In 2009, St. Louis glass blower James McKelvey was working on a custom glass faucet for twitter founder Jack Dorsey when he expressed a chief problem he was having with his business. McKelvey’s artwork attracted many shoppers, but due to the complexity and opaqueness of setting up credit card transactions, the business only accepted cash. Despite being interested in purchasing an item many customers, upon learning that he only accepted cash, would leave his business and often failed to return. Sensing a new arena ripe for upset, Dorsey teamed up with McKelvey to find a solution and created the business Square.
At the time, other mobile payment systems were already being implemented by financial giants like Intuit. In addition, the industry was already being revolutionized by PayPal, a company founded by heavyweight innovators Peter Theil and Elon Musk. So why is it that when you last visited your favorite local coffee house you most likely paid with a Square credit card reader instead of using “Intuit GoPayment” or “PayPal Here” despite both services being cheaper than Square and bolstered by companies with far more assets?
Square is as common in coffee shops as a four-dollar latte and a handlebar mustache
Author and career analysis Dan Pink makes a strong case in his TED talk “The Puzzle of Motivation” about what truly drives human innovation.
As Pink points out, financial incentives do not increase creative thinking nearly as much as being provided opportunity for autonomy, mastery, and purpose. In fact, financial incentives may actually kill creativity. These findings are echoed in a 2016 study that found that Only 20% of employers in North America say merit pay is effective at driving higher levels of individual performance.
Consider again the innovator’s dilemma and the fact that time and time again the Squares of the world continue to upset the Intuits and the PayPals. This is true even though these companies have well-funded research and development departments. The “designated innovators” at Visa, American Express, Intuit, PayPal etc., who were more educated and financially incentivized, got bested by two people without any industry experience creating an alternative in their spare time.
The main differentiator between Square and its competition was that the interface and fee structure was simpler and more intuitive for merchants than any of the alternatives available. Square’s competitors offered powerful, yet needlessly complicated hardware and applications coupled with archaic subscription models and fees that varied based on the card type. Conversely, Square provided a simple credit card reader, intuitive software, and a standard 2.75% fee for all transactions with no subscription required. As a result, Square has been so successful that even finance giant Visa admitted recently that it has purchased almost 10% of the company.
So how did Square innovate a better product?
Simple. James McKelvey was a small business merchant (an artist with his own sense of intrinsic autonomy, mastery, and purpose) who was driven by his own frustration to improve the process. It is precisely because McKelvey and Dorsey were able to view the service as a customer and not an employee of an existing financial transaction firm (and yoked with the organizational inertia that kills innovation) that they were able to develop a product that customers preferred. The “innovators” at the existing firms had no motivation other than potentially detrimental financial incentives to come up with a better product, and even when they were motivated they lacked the customer perspective to know how to do it.
What’s the takeaway:
If you are part of a large organization that wants to motivate innovation, you need to do two things:
- Focus on designing the organization so that employees are rewarded with higher levels of autonomy, mastery, and purpose.
- STOP consolidating innovation into a small room full of PhDs with high salaries and instead start empowering your first level employees (the ones interacting with customers and/or touching the actual product) to experiment and innovate themselves.
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