In 2023, there were 15,000 new businesses created every day. That’s 60% more than in 2019. Harvard Business School estimated in 2011 that there were 30,000 new products introduced every day - and that number has ballooned since then.
Coincidentally or not, 90% of those products and 90% of those companies fail.
To create the urgency and command the attention required in a market like this, you have to go far beyond simply creating a better product (there are 30,000 of those every day!), you have to identify something wholly different.
“There is a myth in business that the best product wins. That is not true.” - Nir Eyal, author of Hooked: How to build habit forming products
The vast majority of all of those products and companies claim to have a better solution. They find an existing category and try to out innovate the entrenched incumbent. But it almost never works. Here’s why:
- Entrenched incumbents are built for the status quo: They’ve got a sophisticated machine designed to extract as much value as possible from the status quo, and they’ve got massive budgets they can pour into this. Trying to fight incumbents within the existing status quo, even with equally massive budgets, is historically a losing game (See also: Zune and Orbitz Soda - yes that was a real thing).
- Customer brains are built for the status quo: People don’t have time to hear why you are marginally more effective at solving a problem they already solve, and they don’t want to take a chance on a new thing, when the old thing is fine!
- Doing something better opens up a race to the bottom: When you start comparing yourself to other products; customers, consumers and procurement officers will start doing the same - pressuring you to do more for less in a losing game
- Zero-sum games are the least valuable games: When you enter an existing market, you are entering a mostly zero-sum category, if your competitor wins you lose and vice versa. Finding net new problems to solve means moving from a procurement debate to a line item in a budget, or a spot on a shopping list.
How Does Category Design Help?
Category Design is a business strategy for creating and owning new markets, by identifying and solving new - and costly - problems. The kinds of problems that when people in your target audience hear or see them, they start to sweat, they realize you are right, and then start quickly looking for a solution.
By establishing this new market, and designing this new category a company has an excellent chance of dominating it:
And once that happens, according to peer reviewed research in the Harvard Business Review, 76% of the market cap will go to the dominant “Category King,” while the competitors are left to fight over the remaining 24%.
Category Design is a growth strategy aimed at delivering competitive advantage through differentiation, which is realized via the creation of new markets. As a strategic planning framework, it’s designed to work with how customers and markets work, not the way competitors and standard operating procedures do.
Five Golden Rules of Category Design:
Category Design is founded on core principles that give it such value.
- Fight the status quo, not the competition
- Understand who the category is for, and who it isn’t
- See problems others don’t or can’t
- Solve with a vision for the future
- Frame it. Name it. Claim it.
Putting Category Design Into Practice: A Step by Step Guide
STEP ONE: Identify the problem and who has it
Finding the problem is the single most important part of category design. Without the right problem, there is no category. And finding it is not a walk in the park. If it were, the status quo machinery of the entrenched incumbent would have gobbled it up and spit it out already.
To find the right problem, you have to change your perspective. Think about the category you are in as one reality, and the category you will create as another. Often, this requires lateral thinking - an aha moment that suddenly leads to a realization: If we could solve this problem, the worlds’ of our customers would be vastly different.
Once you’ve identified potential problems, it’s important to size them. How many people have this problem? How costly is it to them? How much are they willing to invest to fix it?
With this information, you can start to roughly size the category potential through a simple equation:
CP = Pr x P
where CP is category potential, Pr is the number of people with the problem and P is what they are willing to pay to solve it
For instance, if there are 1,000,000 people with the problem you have and they’re willing to spend $1,000 a year to solve it, you have an annual CP of 1,000,000 x $1,000 = $1 Bn
STEP TWO: Lay out the components of the solution
A good problem likely requires a dynamic solution, with multiple components working together to solve the whole. For example, Netflix solved the problem of content availability and discoverability with (at first) a large cache of DVDs, a customer app for reserving films, a delivery mechanism, and a feedback loop for suggesting new titles. Together they created a unified solution called, at first subscription based DVD rentals, and eventually content streaming.
STEP THREE: Choose your category name
When you identify a single minded problem, you also have to identify a single minded solution. That may seem counterintuitive given in step three we outlined the components of the solution (plural, as in, more than one).
The job of the category name is to unify all of these components into a single minded categorical solution. As in the Netflix example, all of those components add up to one thing (Content Streaming).
This helps the category make sense as it mirrors the way people process problems - if we have an issue, then we want a single solution, not a bunch of things we have to figure out how to assemble into a solution.
Anytime you find yourself saying, our solution is like a Lego set where you can take what you need to solve the problem you have, you should have alarm bells going off in your head that you are missing a single minded category.
