Quit Battling Over Market Share With Category Design

This is the first of five articles that make up The Newcomer’s Guide to Category Design.

If you’re a leader in B2B SaaS, this series will help you assess your company’s readiness for category design and help you plan for implementation.

In part one, you’ll see how category design is different from the typical strategy of “capturing market share” by exploring the stories behind Salesforce, HubSpot, and Tesla. We’ll walk you through why “category” plays an important role in the buying process and how the thinking behind category design has evolved through today.

Want to access the entire guide all the once?

We’ve created an easy-to-read, downloadable version of The Newcomer’s Guide to Category Design that includes all five parts, plus a special foreward by category design godfather Christopher Lochhead. Access the entire guide for free at Flag + Frontier.

Why category design should be on every business leader’s radar

If traditional strategy means battling competitors over market share, category design involves setting up a new market where you have a better chance of dominating.

The military equivalent would be this: instead of going to war over a piece of land your enemy already occupies, you seek out a new, unclaimed territory you can have all to yourself.

As you’ll soon see, category design isn’t just about breaking free of an existing category – it can pay massive financial dividends, too. Consider this research from Harvard Business Review. During the period from 2009 and 2011, just 13 of Fortune’s list of 100 fastest-growing U.S. companies were category creators. Yet, those 13 companies generated 53% of this group’s revenue growth and a whopping 74% of its incremental market cap growth.

Examples of category design

To show you what that looks like in practice, here are a few examples.

1. Tesla: electric cars

Even though this is a guide for B2B, I want to include one example from the consumer world to give you a full picture of category design.

You’re already familiar with Tesla as the leader in the electric car category. But what’s important about Tesla is that they didn’t create this category – they redesigned it in their favor. Electric cars were actually invented more than a century ago, and other brands, like GM, have made attempts at commercializing electric cars since then.

But those previous attempts had a major issue. They were positioned as “fuel-efficient” cars. By trying to sell electric cars as a nifty (and expensive) way of helping the environment, GM and others struggled to gain any real interest. Owning such a car simply wasn’t desirable to many people.

Tesla could have used its advanced technology to design and market cars that went head-to-head against the Prius – the leading “green” car when Tesla’s sedans were introduced. But the Prius would have won. It was cheaper, more suitable for long trips, and still fuel-efficient enough for the environmentally-conscious consumer. But by creating high-performance, technologically-advanced cars that offered a unique ownership experience, Tesla designed a category that it could easily dominate.

This process of getting buyers to shift the way they think about something is what the authors of Play Bigger refer to as a “FroTo” (as in from-to). Tesla did a fantastic job of executing this when it came to electric cars, but as you’ll see in a moment, it can work equally well in software.

2. HubSpot: inbound marketing

Prior to HubSpot, most demand generation would be defined by what you’d now call “outbound marketing”. Except at that time, it was just called “marketing”. Cold calls, unsolicited emails, display ads – most companies relied on tactics that involved reaching out to potential buyers. Marketing automation software was built to help marketers execute these tasks at scale, and companies like Eloqua led the pack.

When Brian Halligan and Dharmesh Shah founded HubSpot in 2006, they could have positioned themselves as a “better” version of Eloqua. But they knew that head-to-head combat would be a losing proposition. Instead, they set up a new category, called “inbound marketing,” based on an entirely different philosophy.

Here’s how HubSpot’s new category compared to the old way of doing things:

HubSpot’s message was simple: if you believed that content, SEO, and social media were the future of marketing, then inbound marketing software was for you. By positioning their software around an entirely new philosophy of marketing, HubSpot was able to establish a new category and avoid a head-to-head comparison.

3. Salesforce: cloud-based software

In the late ‘90s, enterprise software was installed “on-premise” – on physical servers located in the customer’s building. Sure, if you wanted to install a copy Excel on your PC, you could use a trusty CD-ROM, but for software that used a shared database (like CRM), you had to connect to that “on-premise” server. It was expensive, time-consuming, and tedious to maintain. But buyers didn’t know anything different.

That’s why when Salesforce introduced the idea of software that could be accessed remotely, over the internet, they needed set themselves apart from the “on-prem” software that buyers were familiar with. Instead of comparing themselves directly to on-prem CRM software companies, Salesforce broke free of that paradigm and defined themselves on different terms.

Here’s what that looked like:

Had Salesforce told enterprise customers that it could provide a better CRM than the leading on-premise offerings, it would have failed. But by defining a new category that would later be defined as cloud-based computing or SaaS, Salesforce set up a new category where they could be first.

Why do categories matter?

We live in a complex world. There are so many brands and products competing for our attention that there’s no way for us to evaluate each one on its own merits. According to researchers at Ruhr-University Bochum, when we encounter something novel, we compare that thing to existing categories our brain has created, and try to find a match. In other words, we use categories as a shortcut for processing information about thousands of products.

