397: Creating a New Category as a Startup

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Steli Efti: Hey everybody, this is Steli Efti.

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Hiten Shah: This is Hiten Shah and in a rare turn of events today we’re going to talk about something that was inspired by a book. This book is called Play Bigger and the book is about what people are calling category design. This is the idea in business, in a company, in a startup, you can have the ablility to create a category.

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Steli Efti: There’s a lot of value in creating a category, in thinking about what you’re building as like a new category that you can then own, right?

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Hiten Shah: Yeah, that too. Exactly.

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Steli Efti: I’m building a product, I have a startup, I have a few customers. I have a little bit of revenue. Usually I play in some space that broadly we can define in one way or another. The question now becomes, is it worth the exercise of trying to come up with a new positioning and branding and give this thing that our software does a category name? Maybe two recent examples I can think of HubSpot created the category … Or named the category of inbound marketing and in content marketing. I think Drift is very recent example of the [inaudible] space where they … Instead of just saying, “We’re doing chat, live chat,” which is something that other companies have done before drift. They started framing this as conversational marketing and calling this a big new emerging category and a big new trend. There are many, many other categories. [Gainsight] with Success software, and all that kind of stuff. How do you think about doing category design, does every company need to? And is it just a marketing and branding exercise or does your product really need to do something uniquely different that is its own category in order to be able to do that?

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Hiten Shah: Yeah, I mean the line in there is, and I have this saved … I have this saved because I’ve been thinking about this a lot and the line I would use for that is basically like, “It’s much easier to be number one in a category you created.” I think that that’s really this idea in the book, and this idea, category design, which is age old. I guess my response on this whole thing is most products are already in an existing category. Very few products create a new category, literally like they are already sitting in a new category when they start. For example, HubSpot resegmented blogging, that’s my opinion. Blogging was a very personal thing, HubSpot comes around, see this pattern based on Dharmesh Shah, one of the co-founders, blogging about startups about his blog onstartups.com. He convinces Brian, the CEO, now CEO/co-founder of HubSpot to start the company around this idea that blogging can be done for business. That’s really to me how I would describe the original category that HubSpot was in, which was blogging. They were building blogging software, believe it or not, that’s my take on it. And they resegmented that as they started talking to customers into what they called inbound marketing which is this idea that you don’t need to do paid marketing in order to get traffic, and leads, and customers. Then they built a whole suite of software and it’s a public company growing super fast and all kind of things are going on. But originally, to me, it was resegmentation. They were not in their own category, and then they re-segmented the category and gave it a name. So that’s one example. And the one you used for Drift, to me, was a resegmentation of what I’m calling content marketing. The reason for that is after we went into inbound marketing and blogging, content marketing became a thing. It’s like basically any kind of content that you’re putting out there for marketing purposes, even thought that’s been done, that’s what people started calling it, because it went beyond blogging. It was all about doing this marketing and getting emails, or getting leads. And so Drift is basically saying, “Okay, well you’re doing content marketing, that’s great. Traffic is coming to your site. We got this thing called conversational marketing to help you convert those people without just using email.” They basically replaced this idea of what I call content marketing in my definition of it, with conversational marketing. That’s like two good examples where they resegemented an existing category. They took something that was a pattern that was working and they gave it a name and they built a software around that in a business.

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Steli Efti: So how do you decide when this is valuable or not? Or would you say this is something that is universally valuable and that every startup should strive to do category design and resegment? Is this just an exercise that every startup should try to be number one in the category that they named or designed? Or is this something that becomes relevant at a certain phase? What’s your thinking on that?

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Hiten Shah: Yeah, I wonder. I really wonder. I think this is not clean cut and clear. In the past one of the things that category design really was called was branding. That’s my take, like-

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Steli Efti: Positioning.

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Hiten Shah: Positioning, there you go. Yeah. It’s almost like, “Okay.” You want a differentiated position in the market, now that the markets are crowded, creating a category of your own and naming it and marketing it as such. In Drift’s case they wrote the book on it, right? And things like that, like recently. It’s not for the faint of heart. If you find yourself in resegmenting a category, and you see customers drawn to it, and it’s different, then yeah, it’s worth it. But if you’re in a category, and it exists and people understand it, and there’s a lot of software in it, it’s not necessary to do to stand out from the crowd, but honestly, there is still a differentiator you might have. It might be worth entertaining it. So to me it’s really about how do you think about what you’re doing? If you’re in a market and you’re hitting on being directly competitive with others … And I think your business is very close to that, if not right there, then maybe you don’t need to resegment. I’m sorry, you don’t need to resegment, you don’t need to do any category design, you don’t need to invent anything. You’re just like, “We’re another CRM, we do things a little differently, choose us because we’re right for you.” And if your pitch is any different than that, please speak up, Steli, but I don’t think it is. I think it’s like you have some differentiation, and you’re in the market, and you’re selling against larger and smaller competitors, right?

