Congratulations, You’ve Created a Category. Now What?

(Revised 06/27/20)

I was talking to an old friend the other day who’s marketing chief at a successful infrastructure startup.  “Congratulations,” I said, “I know it was a long slog, but after about a decade of groundwork it looks like things have really kicked in.  I hear your company’s name all the time, I’m told business is doing great, and Gartner literally can’t stop talking about your technology and category.”

“Yes, we’ve successfully created a category,” he said, “But I have one question.  Now what?”

It reminded me, just for a minute, of the ending of The Candidate.

While it’s definitely a high-class problem, it’s certainly a great question and one you don’t hear very often.  These days a lot of very clever people are out dispensing advice on how to create a category — including some wise folks who first dissuade you from doing so — but nobody’s saying much about what to do once you’ve created one.  That’s the topic of this post.

Bad Fates That Can Befall Category Creators
Let’s start with the inverse.  Once you’ve created a category, what bad things can happen to it?

• It can be superannuated.  Technology advances such that it’s not needed any more.  Think:  buggy whips or record cleaners [1].

• You can lose it to someone else.  Lotus lost spreadsheets to Microsoft.  IBM lost databases to Oracle [2].  Through a more oblique attack, Siebel lost SFA to Salesforce.  Great categories attract new entrants, often big ones.

• It can be enveloped, either as a feature by a product or as a sub-product by a suite.  Spellcheckers were enveloped as features by word processing products, which were in turn enveloped by office suites.  See the death of WordPerfect [3].

Given that we don’t want any of these things to happen to your category, what should we do about it?  I’ll answer that after a quick aside on my views on categories.

My Principles of Categories
Here are my principles of enterprise software categories:

• Companies don’t create categories, market forces do.  Forces converge such that one or more companies are in the right place at the right time, and a new category is born. For example, while GainSight is generally seen to have done a great job creating the Customer Success category, I would more say that they did a great job seizing the opportunity created by the convergence of forces that led to its existence [4] [5].

• Companies don’t name categories, analysts do.  Companies might influence analysts in naming a new category, but in the end analysts name categories, not vendors [6].

• Categories sometimes converge, but not always.  Before the SaaS era, enterprise software categories almost always converged because IT was all-powerful and saw its role as entropy minimization [7].  SaaS empowered line of business buyers to end-run IT because they could simply buy an app without much IT support or approval [8].  This is turn led to category proliferation and serious “riches in the niches” where specific, detailed apps like account reconciliation have born multi-billion-dollar companies.

• Category convergence is about buyers.  Analysts like predicting category convergence so much they get it wrong sometimes.  For example, while the analyst prediction that BI and Planning apps would converge [9] served as the face that launched 1000 ships for vendor consolidation [10], the reality was that BI was purchased by the VP of Analytics while Planning was purchased by the VP of FP&A.  You could put Brio and Hyperion under one roof via acquisition, but real consolidation never happened [11] [12].  Beware analyst-driven shotgun weddings between categories sold to different buyers.  They won’t result in lasting marriages.

• In category definition, the buyer is inseparable from the category.  Each category is a two-sided coin that defines the buyer on one side and the software category on the other [13].  For example, when categories converge it’s either because the buyer stayed the same and decided to purchase more broadly or the buyer changed and what they wanted to buy changed along with it.  But if there is no buyer, there is no category.

What’s a Category Creator To Do?  Lead!
Having contemplated the bad things that can happen to your category and reviewed some basic principles of categories, there is one primary answer to the question:  lead.

You need to lead in three ways:

• Grow like a weed.  Now is the time to invest in driving growth.  Nothing attracts competition like fallow land in a new category.  You created a category, you’re presumably the market share leader in the category, and now your job is to make sure you stay that way.  Now is the time to raise lots of VC and spend up to $1.70 to purchase each new dollar of ARR [13A].

• Market your category leadership.  Tech buyers love to buy from leaders because buying from leaders is safe.  Reinforce your position as the category leader until you’re tired of hearing it.  Then do it again.  Never get bored with your own marketing.

• Lead the evolution of your category by talking about your vision and your plan to realize it.  This makes you a safe choice because customers know you’re not resting on your laurels.  It also forces your would-be competitors to shoot at a moving target.

The vision for category evolution typically takes one of three forms:

• Double down.  Make your thing the best thing in the market.  Stay incredibly close to your customers.  Understand and cater to their precise needs.  Your strategy is thus category defense via customer intimacy.  You simply know the buyer better.  Large companies can’t put their best people on everything, so this works when your best people are better than their average ones, they don’t put a massive investment in the space (instead preferring a good-enough solution), and the buyer cares enough to want to buy the best and can continue to do so [14].

• Build out (i.e., lateral expansion).  Move into adjacent categories, ideally sold to your existing buyer, giving yourself economies of scale in go-to-market and your buyer the ability to buy multiple products on one platform [15].  GainSight’s move into product analytics is one example.  Another is Salesforce’s systematic move across buyers, from VP of Sales to VP of Service to VP of Marketing.  This strategy works when you can afford to build or acquire into the adjacent category and, if the category involves a different buyer, that you can afford to invest in the major transition from being a single-buyer to a multi-buyer firm [16].

• Build up (i.e., vertical expansion) [17]. Build up from your platform to create one or more applications atop it.  An ancient example would be Oracle expanding from databases into applications [18] which was first attempted via in-house development.  Anaplan is a contemporary example.  They first launched a multidimensional planning platform, had trouble selling the raw engine in finance (a more saturated market with more mature competition), shifted to build sales planning applications atop their platform, and successfully used sales planning as their beachhead market.  Once that vertical (i.e., upward) move from platform to application was successful, they then bridged (now laterally) into finance and later into supply chain applications.

