Jul 5, 2011

How To Become The Category Leader

The advantages of category leadership are obvious. Investors (private and later, public) want in and are willing to pay for the privilege. As a result, category leaders can raise more capital on better terms than any other player in the market.

They have pricing power. Because they’re #1, customers and users want to go with them, so they can charge a premium, even if their products are not as good as others on the market. And of course, their brands are the most well-known, so user and customer acquisition costs are lower.

But what if you’re not the category leader? With the market white-hot, time is quickly running out for companies to move from #2 to #1 in the current cycle. It’s the elephant in the board room, the difficult question no one really wants to ask. We’re #2: how do we become #1? If you don’t answer the question, #1 will answer it for you.

Here then are six proven ways to move from #2 to #1.

1. Sell. Many think of this answer as a cop-out or giving up. It seems like sacrilege even to put it on the list. But from the point of view of delivering shareholder value (not shareholder ego), it’s quite conceivable this represents a high value strategy. Hypothetically, if #1 is worth $100B and #2 is worth $10B, #2 “only” has to sell for 10% of #1’s value to be worth the same amount.

When thinking about this option, it’s important to consider market timing:

A) Is #1 still on the rise in a growing market? Have they out-executed, out-capitalized, or out-captured network effects to such an extent that they’ve clearly pulled away from the other players, making a pivot necessary?

B) Is it still jump ball? #1 is in the lead, but the category is still early and it’s therefore still anyone’s game?

C) #1 has held that position for a while, is stagnating, and is therefore ripe for attack.

D) None of the above. “We’re in it to win it!” In that case, read on.

2. Shatter the myth. In some cases, #1 by all measurable accounts (revenue, market position, number of users, capital raised, etc.) is #1. But in less developed markets, it’s often more marketing than reality. This happens to “all steak no sizzle companies” who get outmaneuvered by companies whose products aren’t as compelling yet get all the buzz.

Up your profile, get visible, and market like crazy. Every time #1 is mentioned, you want to be mentioned. Shatter the myth through marketing, PR, and customer acquisition. Implement a partner strategy to make yourself bigger than you are alone. Make your reality the market perception.

3. Turn the #2 position into an asset (until you’re #1). This is the Avis “we try harder” strategy. Deliver a better product at lower cost with better service. Organizations with existing products simply cannot move as quickly. They have to consider their existing user, product, and cost investments when making changes. This is the quintessential startup strategy: be more nimble than #1.

4. Make it easy to switch. A trail first blazed by Excel/Notes and Word/Wordperfect, these products made it easy to switch by implementing the same keyboard shortcuts as existing products. With little to no behavior change, users were able to do everything they’d always been able to do and take advantage of a host of new features as well. More recently we’ve seen this in the form of email and contact importers, which make it nearly friction-free for users to take their contacts with them. Features like importers and migration tools may seem unglamorous to build but they’re pivotal in getting users to switch.

5. Be open when others are closed. This is the Android strategy. You can’t out Apple-Apple. Their products are elegant, easy to use, and supported by the incredible marketing power of Steve Jobs and the Apple brand. They are also closed. Provide the other players (that is the other phone manufacturers and wireless carriers) in the market with a viable alternative, and you can quickly establish yourself as an alternative. This works especially well in markets where the existing ecosystem very badly wants there not to be a single-source winner.

6. Team up with numbers three through 10. With the right capitalization strategy, you can go on the offensive, acquire some subset of numbers three through 10, and voila, you’re #1! Proper investor backing and valuation are critical to this approach, along with an organization that can execute on it. But acquiring your next largest competitor is a time-proven way to accelerate customer adoption, revenue, and growth. Just make sure your organization doesn’t get indigestion!

Category leadership has proven time and time again to deliver the most value for investors and entrepreneurs alike. Being #2 can certainly be a lucrative (if perhaps not emotionally fulfilling) strategy, but all too often startups that could become #1 miss their window of opportunity. They let the market move faster than them. Don’t let it happen to you: use the approaches above to move faster than the market.

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