In 2013, Jessica Shalek left Wall Street to join Square, the upstart payments company with a billionaire founder and hot new product that seemed on the fast path to a public offering. Two years later, the company has narrowed its focus, eschewing its consumer initiatives in favor of its small business software suite, putting Shalek, the lead of its App Marketplace initiative, at the nexus of one of the more strategic products governing its future success.
Earlier this month, the company shut down Order — the intended successor to its failed payments app — marking at least a momentary end to its consumer aspirations. While the company continues to operate food delivery service Caviar, the move marks a new era for the company — one committed to the challenges and opportunities facing the supply side of a local economy that has mostly ignored digital.
To an extent, the move reflects the realities of a payment processing business that Square helped to destroy. The ability to process payments through the internet dramatically reduced the barriers to entry in a traditionally impenetrable industry, putting pressure on the traditional interchange rate charged to merchants. That pressure is pushing payment companies, from startups such as Square to legacy firms such as FirstData, into the reaches of a small businesses operations in hopes of creating some mass.
But the story of Square has always been the story of the cloud and the store, just obfuscated by ill-advised forays into consumer products. The company’s breakthrough product, Square Reader, offered owners of very small, and often mobile, businesses the functionality of enterprise software with the ease and accessibility of a consumer product. It carved out a middle ground in a cloud software market that excelled in serving either the very large enterprise or a newly empowered mobile consumer.
A shift from product to platform
Now, with millions of small businesses already using its application to process payments, the company needs to navigate through a complex and crowded small business software market to build a platform from which merchants can run their business. Part of that will be determined by software Square builds, but the company also believes that the software others build may play a critical role as well.
“We want merchants to be more engaged and rely on Square to run more parts of their business,” said Shalek, who has been part of the App Marketplace project, which offers an App Store-like experience for merchants, since joining Square in 2013. “Having an ecosystem of partners that can extend the tools that Square can offer is a great way that we can grow the services we can offer our merchants.”
The concept of an app store has become a central tenet in the modern software strategy. Popularized by Salesforce and Apple, the software marketplace captures one of the most defining aspects of cloud software: interoperability. Because data is hosted centrally, these large cloud software providers can offer third-parties an easy way to share data with each other, reducing the costs of using new software and eventually increasing the amount of software the customer can use.
“Small businesses used to have these very siloed tools — tools where the only way for them to talk to each other was through manual entry,” said Shalek. “Large businesses always had the benefit of having an IT department, and teams of developers, to customize integrate all of these legacy tools. Now cloud-based small business tools are doing what large business always had — communication.”
Launched last October, the App Marketplace now has 18 partners that range from cornerstone applications such as Intuit’s QuickBooks to custom products such as FreshKDS, an order fulfillment app developed exclusively for Square. The company has added four new partners since the launch in October including BigCommerce, the ecommerce software firm that racked in $50 million in venture funding last fall from Softbank and others.
“Three and a half years ago, the [small business technology] market was very nascent in terms of partnerships — most of these brands were not thinking about partnering with an ecommerce company,” said Melanie Kalemba, SVP of sales and strategic business development at BigCommerce. “ When we approached Square or even Intuit a few years ago, they didn’t have it as some on their radar that was strategic to their customer set.”
Neither BigCommerce or Square would comment on the financial details of the agreement. Other marketplaces, such as the Salesforce Appexchange, will charge third-parties up to 25% of revenues generated on the platform. But these platform-application relationships tend to serve a more strategic than revenue generating role — at least during the growth phases.
For Square, the platform-product approach helps create a certain degree of defensibility in an extraordinarily fast moving industry. The company can build on the success of a incumbent such as QuickBooks by solving peripheral problems such as on-boarding sales data into the accounting application. Meanwhile, the platform deepens the company’s role in its customers’ day-to-day lives, creating much higher switching costs.
More importantly, these platforms create an unprecedented sales channel into the small business market. For decades, the small business software industry was bloated by a layer of independent sales organizations that resold, installed and maintained commercial infrastructure such as payment processing equipment and point of sale terminals. A company such as Micros, the point of sale provider sold to Oracle last year, generates nearly 60% of revenues from service and installation of its products.
“Part of the history of Square is the ability to give merchants a quick and easy tool which they can on-board themselves into,” said Shalek. “A lot of people would have said that [merchants need a salesperson] about payment processing a few years ago. If you don’t need help with set up, you should have to have it.”
Technology may lessen the need for an army of sales people in each market, but service remains critical in the small business market. Square works with its partners to manage service requests, whether that means handling itself or passing along to the partners customer service organization. In advance of the BigCommerce integration, for instance, the BigCommerce team, based in Austin, Texas, visited Square’s office in San Francisco to demo the product.
The success or failure of the App marketplace will not determine the success or failure of Square over the next few years. The marketplace is what we can call a network product, meaning that it takes advantage of the collective power of its merchant base. The bigger Square becomes, the more powerful the marketplace becomes and the more defensible square becomes from competitors.
The concept of an app marketplace is not unique to Square — nearly every major competitor offers similar functionality. But collectively, these app marketplace will have deep implications for the way software is sold to small businesses over the next decade.
And more than any other product, these products define the very concept of the cloud software age — namely, the idea that machines, not just humans, should talk to one another.
Steven Jacobs is Street Fight’s deputy editor.