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Steli Efti: Right.

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Hiten Shah: It’s pretty straightforward. You’re in a highly competitive market, and you’re going after, and the market is big enough to hold I don’t even know how many CRMs now, right? Especially if you widen it and talk about CRMs targeting specific industries. So that’s one way, which is you just compete against everybody, and you’re one of many, and that’s okay. Because you can find your niche or carve out your audience. Another is you resegment, which is essentially Drift and HubSpot are classic examples of that I would say. And then, a third is more of like when you just invent something new. You invent something new because whatever your product is or your service is just doesn’t look like anything that existed before and is solving problems in a way that is differentiated amongst your market in the first place. This is my take, if you’re competing with everybody you don’t need to do category design early. You might not even need to do it mid-stage, you might think about it much later, actually, because it takes a while to find differentiation in a highly, highly crowded markets. If you have a resegmentation strategy where you discover underserved set of people or a trend that you can hit on and go after, then … And the trend that you believe is a new one and customers are sort of just gravitating towards you because of like that little bit of differentiation that you have, usually it’s product differentiation, that’s resegmenting. And I think that is more something you think of it more medium term. Early stage you’re still discovering what that difference is, but you might have some inclination that you can do something different there. And then, I’d say that if you’re creating a new market, you have no choice but to figure out how to describe what you do in a way that people resonate with it. And whether you’re creating a category in that case or really going after hammering the value proposition and the problem that you solved, then I think it’s more imperative to do that much earlier in sort of that third market or type of market.

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Steli Efti: Yeah, I love that framework. And I think it’s a very common pattern that for companies that successfully kind of reposition, resegmented, and defined a category, the ones I think of that did this successfully, they didn’t do it on day one, right?

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Hiten Shah: No.

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Steli Efti: They did much later in the life cycle where they had a few iterations, a chance to iterate a few times, both of the product, the marketing, finding product market fit, kind of fixing some of the early bugs of, “What is our brand, what is our identity, who’s the ideal customer, what do we need to do to switch around the product?” And once they get a good momentum going, then it might make sense to really throw the entire weight of your business around the idea of designing a category and positioning yourself in a really strong way. Because that also points to the second thing I’ll say before we wrap up this episode, which is that the companies that have done this successfully didn’t just do this a little bit later, once they had already figured out some fundamental questions about that business, but they also … You need to be really committed to that idea, because once you design that category, typically I find that, or what I’ve observed, is that it takes a company a few years of consistent effort and repetition. Just keep, like this evangelical promotion around this new idea, new category, and it takes a long time before it starts catching on. Before other people and your customers and other competitors in the market are starting to latch and jump on this idea and use the same verbiage and describe the same category. So it’s not one of those things that you can just like write a blog post about, or run an ad campaign, and within two months, boom, you now have a category you’ve created a certain positioning that everyone in the market adopted. It takes kind of very long term commitment, it probably is the reason that it doesn’t make very much sense to do it in the early days when you’re still a few pivots away from having even rudimentary product market fit, right?

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Hiten Shah: Yeah, couldn’t agree more. I think it’s timing that you have to do it. And the things people forget is they just do it, but they don’t realize it is all about timing, and also when you are able to do it, because you’ve learned exactly what the sort of customer perspective on the market is. So if someone wants to buy a CRM, let them buy a CRM. If someone wants to buy yet another marketing tool, nobody does, then go help them buy inbound marketing or a conversational marketing tool. And if someone doesn’t even know what the heck you do, but you solve a real problem for them, then figure out how to pitch it to them because that’s sort of a whole different level of problem. And I think you’ve got to start with the customer and figure out what the customer’s perception is, and their perspective is, and then map that to when you decide to go after creating a category or you might never need to, because you’re able to grow without having to have that level of explainable differentiation.

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Steli Efti: Beautiful. All right, I think that’s it for us for this episode. We will hear you very soon.

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Hiten Shah: Cheers.

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