fees, other fixed
fees...)
2 N/A 5 N/A N/A 3 N/A N/A 3 2 5 2 4
5) How is it to
maintain the
system? (storage,
recharging…)
2 N/A 2 N/A N/A N/A N/A N/A 1 1 1 2 1
6) How is it input
and reconcile data
at the end of the
day?
4 N/A 3 N/A N/A 3 N/A N/A 1 2 2 2 2
7) How is it replace
or dispose the
device?
3 N/A 2 N/A N/A 2 N/A N/A 1 2 2 3 2
December 2013 21

2013 INSEAD Blue Ocean Strategy team project Square

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