Acquisition Tool — Trojan Horse (Square and Waze)

A few notes on acquisition tools. There are ways in which a company can add value to the user from day one, and build a massive business around the data it collects from its users. We will call this the trojan horse method because at the beginning the company does not disclose what it will use the data for. Here are a few examples:

Waze

Waze, the Israeli based startup which launched in 2006 and later acquired by Google for $1.1B, was a smartphone app that connects drivers and allowed them to leave route details along the way. An example of a detail that can be left is if there was a traffic camera on a specific intersection. However, the biggest value that was mined out of the app was how you could tell which roads were congested with traffic and which were clear based on the speed at which the phone was traveling. The users of the app were happy with having the app open because they were deriving so much value out of the information it was passing back to them, and Waze itself was benefiting from their own “crowdsourced” traffic information.

Square

Square, the company that allowed your phone to accept credit cards with a little dongle, positioned itself as the de facto point of sale (POS) system for merchants. When it launched in 2011 with a “square” credit card reader that plugs into your headphones jack and then rolled out its own Square Register in 2012, it was obvious that it going after small businesses.

In 2011, there were 28.2 million small businesses in the United States. And it is clear the easier you make it for a customer to pay, the higher likelihood it is of them to purchase, so all these businesses needed a way to accept and process credit cards without having to purchase expensive POS systems. The great thing about being in the center of the transaction, other than charging the merchant 2.75% per swipe, is seeing how much monthly revenue they are processing per product.

With this knowledge, Square rolled out Square Capital where it would lend businesses money. It was automatically be able to pre approve merchants based on the financials that they doing on the Square platform. And to close the redemption loop, the way Square would get paid back on these loans would be through credit card swipes.

They call it a cash advance and it works like so. Square deposits the loaned amount in a merchant’s bank account. The merchant will deliver a percentage of the proceeds from their future card sales to Square. The Square Capital percentage taken out of sales is in addition to Square’s normal processing fees. After being active for only a year, Square Capital has lent $100M to more than 20,000 small businesses. And they were able to do all this from mostly their existing users of the Square Platform.



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