What can you learn from coconut water? … Creating new or recreating existing categories is the big thing

July 7, 2017

It may seem like semantics, but in every different kind of business today, creating – or recreating – a category is the most effective winning strategy.

Geoffrey Moore’s Crossing the Chasm revolutionized how we think about new products in an existing market. Clayton Christensen’s The Innovator’s Dilemma taught us about disrupting an aging market. In my book Gamechangers we explore how to create markets, either by finding completely new spaces, like Blue Oceans, or more likely by reframing and redesigning how markets work.

These Gamechangers give us new ways of living, thinking or doing business, many times solving a problem we didn’t know we had—or a problem we didn’t pay attention to because we never imagined there was another way. Before Uber, we hailed a taxi cab by standing at the kerbside, waving frantically as every usually occupied taxi approach. After Uber, life was much easier.

These companies don’t only invent something to sell us. They are not making products or services that just incrementally improve on whatever came before. They don’t sell us better. The most exciting companies sell us different. They introduce the world to a new category of product or service—like Clarence Birdseye creating the very idea of frozen food a century ago or Uber defining on-demand transportation in recent years. Such companies replace our current point of view on the world with a new point of view. They make what came before seem outdated, clunky, inefficient, costly or painful.

Disruption has been a holy word in the tech industry, like maybe you should genuflect when someone says it. But disruption is a byproduct, not a goal. Add to that Christensen, has pedantically insisted that only his approach to disruption – an inferior technology beating a superior one – was right.

Winning companies create new categories that generate a gravitational pull on the market. Customers rush to a new category because it makes sense to them. In some cases, people leave an old category behind, and their departure sucks the life out of it.

In that way, sure, new categories disrupt old categories. But for the smartest innovators on the planet, disruption is never the goal. Elvis Presley didn’t set out to disrupt jazz. He set out to create rock ’n’ roll—a sound that came from his soul. Rock was different from jazz, not better. But over time, as young audiences embraced rock, they left big band jazz and crooners behind. The byproduct of Elvis’s creation was disruption.

Sometimes, booming new categories don’t disrupt anything. Airbnb created a new category of on-demand places to stay, but no one, including and especially its co-founder Brian Chesky, is predicting the new category will lead to the collapse of the hotel industry.

A term for the companies that create, develop and dominate new categories is category kings. From time to time, like the recent surge of “unicorns”, the technology industry gets caught up in hype about soaring valuations of startups. But like disruption, valuations are an outcome, not a strategy. A billion-dollar valuation of a company that is not a category king is likely to be fleeting. A billion-dollar valuation of a category king is often a bargain, in good economies or bad. Think of Amazon, Salesforce or Google.

Download: Why it Pays to be a Category Creator

Another new book Play Bigger explores the same theme. It analyses data on U.S. venture capital–backed tech startups founded from 2000 to 2015 and found that category kings earned 76% of the market capitalization of their entire market categories. Tech analyst Michael Walkley of Canaccord Genuity looked at the earnings of smartphone companies in late 2014 and found that Apple took in 93% of the industry’s total profits that quarter. Eddie Yoon, a principal at the Cambridge Group, analysed the top 20 of Fortune’s 2010 list of fastest-growing companies. Those companies received an average of $3.40 in incremental market capitalization for every dollar of revenue growth. But half of those 20 were category creators, Yoon determined, and those 10 companies got $5.60 in incremental market cap for every dollar of revenue growth. “Wall Street exponentially rewards the category creation companies,” Yoon wrote.

Download: Time to Market Cap: The New Metric that Matters

Why is this happening? The ubiquity of networks, cheap cloud-based distribution and lightning-fast word-of-mouth through social media is intensifying a winner-take-all economy—especially when we’re talking about digital products and services.

Since networks give everyone from anyplace access to the perceived best in any category, the vast majority choose the leader and leave the second- or third-best behind.

Once a company wins a position as category king, a gap widens between the leader and the rest. The leader, for example, increasingly has the best data. In today’s world, data is power. Also, the best employees want to work for the category king. The best partners want to sign deals with the category king. Outside developers want to develop for the category king. The best investors want to put in their money, and the best investment bankers want to work on the initial public offering. As a category king pulls far ahead economically, it has the wherewithal to make acquisitions that vault it even further into the lead. The economic power of a category king builds and builds.

