Can you find the next massive, invisible market before someone else does?

Being attacked by a much larger competitor, or an entire industry of competitors, feels scary and very lonely. When Amazon first attacked Square I tried to find any other companies in our situation. I wanted to copy their solutions, or at least learn from their mistakes. I failed. But it turned out that we were not alone, I was just looking for the wrong type of company. 

Entrepreneurial companies are surrounded by millions of potential customers who are outside the wall as well. In every case where I saw a company forge an Innovation Stack, there were millions of new customers eagerly waiting for a product they never knew existed. 

These customers are difficult to see at first, especially if you view the world from within the walled city. When Southwest was beginning, the prevailing wisdom was that people didn’t actually want to fly, and the US government had data supporting this absurd assertion. Of course, the government was surveying people on planes while most of Southwest’s future customers were on the Dirty Dog (what riders called traveling on Greyhound buses.)

This is not surprising, because measurements are based on what’s measurable. When the government began keeping records on air travel, it counted only people who flew on airplanes: mostly business fliers and rich folks. If you survey only the wealthy, you might conclude that polo is a much more popular sport than it actually is. But this bias isn’t always the fault of the survey makers, it is simply the nature of the new. Until something exists, it is not going to appear in any graph. 

Herb and the team at Southwest looked at the statistics differently. “The government estimated that between 15 and 20 percent of adults in America had never flown on a single commercial flight,” he told me. “That sounds like a pretty big market opportunity, doesn’t it?” Indeed it was. 

Most Square customers were tiny businesses that had never been able to accept credit cards. Most IKEA customers had never purchased new furniture. Most Bank of Italy customers had never been into a bank. And none of these people ever appeared as a statistic until the industry expanded to include them. Invisible does not mean uninterested. Invisible markets can be massive, but it is nearly impossible to prove that beforehand because all the measurements are optimized for the current market.

Adopters and Adapters

Customers new to a market hold few preconceptions, which is one of the great benefits of massively expanding an industry through innovation. Your new customers learn how to participate in the market from your way of doing business. This is a powerful advantage that influences both your Innovation Stack and your competitive position. The first group of customers are traditionally called early adopters, but in the world of Innovation Stacks calling them early adapters is more accurate. In fact, some innovation is only possible if new, adaptable customers board in a group, assemble their own furniture, and swipe through the wobble. 

When we began Square, the majority of our customers had never before accepted credit cards. We taught them to expect simple, low rates. We taught them to operate without live customer support. We taught them to expect settlement three days faster than the industry average, and to expect not to pay transaction fees, chargeback fees, or cancellation fees. We taught them to reject a multiyear contract. We taught them to expect free hardware and beautiful software. 

Southwest taught its customers to board in groups and to choose their own seats on the plane. Its customers got used to eating before the flight and not changing planes in some hub. They expected not to pay baggage fees or cancellation penalties. Southwest eventually even taught its customers to use Southwest.com by keeping its fares off all other websites. The Southwest passenger’s expectations are exactly what Southwest delivers, because Southwest custom built its market. 

Herb explained, “In essence, we are training people to be Southwest customers. One of the biggest complaints that we had on an ongoing basis was not having assigned seats. And I understand because everybody likes to think, ‘My little nest is waiting for me.’” But Southwest’s customers value the flight more than the nest.

IKEA taught customers to visit a massive showroom and choose from dozens of options. It taught them to assemble the furniture themselves, and to pick up the items in a store without waiting weeks for delivery. It taught them to expect great design at a low price. It taught them to bring the kids to the store and make shopping a family experience. About the only thing IKEA has not done is teach customers how to pronounce its products’ names.

New Ideas vs. Changed Ideas

One of the reasons entrepreneurial firms are so successful at training new customers is that they employ the psychological phenomena known as anchoring and conservatism. Anchoring is the tendency to rely heavily on the first piece of information acquired on a subject. Conservatism is the tendency to insufficiently revise one’s belief when presented with new evidence. Entrepreneurial firms quickly learn that by mixing these two tendencies, it can be easier to teach a new idea than to change an existing idea. 

When a company invents something truly new, and people actually realize that it is new, that information gets its own “storage space” in their memory. This is a huge advantage for the company occupying that new mental real estate, for once individuals open up to a new idea, they are primed to learn much more about that idea. In other words, once your customers are paying attention it is much easier to teach them about the rest of your Innovation Stack. Your customers become anchored to your message and conservative toward your competition. 

Conversely, anyone trying to steal your customers faces a massive challenge: either copy your Innovation Stack, which is nearly impossible, or retrain the customers, which is just supremely difficult. 

Retraining is much more difficult than teaching something new. To retrain people, first you must get them to dislodge their current belief; but people have a strong tendency to think that their beliefs are immutable facts that never change. So, since they are “right,” they have no reason to pay attention to new information. People think they already know, so they just ignore alternative viewpoints. Then, even if you succeed in dislodging their current belief, you must still do the work of explaining something new. Unless you really grab these individuals’ attention, they will ignore all of your beautiful logic. 

Adapted from The Innovation Stack: Building an Unbeatable Business Model One Crazy Idea at a Time, by Jim McKelvey, to be published March 10 by Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House, LLC. Copyright ? 2020 by Jim McKelvey.