STEP FOUR: Map the entire thing in a Blueprint
A category is much more than marketing or sales lip-service. It is an entirely new way of doing business in an entirely new market. The Blueprint lays this bare with a schematic of how the category actually works. This isn’t a marketecture that requires trademarking, but rather an overview of how all the components of a category work together to form a whole.
The point of the Blueprint is to enable technical and nontechnical people to understand the mechanics of your category. It is the RFP for the category, if anybody wants to come and compete with you, these are the rules.
One of the most powerful use cases of the Blueprint is in educating customers on what they should expect from a vendor in this category. If a competitor comes in with an incomplete approach, it is the customer who will be the gatekeeper keeping them out until they have a complete solution. And by the time that happens, you are likely to already be entrenched as the Category King.
STEP FIVE: Lay it all out in a provocative POV
The Point of View is the whole point of category design. It is the single most important deliverable of any category design project, as it arms companies with a unique perspective on how to solve a previously unsolved and costly problem. That is what makes category design different as a go to market strategy.
The POV follows a specific structure in order to lay bare the problem, it’s resolution and why it all matters.
- Context: What is happening in the world that sets the stage for your problem?
- Problem: What is the problem that people haven’t been able to solve?
- Villain: The shorthand for the problem
- Why: Why aren’t the current approaches sufficient?
- Costs: The specific, quantifiable costs for not solving this problem - make it easy for prospects to understand what they are losing by leaving this problem unsolved
- Solution: Lay out your vision for a future in which that problem can be solved
- Category Name: Unveil the category
- Blueprint: Show how the solution works by walking through the Blueprint piece by piece
- Outcomes: Describe what happens when customers adopt your solution
- Call To Action: Give people something they can do right now to begin the journey to your category
STEP SIX: Mobilize your company behind the category
By this point, you have a powerful POV that fills with pride and optimism for the future.
The problem is, nobody cares.
To change that, we need to first bring the entire company on board. This can be challenging especially in larger, more established organizations where ways of innovating, selling and marketing may be deeply entrenched. People know how to do the old way, are comfortable with that and may resist change.
Your job is to convince them that what got you to where you are today, isn't what is going to get you to where you want to be tomorrow. That this new vision for the future is the vehicle the company will take to a 76% market share - an express trip to becoming the Category King.
The idea is to generate excitement, buy-in and ultimately, evangelism. Sometimes, this step can be painful. Sometimes, people resist the vision and sometimes that resistance will lead to changes in staffing. That’s okay. Sometimes people don’t share the vision and need to find theirs somewhere else.
STEP SEVEN: Bring it into the world with Lightning Strikes
With the entire company galvanized behind the POV and the new category, it’s time to bring it into the world. Lighting Strikes are the powerful forcing functions that create lines in the sand for launching (as opposed to delaying) new categories.
And also the mechanisms by which the problem you are solving becomes inescapable for the audiences you are trying to reach. Typically, companies will execute two lightning strikes a year, allocating 80% of their marketing budgets to the strike. In those moments, super consumers are confronted with the problem, the category solution, the product and the company (in that order), over and over again.
Until it occurs to them that this problem must be solved immediately.
Category Design Examples: Transforming Markets By Creating Categories
So what does it all look like in practice? Here are a few case examples of killer category design.
1. Qualtrics
Situation: In 2015, Qualtrics was a market research startup in a dead heat with Medallia and Survey Monkey, each of which had a market cap if $1bn, selling surveys almost exclusively to market research teams. The average contract size was small, and as then-CEO Ryan Smith put it, the fastest trip to the basement was to talk to a CEO about market research (go talk to my market research team, I don’t have time for this!).
Context: We live in an experience economy. The companies that deliver the best experiences are the ones poised to capture the most value.
Problem: CEOs grossly overestimate the quality of experience they deliver to customers because they have no way of measuring it.
Villain: The Experience Gap (80% of CEOs think they’re delivering a good experience, 8% of customers agree)
Costs: Lost business, poor reputation, decreased competitiveness
Category: Experience Management (XM). A new category of data enabling enterprises to understand the experiences they are delivering in real time and adjust accordingly.
Outcomes: Better experiences, repeat business, enhanced reputation
Results: Qualtrics went from a $1bn market cap to a high of $29bn, establishing one of the biggest categories in the research and business intelligence space
2. Cloudflare
Situation: Cloudflare’s purview is enormous - they help companies with security, network reliability, connectivity, and development. They do many things well, but needed to define the one thing it all added up to.
Context: CIOs are responsible for controlling the IT environment of their organizations …
Problem: … but increasingly, that’s an impossible task. Work-from-anywhere policies, the advent of public clouds, the rise of hacker attacks, and many other factors have led to an IT environment that is impossible to control. CIOs can’t do the most fundamental part of their jobs anymore.
