The Marketing Strategist:

Why Category Design Is the Make-or-Break Marketing Skill: An Interview with Christopher Lochhead

May 21, 2015

Christopher LochheadChristopher Lochhead, one of the three founding partners at Play Bigger Advisors, is a headline speaker at ITSMA’s June Marketing Leadership Forum in Napa. He sat down with us to talk about his session and why he thinks category design is such an important issue for B2B marketers in the technology industry.

ITSMA: Chris, what is category design is and what does it means for us in B2B marketing?

Christopher Lochhead: Category design is a new discipline focused on creating and monetizing new markets. It’s based on the idea that the company that designs a space is best positioned to dominate it.

Category design is about conditioning a market to see a problem and want to solve it with the new model. Netflix didn’t disrupt Blockbuster, it killed Blockbuster’s category. They conditioned us to believe that their model was different. They evangelized (a) the problem and (b) the different solution. That’s not competition, that’s category design. It’s not about disrupting a market, it’s about changing the rules to influence the conditions in a market and get people to adopt your design.

In our sector, companies that launch products or offerings are almost always doing so in existing categories or markets. Everyone is doing almost exactly the same thing, but in category after category, there is really only one dominant player. To us, that just doesn’t make sense. The real opportunities are in creating new markets.

If a new category takes off, on average one company gets 76% of the market cap in that space.

ITSMA: Why look at market capitalization?

Lochhead: It used to be that market share, revenue, margin, and earnings were the leading indicators of success and drove market cap. But for the last 15 years or so, that’s become inverted. Market cap is now the leading indicator. It’s an indication of who investors believe the winner in a given category will be, and it often proves to be true.

At Play Bigger, we researched every venture-backed technology company started in the US from 2000 to 2014. We developed an indicator called time to market cap (TTMC). This is a measure of where in time a company hits certain market cap milestones. The speed with which a company adds market cap is even more of a leading indicator than market cap itself.

Take the example of Uber. A private company worth $41 billion, Uber has the fastest TTMC of any US company we analyzed. Uber has a massive TTMC lead over Lyft, which is worth somewhere in the range of $2–$4 billion. That advantage gives Uber a currency to do things that its closest competitor can’t. Uber created the category and is the category king.

We call this category king economics. Even for established companies, when you’re launching new stuff, you want to be the company that creates a new space, a new agenda, and that educates the market on that agenda or point of view. When you do that well, you have market pull and you create a market. The effects have staying power, too. Look at Oracle. It created the relational database category and all these years later still has a dominant 48% share of that market. Hadoop is making good progress in creating a new category in the database market, but it can’t touch Oracle on its own turf.

To become a category king, you have to create a new kingdom; you can’t storm an old kingdom.

ITSMA: What does this mean for marketers in the technology and professional services sectors? What should we take away from all this?

Lochhead: In order to win the game, you have to understand the game. If someone else designed the space and set the agenda for the market, by definition you’re a me-too player—and there’s a very good chance you’ll lose.

Marketing departments essentially do two things: help win currently running category king battles and design new categories to launch new products and services into. Where there is still a kingship up for grabs, the goal is to do everything possible to win that battle. Anything less than the number-two position, which typically gets about 10% of the economic value of a category, is a very undesirable place to be.

When it comes to designing new categories, the objective here is to clearly and compellingly articulate a path for your target audience, one that takes them from the way they frame their problems or needs today to your way of framing them. We call this the from-to. The trick is to do it in such a way that they drop other existing alternatives and your product or offering becomes the most desirable choice. You’ve got to get the from-to right, or you’re nothing more than a me-too player—wasting your time and destroying your market cap.

ITSMA: Chris, thanks so much for giving us a preview of your talk. We can’t wait to get into the full discussion at the Marketing Leadership Forum!

 

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