A category king strategy is important and effective when the economy is roaring, and perhaps even more powerful when downturns cripple runner-up competitors. Some of the great category kings have been built during some of the “worst” times—Google in the early 2000s, right after the dot-com crash; Airbnb in 2008, as financial markets melted; Birds Eye amid the Great Depression.

Airbnb, Tesla Motors, Snapchat and Twitter are recent category kings in consumer-facing markets. The enterprise technology space is full of category kings too. Salesforce developed the cloud-based sales automation category. VMware defined and dominated a category of computer virtualization. Workday, NetSuite, and Slack are among the new category kings of business services.

Most category kings are once-in-a-founder’s-lifetime achievements. A rare few individuals have proved to be master creators of category kings. One of the best of all time, as you might imagine, was Steve Jobs, especially during his second go-round at Apple. He led the creation of three important new categories: digital music (with the iPod and iTunes), smartphones (iPhone) and tablets (iPad).

Elon Musk made Tesla into the category king of electric cars and SpaceX into the category king of private spaceflight, incredibly doing that for both companies at the same time. Jeff Bezos started out making Amazon.com the category king of online retail, and he repeated that success with e-book readers (Kindle) and cloud-based computing services (Amazon Web Services). A lesser-known but no less prolific creator of category kings is Seattle entrepreneur Rich Barton. He had a hand in founding Expedia, Zillow and Glassdoor.

While our connected age has revved up category king economics, category kings aren’t just a connected-age phenomenon. When Chrysler introduced the minivan in 1983, it created, and then dominated for three decades, a new category of personal vehicle. Bob Pittman’s MTV and Ted Turner’s CNN were once category kings. Boeing created the category of the jet airliner with its 707 in 1958.

So forget about that whole unicorn thing. Roll your eyes at anybody who calls themselves a disruptor. To find the next great companies, look for creators. Or as I call them, the Gamechangers.

5 ways to create a new category

Branding veteran David Aaker reflected on this challenge in a recent article. He said “Gaining share in the market would require educating the consumer and essentially reframing the category. They needed to build a new sub-category in which they could be the dominant brand.  This sort of new category creation, if done well, can make the competition irrelevant”.

For inspiration, consider other products in traditionally commoditized markets that have used a strong brand to establish a new category – and 5 key principles for anyone looking to grow their business:

  • Establish a frame of reference and central benefit that is instantly relatable (but that can also evolve over time into something unique and defendable)
    When Gatorade launched, the notion of a “sports drink” and what it could do was completely foreign. While the long term goal was to demonstrate that the drink delivered better hydration and athletic performance, the company initially positioned the product around the notion of “quenching thirst,” which everyone could relate to. Over time, the messaging evolved as they built awareness and familiarity for the category.
  • Create a compelling brand personality that speaks to your core audience. Cuties introduced the clementine to the United States and has since become synonymous with the category. They achieved this by investing heavily in a visual identity and strong brand personality that spoke to the parents of young children. The logo, typeface and color pallet all embody the playful innocence of a young child. Despite being a commodity, it was marketed as a consumer good with branded promotions, packaging (as opposed to simply a bar code) and advertising like “Know why Cuties are small? Because kids have small hands.”
  • Develop a simple, consistent message that is integrated into every element of the product, packaging and promotion. MiO, the liquid water enhancer, achieved $100M in sales within the first nine months after launch. The MiO team created a story around “your drink, your way” that served as the platform for the brand covering everything from the name (which means “mine” in Italian) to the packaging (which enabled use on the go) to the marketing strategy (which was built around personalized social campaigns).
  • Articulate a core belief that translates into a brand promise. Chobani became a billion dollar brand and almost single-handedly built the greek yogurt category by defining its core belief and developing a brand promise that was embraced by consumers. It declared, “Yogurt is meant to be simple: milk and cultures. Our promise is to make yogurt the right way, not the easy way, and to inspire you to experience the enjoyment that comes from eating simple, delicious, nourishing foods.”
  • Subtly tap into influential early adopters. Before launching major ad campaigns, the #1 selling coconut water brand Vita Coc0 tapped into celebrity brand ambassadors to give authenticity to the category. Madonna drank Vita Coco during her world tour and caused sales to rocket up 168% as a result of her “endorsement.” She wasn’t a paid sponsor at first, but did become an investor in the brand, which used the pop icon’s celebrity status to introduce the category in a way that was natural and genuine.

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