Villain: IT Crisis of Control
Costs: Far-ranging damage to the enterprise with new seams opening up all the time. This was an existential crisis few thought could be solved.
Category: The Connectivity Cloud. Cloudflare created the world’s first cloud sitting above an organization’s IT environment and able to head off threats before they reached that environment.
Outcomes: Allowed CIOs to regain control of their IT environment, saved untold billions in loss related to attacks, outages, and other threats to the business.
Results: Cloudflare stock rally timed to a lightning strike and the unveiling of the Connectivity Cloud. The overall contract value for Cloudflare and the perceived value of offerings all increased.
3. Athletic
Situation: Founded in 2017, Athletic Brewing was a new player in a category about to have a renaissance - N.A. Beer
Context: N.A. Beers were growing as consumers looked to limit alcohol. The category focused on what was taken away (Alcohol), but not on what was given back.
Problem: There’s a missing link between the social aspect of drinking beer and the celebration of active moments and lifestyles.
Costs: People were forced to either drink beer with alcohol that didn’t mesh with their active lifestyle, or drink NA beer that stigmatized, taking away alcohol, but also dignity.
Category: NA Active Craft Beer
Outcomes: Allowed people to celebrate active moments with beers in a way that brought them together, instead of isolating them.
Results: The NA Beer category writ large went from $6Bn when Athletic Brewery came on the scene to $22Bn today. NA Active Craft Beers are ubiquitous in social settings, thanks in part to Athletic Brewery Lightning Strikes with the Spartan Race and their “Fit for All” advertising campaign.
Reasons why Category Design is an Important Strategy
- Weaponizes the status quo against the entrenched incumbent: The judo inherent in Category Design enables smaller competitors to upend much bigger competitors, not by outcompeting, but by rendering what the incumbents do irrelevant.
- Works with - not against - the neural circuitry of customers: Customers don’t want to think about a problem they’ve already solved, and when they become a customer of a particular company, there are several cognitive biases at play that keep them there. Rather than fight that neural circuitry, Category Design works with brains by showing them new problems and jump-starting the search for new solutions.
- Puts you in charge: Category Design isn’t a fair fight. The company that designs the category gets to make the rules, and you better believe those rules will favor the designers. When other companies jump into the new categories, they will have to develop things the designer has already created, putting them behind and further entrenching the category designer as the Category King.
- Creates demand, pricing power and long term value: We’re leaving the zero-sum game of traditional strategic frameworks by focusing on a new problem with the potential to tap into net new budget. Incremental dollars that in B2B contexts, often come directly from the C-Suite, and in D2C or B2C contexts, are incremental to spending in other categories.
Why Category Design Isn’t For Everyone
- There is no precedent (if you do it right): Category Design has no precedent, so there’s no rulebook to follow and there’s no guarantee a market can be created. In an existing category, you have proof that it is there because others are there selling. Even if the total value of that category may not be as up for grabs as it seems.
- Non-Consensus Failure Isn’t Fun: Category Design is non-consensus by design. If it was an obvious, risk devoid thing to do, the status quo machinery of the entrenched incumbent would have done it already. If you fail, everybody will say, yeah we told you that wouldn’t work. If you succeed, then you’ll be a genius. A good check on whether you are creating something truly different in category design is how afraid you are of that non-consensus failure. If it doesn’t feel like you’re risking anything, you probably aren’t. And that means you’re at the greatest risk of all, which is another company coming in to render your status quo irrelevant.
- It requires focused attention from the top: Category Design requires buy-in from the C-Suite and top leadership across the organization. This isn’t something that can be delegated and requires involvement and a vested interest in realizing a new reality. CEOs can’t phone this one in.
- It never stops: The first Lightning Strike puts the Category on the map, the next one more firmly establishes it. As needs change, and the problem you solve evolves, so must your category, and future Lightning Strikes must communicate these changes. The category is not static (that’s why category design worked in the first place!), and therefore you must continually work at and evolve it. We call this, continuous category creation.
In Summary:
It’s easier today than ever to bring a product to market, but every day thousands of these products and the companies behind them meet an early demise. Because in a world with so much better, the only real way to stand out is by being different.
Category Design is a business strategy and market framework designed specifically to help companies find their different. To monetize and create entirely new markets based on new and different problems they solve.
There is a specific set of steps companies can take to design their category. The ones who do this successfully, reap 76% of the market cap. Those who choose to compete instead of create are stuck with the 24% left over.
But Category Design isn’t for everyone. It requires bold thinking, risk tolerance, focused attention from top leadership and a long-term commitment to fully realize its potential.
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