Competing head-to-head in business can be an expensive, cutthroat, and often frustrating effort yielding diminishing returns. Throughout my 25-year experience in Enterprise and SaaS software startups, I have observed countless companies try to pull ahead by “out-innovating”, adding new functionality, or offering cheaper solutions. When this happens, companies tend to converge along the same competitive dimensions and become overly focused on beating one another, and lose sight of the customer. This is a losing battle for vendors, investors, and pretty much everyone involved.
Three times in my career I have been fortunate to be part of a team where we found ourselves in heated, competitive situations in crowded markets and we collectively found the courage to think exponentially and completely redefine competitive boundaries by creating a new category. Twice, this occurred at SaaS cybersecurity companies and the other time was at enterprise software company Mercury Interactive. In each case, the effort required a different pattern of strategic thinking. Instead of looking within the accepted boundaries, we identified unoccupied territory that represented a breakthrough in value.
According to Harvard Business Review, companies that were instrumental in creating their categories accounted for 53 percent of incremental revenue growth and 74 percent of incremental market capitalization growth. They also found greater access to capital and enjoyed greater exit multiples.
There are many examples of companies who bet big on category creation and are now multi-billion-dollar leaders: Gainsight created the customer success category, Salesforce created the first SaaS CRM, and Hubspot invented the marketing automation platform. For every company that found these levels of success, there are scores of failed attempts, and — as you can imagine — investors will often advise that creating a category is cost-prohibitive and is generally a bad idea.
The courage and patience category creation requires results in phenomenal market success, not to mention great financial outcomes. The primary goal of this article is to share the valuable lessons learned from creating categories across three separate companies.