This can be extremely helpful if you’re a software buyer. If your brain already has knowledge of a software category, you already have a handle on key information, such as:

• What that product is designed to do
• What that product is not designed to do
• Who the product is for
• How the product is sold
• What similar products to compare that to

In the B2B SaaS world, you can think of categories as a way of grouping together comparable solutions that are alternatives to solving the same problem.

But unfortunately, the B2B SaaS space has become incredibly complex. Check out this illustration of the marketing technology landscape to see for yourself. This is why being clear about your category – and building the right brand to support it – is so important.

“We live in a time where anything can be replicated in what feels like real-time, and a buyer has infinite options. In this world, companies can no longer differentiate on features,” said David Cancel, CEO of Drift and Entrepreneur-in-Residence at Harvard Business School. “Brand is the only true marketing advantage."

What category design is not

Hopefully you’re starting to get some clarity on what category design is and how it works. But what’s helped me the most when explaining the concept to others is to clarify what category design isn’t.

• It’s not a marketing campaign. Category design is a business strategy, not a marketing strategy. It affects and requires the involvement of nearly every area of your company.
• It’s not the same as a tagline. New markets don’t get built because some company coined a new phrase. They get built because buyers recognize a new problem and see the need for a new solution.
• It’s not something specific to your company. A category can’t exist if there’s just one company in it. At least not for long. Category designers have to think about building a space that others can help evangelize.
• It’s not a substitute for having a great product. Category design isn’t about tricking buyers. It’s about delivering a meaningful and helpful solution to a new problem.

Lindsay Tjepkema is co-founder and CMO of Casted, and her company is building a category around conversational content. She put this idea best: “Category design is what happens as you build to solve a problem in a way that has truly never been solved before. It's NOT something you do to just grab attention or stand out from the crowd.“

Category design continues to evolve

To help you understand where category design might be headed, let’s take a look at how this discipline evolved. We like to break down the history of category design into three phases:

The Formative Phase (Dawn of history-1980)

What was the first example of category design thinking? The invention of banking? The telegraph or the first business computer? That’s a discussion for another time, but the point is that for as long as businesses have strategically built new markets around solutions to new problems, category design has existed. For most of history though, there just wasn’t a term for it.

The Blueprint Phase (1981-2016)

When Positioning: The Battle for Your Mind was published in 1981, and The 22 Immutable Laws of Marketing was published in 1993 (both by Al Ries and Jack Trout), they were the first books to set up the idea that companies should be intentional about their position in the market. And it was the latter of these books that introduced the idea of intentionally setting up a new category.

Crossing the Chasm continued that thinking by showing us how to take new ideas to the early majority – a key ingredient in legitimizing a new category. Later, The Innovator’s Dilemma demonstrated how breakthrough innovations often have greater initial success when used in a different application than earlier technology.

Finally, in 2016, a book called Play Bigger was written by Al Ramadan, Dave Peterson, Christopher Lochhead, and Kevin Maney. While the books we mentioned above are great on theory, they are short on execution. Play Bigger changed that by providing the first clear blueprint for pulling off category design. It’s a must-read for anyone interested in the topic. Once you’ve read it, check out this resource from Category Design Advisors that has further reading ideas.

The Beta Phase (2017-Present)

Now that category design has started to become recognized as a business discipline, we are seeing more companies make an attempt at it. This will only increase as the pace of change and innovation continues to accelerate. We’re seeing category design happen with both single-product companies and enterprise companies. You should know that if category design is something you choose to pursue on your own, you need to think of yourself as a “beta tester” – we have the broad pieces in place, but there is still much that needs to be discovered!

Should you attempt category design yourself?

At this point, category design might sound pretty exciting. After all, who doesn’t want to be the next Salesforce or HubSpot – to build and dominate a new market on their own terms? But this process of “claiming new territory” isn’t something you should pick capriciously. In fact, it’s not something many companies should even attempt. Instead of pursuing category design, you may be much better off pursuing a niche within an existing category.

No one makes this choice clearer than Mike Volpe, founding CMO of HubSpot and CEO of Lola.com, who said, “There are really only two business models: a Better Mousetrap, where you enter an existing market with a product that is better than the current solutions in some way, and a Category Creator, where you are creating a market that does not exist by inventing something new. Neither business model is better, they just have different implications for what you need to do in order to grow.”

Conclusion

Category design provides a different approach to growth. Instead of trying to take away market share from competitors, category designers set up a new category that they can lead themselves. Buyers use categories to make sense of a complex world, so companies need to be thoughtful about their choice of category.

The term “category design” was coined in the 2016 book Play Bigger, but books like Positioning, The 22 Immutable Laws of Marketing, Crossing the Chasm, and The Innovator’s Dilemma paved the way for this way of thinking. Category design isn’t a marketing strategy, it’s a business strategy. Marketing only happens after category design takes place.