What If You Can’t Afford to Lead?
But say you can’t afford any of those strategies.  Suppose you’re not a particularly well-funded company and your market is being attacked on all sides, by startups and megavendors alike.  What if staving off those attacks is not a viable strategy.  Then what?

If you’re at risk losing leadership in your category, then your strategy needs to be segment.  Pick a segment of the market you created and lead it.  That segment could be on several dimensions.

• Size, by focusing on SMB, mid-market, or enterprise customers only — this works when requirements (or business model) vary significantly with size.
• Vertical, by focusing on one or two vertical industries — ideally those with idiosyncratic requirements that can serve as entry barriers to horizontal players.
• Use-case, by focusing on a specific use-case of a platform that supports multiple use-cases.  For example, what if Ingres, instead of focusing on appdev tools after placing 4th round I of the RDBMS market, instead had focused on data warehousing, a distinct use-case and one to which the technology was well-suited?

Conclusion
If you’re reading this because you’ve created a category, congratulations.  You’ve done an incredibly difficult thing.  Hopefully, this post helps you think about your most important question going forward:  now what?

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Notes

[1] I struggle to find software examples of this because the far more common fate is envelopment, typically into a feature — e.g., spellchecker.  I suspect it happens more in hardware as the underlying components get smarter, they eliminate the need for higher-level controllers and caches.

[2] Despite both inventing the relational database and being the leader in the prior-generation database market with IMS.

[3] The precise cause of death is still debated and a final lawsuit concluded less than a decade ago.

[4] Software industry evolution led to the SaaS model, which then put huge importance on renewals which in turn led to the creation of the VP of Customer Success role which created both the demand for and buyer of Customer Success software.

[5] And either way, a great company.  (I know both the founder and the CEO, so see my disclaimer.  I can say I’ve also been a customer and a happy one.)

[6] I credit Arnold Silverman with pointing this out to me so clearly.

[7] To reduce the degree of disorder in a company’s software stack, IT had a strong tendency to prefer one-stop-shop value propositions over best-of-breed.  Ergo, vendors incented by economies of scale in go-to-market, were naturally aligned with buyers who wanted to buy more from fewer vendors.  Both forces pushed towards developing suites, either in-house or through acquisition.

[8] As I did in the early 2000s when I was CMO of a $1B company and the CIO said I needed to wait 4 years for lead management in Europe during our CRM deployment.  “That’s funny,” I thought, “we have leads today and if I wait 4 years for lead management, I can assure you of only two things:  I won’t be CMO anymore and the CIO will be the only person coming to my going-away party.”  That’s when I bought Salesforce.

[9] That was the initial use of the category name enterprise performance management (EPM), which later evolved before eventually, and only of late, being retired.  A key point here is that while these categories organ-rejected each other, that took place literally over the course of decades.  Thus, paradoxically, you likely would have been “dead right” as a BI vendor if you rejected the inclusion of financial planning in 2003 .

[10] Cognos acquiring Adaytum, Business Objects acquiring SRC and Cartesys, and Hyperion acquiring Brio, among others.

[11] Meaning you could ask someone who worked in the organization “which side” they worked on, and they would answer without hesitation.  You can’t sell financial planning systems without significant domain expertise that the BI side lacked, and that was more about DNA than training.  (For example, most EPM sales consultants had years of experience working in corporate finance departments before changing careers.)  It was more conglomeration than consolidation.

[12] Amazingly, this pattern repeated itself within EPM in the past decade.  EPM  was redefined as the convergence of financial planning with financial consolidation, both within the finance department, but again sold to different buyers.  Planning is sold to the VP of FP&A, Consolidation to the Corporate Controller.  While both report to the CFO, they are two different roles, typically staffed with two very different people.  Again, the shotgun wedding ended in divorce.

[13] Each category has one primary buyer.  A given buyer may buy in several different categories.  As a marketer, the former statement is 10x more important than the latter.

[13A] See my post on the CAC ratio.  Data source, the KeyBanc 2019 SaaS survey, shows median of $1.14 with mid 50-percentile range of $0.77 to $1.71.

[14] The tension here is between letting, e.g., the VP FP&A purchase their own best-of-breed Planning product versus a good-enough Planning module subsumed into a broader ERP suite decided upon by the CFO.  This is a real example because Planning exists on both sides today; there remain several successful SaaS planning vendors selling best-of-breed outside the context of a financial suite while most ERP vendors bundle good-enough Planning into their suite.

[15] When accomplished via M&A, the single-platform benefits are typically limited to pre-defined integration but can hopefully over time — sometimes a long time (think Oracle Fusion) — become realized.

[16] Typically this means creating product-line general managers along with specialized overlay sales and sales consultants, product management, product marketing, and consulting teams.  It also means the more difficult task of going to market with products at differing levels of maturity, something very hard to master in my experience.  Finally, in apps at least, the more you are multi-buyer, the more IT needs to get involved, and the firm must master not only the art of the sale to the various business buyers, but to IT as well.  Salesforce has done this masterfully.

[17] Vertical in the sense of up, i.e., atop your platform; not vertical in the sense of focusing on vertical markets.

[18] Which, for ancient software historians, was the failed strategy that Oracle gave a mighty try before giving up and acquiring PeopleSoft in 2005, the first in a long series of applications acquisitions.