category creation

Five years ago, when the book Play Bigger was published,  my co-authors and I were certain that the best strategy for building a valuable, enduring business was to identify a new, unserved market category, clearly define it, and then work to win the category over time. 

Data that we and others analyzed showed that category winners typically take in more than 70% of the category’s economics, capture most of the category’s market value and lure the best talent – and certainly get the most attention. Think Salesforce in cloud CRM, Tesla in electric cars, or Netflix in streaming content.

Since publishing the book, my firm, Category Design Advisors, has worked with dozens of companies – from early-stage startups to public companies – based on the concepts in Play Bigger, and that experience has led us to believe there are four key reasons why category design matters more today than it might’ve a couple decades ago, or even five years ago. 

Here are those reasons:

The End of Friction

Technology, such as the internet, cloud and mobile devices, has been removing barriers to everyone being able to get the best (or perceived best) of anything. 

One simple example: newspapers. When I was a young reporter at a newspaper in Binghamton, N.Y., the local paper was pretty much your only choice for timely news. Stories had to be printed on paper, then hand-delivered to every doorstep in the morning. Sure, you could get the New York Times or Wall Street Journal, but it would arrive a day late and cost extra. If you lived in a city with more than one newspaper – like Detroit or San Diego – you could choose the best paper locally for timely news, but not the best anywhere. You were limited by geography and the heavy friction of distribution.

Now you can wake up in the morning anywhere in the world, open the Times or Journal app on a phone, and instantly get timely news. The friction of distribution has fallen to near zero. And since those two papers could invest in hiring top journalists and send them all over the world, they came to be seen as two of the best news sources. Since everyone could access the best – with the barriers of geography and distribution eliminated – readers flocked to those category winners and gave up on the rest. The Times now has 8 million subscribers – multitudes more than ever subscribed to its printed newspaper – while more than 2,000 newspapers have closed in the U.S. since 2004. 

That same dynamic is happening in everything. Everyone can shop at the category-leading retailer, get the category-leading app, use a category-leading service – so they do. The category winner gets all the momentum and invests in staying the winner, while the rest shrivel. The pattern is hard to disrupt once started, which means category winners become terribly hard to unseat.

Network Effects

Network effects have been well-described over the years, particularly by Metcalfe’s law, originally formulated to describe telecom networks: “The value of a communications network is proportional to the square of the number of its users.” Basically, it means that every time a new user joins the network, it exponentially increases the value of that network for all the other users. 

Facebook is the most obvious example of the power of network effects: the site is so dominant simply because so many people are on it. The value of Facebook for users is the other users. Airbnb is a hybrid network-effect business. The more spaces in its listings, the more users join Airbnb, and as more users join, more property owners list their spaces – and round and round until nobody else in Airbnb’s category can compete. 

Not every business is a network-effect business. But any two-sided marketplace, like Airbnb, certainly is, and that would describe a lot of companies we’ve worked with on category design. And the pattern is clear: in any network-effect category, one company is going to completely own the category, and everyone else gets the scraps. All effort should go to winning the category, or you're sunk.

Data Effects

Artificial intelligence is the new electricity, as described in Unscaled, the book I co-wrote with General Catalyst’s Hemant Taneja. Some form of AI is increasingly powering everything, whether enterprise software, phone apps, smart devices, cars, farm machinery – you name it. 

AI learns from data. Some of that data can be bought or accessed by most any company – like data from satellite images, social media, or financial markets. But in many categories, important AI-training data comes from users and usage – the AI watching what people do, the choices they make, the words they type or speak. Google is a champion at running user activity through AIs to better tune its products such as search results and driving directions. 

In data-effect categories, the product or service with the most users obviously gets the most usage data, and that turns into the same kind of flywheel that powers network-effect categories. Once one company in a category gets an edge in users, the usage data starts to train that company’s AI to be much better than any competitor’s AI, which in turn makes the category leader’s product better, which brings in more users, making the AI even better and widening the gap.

Logically, then, in any category driven by data effects, a company has to do everything in its power to claim category leadership, because over time the category winner will swallow up most of the category’s economics while everyone else gets crumbs.

The End of Marketing

This one I didn’t completely get until CDA worked with Sprinklr on category design prior to its IPO. Sprinklr’s category is unified-CXM, which is short for unified customer experience management. A big company will use its software to listen to social media and glean data from user activity to help the company know what’s going right or wrong with its products and its image and how to fix it.

Sprinklr’s CEO, Ragy Thomas, kept emphasizing that one reason unified-CXM has become important is because a company or product is no longer what the company says it is – it’s what the public says it is. A couple decades ago, a company could blitz the world with a marketing campaign to shape perceptions. But today, those perceptions are shaped by people’s Instagram posts, tweets, online reviews, users’ YouTube videos and so on.

Why does that shift make it more critical to be the category winner? A couple of reasons. One is straightforward: if one company has far more customers than the others in its category, it has more voices out there doing its marketing for it. Those voices reach yet more people, winning more customers, who make more noise, drowning out competitors’ voices.

The other reason has to do with cognitive biases. The product or service that dominates a category is not always the best one. You could argue that there have always been “better” phones than the iPhone or “better” ketchups than Heinz. But once a category winner gets solidified, our biases kick in and most people will justify choosing the category winner because it’s the category winner. That in turn means that on social media, the category winner will benefit from those biases – all those voices will tend toward the positive for the category winner and dismiss the also-rans, which in turn adds to the positive perceptions of the category winner and reinforces the biases in yet another category flywheel.

The bottom line: discovering, defining and dominating a market category has always been a powerful strategy and goal. But the dynamics of recent years – the end of friction, the power of network and data effects, and the transformation of marketing – have made category design and dominance more essential than ever.

To hear Kevin Maney and Christopher Lochhead discuss these topics and more, listen to this podcast: