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8 Category Levers: How To Build A Massive, Pacific Ocean-Sized Differentiation Moat
The ultimate guide to category differentiation.
Pirates, this is a mini-masterclass in category design differentiation. This is a long letter, so please do not feel the need to consume all in one sitting. We encourage you to take this section by section, and to refer back to it often in your category design endeavors. Arrrrrrrrr!
Dear friend, subscriber, and fellow Category Pirate,
What happens when you take management principles and run them through the category design lens?
What happens when you think about every function in your company and ask, “How is this function helping us design and dominate our category?”
The way you think about each function changes.
One of the big mistakes people make is they think of category design as some kind of marketing exercise.
And while category design and marketing are, of course, deeply connected, the reality is that most legendary category designers view it as a business strategy—not just “a marketing strategy.”
For example, the bigger the Different you are trying to create in the world, the more you have to think about how that Different is going to work across your entire business. One of the examples in Play Bigger is Clarence Birdseye, founder of Birdseye Foods and the creator of the entire frozen food industry, and how in order to create frozen food, he had to transform everything.
Including railroads. And grocery stores.
Henry Ford is another great example. In order to make the automobile happen, he had to convince the US government to create the highway system.
The more radical the breakthrough, the more likely it’s going to require radical change.
Spotify ushered in a complete transformation of the way the music industry works, including how money flows and licensing laws work. Scooter category pioneers Bird and Lime are getting cities to change laws for them to operate. Uber and Lyft danced on the edge of legality for a long time. Airbnb was sued by hotels all over the world for years, claiming “unfair competition.” (These words are usually a signal you are executing category design terrifyingly well. Arrrrrrrrr!)
The point is, category design is about so much more than just getting customers to pay attention and understand the value of your product or service. It’s about redesigning the world so that it aligns with your point of view. Sometimes this requires new thinking. Other times, new laws or significant infrastructure changes.
The big question is, “How?”
While there may be 50 ways to leave your lover, there are 8 very clear levers you can push and pull to create massive differentiation. Dozens of business books have been written about each one of these, so our goal here is not to give you “Pricing 101” or “Zen & The Art Of Manufacturing.” Our aim is to show you how you can view each of these different levers within your business through a category lens, and achieve radical differentiation by implementing category design thinking on a 360 degree level.
Within each one of these 8 levers, we encourage you to apply the scorecard and evaluate how well you are scoring in all 5 areas of the scorecard for that particular lever.
Lever 1: Radically Different Benefit (For A Radically Different Problem)
“What is a radically different benefit we can offer the customer/end user?”
When developing a product or service, there is really only one thing the customer cares about.
They want to know what benefit(s) they’ll receive.
Notice, we are not saying “what features they’ll receive,” which is what 99% of companies market. The customer is never buying “the thing” your product or service does. What they’re buying is the outcome or result of them using “the thing.” For example, readers don’t buy books—they buy answers, captivating stories, and unique insights. Students don’t buy online courses—they buy acceleration in their careers. The benefit of your product or service is not the sum of its features. It’s the transformation it unlocks in the customer as a result.
So, how do you find your “radically different benefit?”
Fall in love with a (radically) different problem.
The benefit you emphasize most is a direct reflection of which problem you’ve chosen to fall in love with solving.
Companies that opt to solve already established problems tend to fall into “The Better Trap,” and list out as many benefits as possible to make themselves seem “better” than the competition. Whereas companies that fall in love with solving new, different problems, or successfully reframe existing problems in new and different ways, are the ones with the most clarity about the benefit(s) of providing a solution.
Having a radically different benefit reflects the company’s desire to solve a radically different problem.
Rogaine: The Story Of What Could Have Been
So, how do you find a radically different problem?
Here is one way:
Change the “who,” “what,” “when,” “why,” and “how” of the problem.
Rogaine is a terrific example. Historically, the “Who” has been a man that is (“What”) balding, after his hair falls out (“When”), to recapture his youth (“Why”) and is putting the product on the crown (apex) of his scalp (“How”).
The problem is, men are less disciplined in personal care. And balding for a man can be okay (you can still be an attractive bald guy). And when your hair has already fallen out, it’s usually too late. Which means the “Why” of recapturing your youth is not motivating enough for all men, and the crown/apex of your scalp (“How”) is not a problem you see all the time in the mirror.
Someone like Pirate Christopher loves being bald. He is never going to be a Rogaine user.
But what if Rogaine fell in love with an entirely different problem? Specifically: Women (“Who”) experiencing hair thinning (“What”), after pregnancy when a woman’s hair tends to fall out more (“When”), and want to maintain a youthful appearance vs recapturing their youth (“Why”) by taking care of the whole scalp (“How”).
With each question, you can see how the second problem (for women) is fundamentally different than the original one (for men). Women are far more disciplined in personal care, hair thinning is not okay for any woman, and women see hair in the drain of the shower all the time. Category Pirate Eddie did some analysis back in the day and realized that Rogaine would generate exponentially higher revenue had they started with hair thinning for women opposed to hair replacement for men. Said differently, women are far superior Superconsumers of personal care than men. (Frankly we think women are far superior overall. But that’s just us.)
When you solve a problem for a Superconsumer, your odds of finding a radically different problem to solve & a radically different benefit to bring to the market go up.
Lever 2: Radically Different Brand
“What are some radically different brands consumers can choose from?”
There are 2 ways to look at “branding.”
The first is what the brand stands for in the world.
Unfortunately, most brands are mercenaries.
What they really care about is their own prosperity and well-being. (Think American Airlines or Comcast, two companies run by assholes with spreadsheets… aka mercenaries). At their core, they believe in scarcity and zero sum games. They fight with each other. They compete. They are Kim Kardashian (“Aren’t I awesome?”) not Martin Luther King, Jr. (focused on making a difference for others).
Brands that are missionaries, on the other hand, evangelize a broader category problem that, when fixed, creates a rising tide that lifts all boats. They want to make the world a different place (not a “better” place, because “better” implies incremental improvement from what currently exists today). They have founders who have personally experienced the pain of a broken category, and have made it their life’s mission to fix it.
For example, CarMax believes the car buying and selling category stinks and they’ve made it their mission to fix it. They will buy your car, even if you don’t buy theirs. There’s no haggling. Transparency is king.
And O’Neill, the brand, wants more people to surf longer. That’s why Jack O’Neill created the surfing wetsuit in the first place.
These radically different brands believe in abundance and growing the pie. They see their “competition” in different ways of helping the end consumer and user. For example, Progressive Insurance is a radically different brand in that they show all the prices of their competitors. Why? Because they believe the total insurance experience (from shopping to claims) is terrible, and want to change that experience in the world.
They want the end user to be happy, regardless of whether or not they buy from them.
The second way to look at “branding” is the brand itself.
The logo. The fonts. The colors.
But contrary to what the entire graphic design, branding, and advertising agency industry would like you to believe, in and of itself, “brand elements” aren’t really differentiators.
Branding only becomes a differentiator when, in the context of the broader category, the branding is executed in a radically different way than what is expected. Recently Pirate Christopher ran full page ads in Podcast Magazine celebrating negative reviews. Why? Because most podcaster-business-guru types break their arms patting themselves on the back. Doing the opposite makes you stand out. These unexpected branding decision make it clear who is not your customer—which is often more powerful than declaring who is your customer.
Lever 3: Radically Different Experience
“How can we make the experience so distinct that it is worthy of a price premium?”
Take a look at coffee.
You can get coffee from Folgers for $0.05 a cup, or Keurig for $0.50 per cup, Starbucks for $2.00 per cup, or Verve for $5.00 per cup.
How much of the price is dictated by the coffee itself vs the experience you get?
It’s far more about the experience.
Companies that understand this recognize the importance of “theatre,” as our Category Pirate friend Joe Pine, the author of the Experience Economy, has often said. He notes the way you avoid commoditization is to migrate from goods to products to services to experiences to transformation at the highest level—and explains how a radically different experience tends to fall into one of two categories: “time well saved” and “time well spent.”
This is an incredibly simple way to be empathetic towards the consumer, which most companies struggle to do.
Unfortunately, most companies don’t want to be empathetic to their customers.
Instead, they want to “trap” them in their stores, webpages, or business models. (Whereas a big part of Amazon’s success has been a radical focus on making returns easy.) Telecom companies lock up their customers via legal teams and long-term contracts. Big retail prioritizes their supply chain over the shopping experience. Banks lock up their customers with minimum balances. Is it any surprise that AT&T, Walmart, and Citibank have Net Promoter Scores of 15, -4 and -41 per Customer? These companies do the opposite of saving you time, and make every minute as painful as possible. Was this their explicit goal? No. But the desire to “trap” a customer usually creates perverse incentives that make the customer want to run away as fast as possible.
Here’s a good way of thinking about your company’s experience:
We call this the “fun-to-chore” ratio.
How much of the category is fun that can be enhanced?
And how much of the category is a chore that can be minimized.
Tesla is the king of this. They’ve removed virtually every pain point of the car buying process by bringing the car to you and allowing you to buy it on your phone. And as Elon Musk has said, Teslas are “the most fun thing you can buy.” It’s why he includes software that makes the Model X dance to music, or (to the consumer’s discretion) make farting noises.
Lever 4: Radically Different Price
“How can we change the way consumers perceive value that is radically different?”
Most companies think about price in one of two ways.
The first way is cost plus: “What does it cost to make what we offer, what profit do we want to make, and given that, what price can we get away with?”
But this is a very self-centered way of pricing. It’s an important consideration to include, but it shouldn’t be the driver of your pricing strategy.
The second way most companies price is benchmarking versus competitors. This is a completely reasonable and worthwhile question to ask, but the answer (and even the question itself) tends to lead down the insane road of comparisons. If most other “competitors” price themselves at $X, companies assume their best path forward is to price their product or service similarly to $X. They conclude, “If everyone else is charging $60 per unit, we should price ourselves around the same. Maybe a little more, maybe a little less.”
The logic here is two-fold:
That competitors have already done the hard work of figuring out what customers are willing to pay, and you would be smart to follow in their footsteps.
That if it costs you $50 to make a product, then charging $75 or $100 “seems reasonable.”
But these are the biggest mistakes you can make when pricing your product or service.
Instead, you should be asking two radically different questions.
How much value does my category create, especially for my Superconsumers?
How much value is created or destroyed by the way I price, specifically “who I charge,” “when I charge,” “where I charge,” and “why I charge?”
We will tackle the 1st question here.
For the 2nd question, we suggest you read everything written by the great pricing guru, Rafi Mohammed. He’s a former consultant with a PhD in Economics from Cornell, and author of several best-selling books on pricing. He’s one of the few folks who have written even more articles in Harvard Business Review than we have!
In a world where companies try to nickel and dime each other to death, “price” almost always becomes a race to the sides: you are either expensive, luxury, premium, or you are bulk, cheap, value pack. Anything that sits in the middle of its given category ends up feeling like something for no one.
Instead, we’d like to introduce you to a third way to think about price. Instead of looking at how much your competition thinks their product is worth, ask, “Who are our Superconsumers, and what does our price say about them?”
Price anchored to your Supers means pricing your product/service outside of the expectations of the everyday consumer.
This is how you achieve radically different pricing.
*Remember: price isn’t just how much money the customer spends, or the profit margin you expect to earn. Price can also be a status symbol. Price can be a differentiator. Price can be a statement about your company and product, and about the people who buy it, use it, wear it, and tell other people about it. Some brands are built by letting the customer scream, “Look how much I paid for this!” Think: Balenciaga T-shirts for $695, or the Louis Vuitton luggage with its iconic print that howls, “Hey, I have expensive luggage!”
For example: how much would you pay for a cooler?
In 2006, entrepreneurial brothers Ryan and Roy Seiders co-founded an outdoor product company called YETI. Maybe you’ve heard of it.
Their idea was simple, and one that came as a solution to a personal problem. They wanted to design a cooler that could withstand the challenges that came with their love of fishing—specifically, needing to stand on the box to cast a more precise line and lure in a tricky fish, or withstand the claw of a hungry bear looking for a midnight snack.
Over the course of the past decade, YETI has gone from being a small business created by two founders who earnestly just wanted more time to fish, to being known as the “Range Rover of cold.” Sales climbed to $29 million just five short years after the company was launched, and in 2014 had exceeded the $100 million mark as the brand began to solidify its category ownership. By 2015, the very next year, the company was doing almost half a billion dollars in annual revenue—and had become the “new cool” outdoor brand. (Note, the only reason the YETI brand is “cool” is the fact that they dominate the category they designed. Their all-caps font has nothing to do with it.)
Now, did YETI invent the cooler as we know it?
Of course not.
What they created instead was the premium cooler—and a whole new category ten times more expensive than its nearest competitor.
The best way to think about pricing is by using this very simple equation:
Value = Benefits/Price.
And value is 100% perception. Nothing is “valuable” until someone teaches someone else how to value it.
For example, did you know that before the 1930s, diamonds were not what ladies wanted in their engagement rings? In the 1940s, De Beers launched a marketing campaign proclaiming “A Diamond Is Forever.” (Which is not true.) And between 1939 and 1979, De Beers’ wholesale diamond sales in the United States increased from $23 million to $2.1 billion.
De Beers focused on becoming “the wedding ring” stone. By niching down, by framing, naming, and claiming their category, they changed the way their product was valued. This is what Category Designers do: they change the way people value what they value. Remember, nothing is intrinsically valuable. We get taught to value certain things and devalue others.
When a company can show a big difference by playing with the V = B/P equation, radical pricing has been achieved.
A few examples of this would be:
Increasing Benefits as much as possible, and Price enough to maintain the ratio
Increasing Benefits as much as possible, but lowering Price for an exponential growth
Keeping the Benefits/Price ratio the same, but at very different “absolute” prices
The biggest misconception when it comes to pricing, however, is that “premium” or “really cheap” are decisions that have to do with the price tag. They don’t. Price should always be a reflection of the Value (V) you are able to provide when the Benefits (B) are divided by the Price (P). Simply making your widget 10x more or less expensive than its nearest competitor doesn’t mean the customer is going to see it as a premium or ultra-cheap product, let alone make the decision to buy. What makes a customer buy is when they feel they can receive the same benefits for a dramatically lower price, or exponentially more benefits for the same or slightly higher price—or some other variation of the equation: Value = Benefits/Price, where “Value” is the outcome and “Benefits” or “Price” are the variables.
More benefits at the same price.
The same benefits at a lower price.
3x more benefits for 2x more price.
75% fewer benefits for 50% lower price.
In the rare situation where you can provide more benefits for an even lower price, you have a rocket ship. (If and only if your pricing strategy is in support of your Category Design. If your price is pegged against a competitor, you’ve fallen into the “Better Trap.”)
And if you can achieve both at the same time, you become Tesla: both a “value-buy electric vehicle” and a “premium electric sports car.”
Lever 5: Radically Different Manufacturing
“What radically different way can we make what we market?”
When it comes to manufacturing, the vast majority of companies focus on efficiency and optimization—namely, “Can we make it cheaper and/or more capital efficient?”
This is fine, but it assumes the category is fixed and will not change. It also assumes customers don’t care about anything other than price.
But consider the words of Phil Marineau, the former CEO of Levi’s during the era when baggy jeans were popular. He had just implemented a massive supply chain re-engineering project to produce Levi’s 501 blue jeans cheaper, faster, and with less capital. Then all of a sudden, demand shifted toward jeans that were the antithesis of what they had always made. He said to his team, “So you’re telling me that we are the fastest, cheapest, and most efficient at making jeans no one wants now?” This is what happens when the way you make your products is disconnected from the way you build your category.
When it comes to manufacturing, most CEOs and entrepreneurs think, “What would make us more money? What would make my investors happy?” But this is what leads to cheaper and faster versions of the same old, same old.
Category Pirates, on the other hand, think:
“What manufacturing approach should we invest in that will empower our design and domination of a giant category that matters?”
“What would make the category Superconsumers happy?”
“How do we reimagine problems to unlock radically different outcomes?”
“What’s a problem most people can’t see, that if we solved would make a massive difference?”
Barry Nalebuff and Ian Ayres, authors of Why Not, pose a similar question, “What would Croesus Do?” Croesus was a Greek King famous for his wealth. Nalebuff and Ayers say, “The first step is to think about what a person with vast resources—connections, money, or time—would do to solve the problem.” Except the beauty of Superconsumers (your most valuable customers) is they are not an ancient king from time past. They are living, breathing category-infatuated consumers who are willing to spend 10x more for a category that is re-imagined and re-invented without compromise.
For example, Royal Canin, a prescription pet food started in France, was designed by Veterinarians. Yet, it’s owned by Mars, the makers of Snickers and M&Ms—who also owns large pet food brands like Pedigree. It’s a massive company ($35 billion large), but you might be surprised to know that Royal Canin is the single largest brand in the entire company.
Why? Because Royal Canin is a category creator.
Prescription pet food is a hybrid of pet food and medicine. It literally helps the lame to walk (via its joint food) and heals the sick from issues like Hypothyroidism to allergies. It is one of the few brands sold only by Vets and Pet Specialty stores (you can’t buy it at Walmart). But before Royal Canin, Hill’s Science Diet (owned by Colgate) was the O.G. And for decades, it was one of the most reliable drivers of growth for Colgate. It was also one of the most profitable, given that they had a few large scale manufacturing plants with massive economies of scale.
That is, until Royal Canin decided to throw a major wrench in their plans.
Royal Canin re-imagined prescription pet food as breed specific pet food. It had the same efficacy as Hill’s, but offered specific variations for Chihuahuas, Golden Retrievers, and so on. Initially, Vets were skeptical as the only real difference was the kibble size. But in the end, Vets decided if it made the consumer happy, then why not?
Boom, new category!
This required Royal Canin to build a completely different kind of manufacturing footprint (remember how we said category design isn’t just about marketing?). Rather than a few large, high scale plants, they needed many smaller scale plants that could handle the SKU complexity. It was less efficient and less profitable than Hill’s, but this was the price of being different that Royal Canin was willing to pay.
And that difference has paid off. In many markets around the world where Royal Canin and Hill’s go head to head, Royal Canin has consistently grown the category AND taken market share at the same time. There is nothing Hill’s can really do in response at this point. It can’t copy their manufacturing, given their sunk costs in their current manufacturing. And no amount of marketing can overcome a fundamental difference like breed-specific food.
By choosing to be different, Royal Canin achieved checkmate.
Sucks to be Hill’s.
Lever 6: Radically Different Distribution
“How might we distribute/sell what we offer in a totally unique manner?”
Most company’s distribution strategies can be summed up by the iconic quote from the Field of Dreams, “If you build it, they will come.”
In other cases, some companies try to be everywhere and anywhere thinking that the more “points of presence” they have, the better. They play an “economies of scale” game to drive revenue and volume up, and costs down.
Said differently, most companies force customers to come to them.
And this might have worked in the age of limited choice, when we only had 3 TV networks, a few places to shop, a limited number of brands to choose from, and consumers had no voice.
But not anymore.
Radically different distribution isn’t just about efficiency.
It’s about power and leverage.
Category creators don’t wait for their customers to come to them. They go to where their consumers already are—specifically where they work, live, and play.
And sometimes in what might seem like unusual places! For example, 5 Hour Energy, creators of the “energy shot” category (as distinct from the “energy drink” category created by RedBull) did not want to be on the shelves next to energy drinks. So they placed themselves at the cash register (right before you check out). Similarly, Netflix allows you to binge what you want, whenever you want. Tesla has retail stores, but doesn’t believe in making you come to their dealerships to get a new car—they come to you. Instacart doesn’t believe you have to make multiple trips to multiple grocery stores, they do the shopping for you and drop it off at your doorstep.
In each of these cases, the company’s distribution strategy is a crucial lever within their broader category design and business strategy.
The highest-scoring category creators turn their distribution costs into revenue streams.
If you want to have sharks with laser beams attached to their heads swimming around your category differentiation moat, this is how you do it.
“Who has the BEST distribution capability? Let’s compare distribution capabilities, costs, defect rates, etc.” This is the question most companies ask themselves, but the question itself is fundamentally flawed. It’s rooted in a reality obsessed with head-to-head competition.
Radically different distribution means turning what most companies consider a “cost” into a revenue-generating point of leverage. Amazon is the king of this, having turned numerous line item expenses on their income statements into independent revenue generating businesses from shipping (Amazon Prime), fulfillment (Amazon Fulfillment), cloud computing (Amazon Web Services) and more recently, health care (Amazon Care). It turns out, the early complaint by analysts that Amazon just loses money given its gargantuan (and growing) expenses turned out to be an early smoke signal of future revenue streams to come. And all of these other revenue streams just add more incentive to expand, innovate, and create new ways to get products and goods to consumers faster, easier, and more cheaply than ever.
The same could be said about OnlyFans, by the way, which allows creators to share in the upside generated by the other creators they bring to the platform. They turned what many companies would write off as “the cost of marketing” (and the effort required to attract new creators to the platform) into another revenue stream.
In both these cases, these companies have successfully turned the tide to the point where they are no longer paying for distribution. Distribution comes to them—and furthermore, it pays them in the process.
So, the question you should be asking here is, “What hook can we create that drives our most evangelistic customers (aka our Superconsumers) to spread our new category and offering virally and organically?”
Lever 7: Radically Different Marketing
“How might we drive category awareness/consideration in a way no one else does?”
Here’s a little-known secret about the way the human brain works.
When people see a company marketing the category (not their product), they assume the company doing the marketing is the category leader. Because the only companies they’ve ever seen market their respective categories are category leaders.
Henry Ford evangelized the “horseless carriage.” Tesla evangelizes “electric vehicles.” Alexander Graham Bell created the telephone category. Marty Cooper, the “wireless phone.”
The result here is, instead of marketing your product, what you should be marketing is your Point Of View of the category.
Software’s OLD category point of view: “The business model for software is to buy it. And run it ‘on-premise.’”
Salesforce’s NEW category point of view: “The business model for software is to rent it. And let us run it for them in the cloud.”
Coffee’s OLD category point of view: “The only way to drink coffee is one pot and one flavor for all.”
Keurig’s NEW category point of view: “The best way to enjoy coffee is one cup of your personal choice—with a Keurig.”
Facials’ OLD category point of view: “Facials make you feel pampered, and lasts for the moment.”
Hydrafacial’s NEW category point of view: “Hydrafacials gives your face your best skin now and a glow that others can see that lasts for weeks.”
Police firearms/armor OLD category point of view: “Guns and body armor protects police in the moment and creates complexity for the courts.”
Axon’s NEW category point of view: “Tasers, body armor with body cameras, and SaaS protects police and suspects both now and later, simplifies the court system, and improves society as a whole.”
Postage stamps OLD category point of view: “You have to go to the post office to buy stamps, and wait in line to figure out how many stamps you need in order to mail your item.”
Stamp.com’s NEW category point of view: “You can print your own stamps from home and we’ll give you a scale so you can figure out how much postage you’ll need.”
Notice how none of the above have anything to do with the company’s brand, and everything to do with their radically different and transformational perspective of the category itself.
These companies are not betting on the world being the same.
They are betting on the world, specifically the category they are creating or re-designing, being different.
Companies deploying radically different marketing do not do brand-to-brand comparisons. They facilitate past-to-future category discussions. They attack the past and declare the category of the future.
By doing this, they force a category choice—not a brand comparison.
Evangelize the problem, not the solution
Facilitate a conversation between consumers (don’t just talk at consumers)
Get Supers to “geek out” and let others listen in versus hogging the microphone (today this is called creating “community”)
Focus on the benefits, not the features
Spotlight the value, not the price
Emphasize earned media, not paid
Customize vs. one-size fits all
Measure vs. hope and pray
Turn founders, executives, and employees into category ambassadors (today the “E” in CEO stands for evangelist)
Your POV is what tells the world you are a company on a mission—not just another mercenary looking to make a buck. The POV frames a new problem your category identifies with and sets you up as the answer. Which is why your POV is, fundamentally, a “story” about how people can move from the way they are currently experiencing the category, to the (new) way they can and should experience the category they didn’t know they wanted.
Which is why the term “brand story” is so misleading.
It implies YOU are the main character of the story, and that’s not true. Your customer, and the transformation you are able to facilitate in them, is the main character and focal point of the story.
Brands are about companies. Categories are about customers.
What you should be aiming for instead is a Category Story—your POV of the category itself—of which you are the only solution. The most powerful POVs make people stop. And think: “Wait, this sounds amazing. I have to get one of those.” Or, “I thought I wanted X, but maybe what I really need is Y?” The “ah-hah” moment happens because the consumer identifies with the mission, the idea, the opportunity and/or the problem—and then they’re get on board with the solution.
The POV is so important that in the most radical cases, the POV of the company becomes part of the customer’s identity. “I’m a coffee drinker” is not just a statement about a preference. It’s a statement about who that person is.
When you shift from marketing your brand or marketing your product/service to marketing the CATEGORY, you’ve just made a massive leap in the effectiveness of your marketing efforts.
When the customer has “bought in” to a company’s POV, word-of-mouth marketing ignites.
This is when gasoline starts getting poured onto the fire.
Word of mouth is the number one driver of marketing. Period. It always has, and it always will be.
Marketing’s job is to put the right words into the right mouths. By having a radically different POV of your product/company’s category, what you are really doing is giving customers the script you’d like them to use when talking about you to friends, family, and the world at large.
HydraFacial has done this masterfully.
Much of HydraFacial’s early growth was driven without much traditional marketing, largely because word of mouth was so powerful.
Just listen what Lauren, a Superconsumer from Texas, had to say about the product:
“I found out about HydraFacial from my younger sister. She had gotten one from a friend that worked at a Medical Spa. And my sister was raving about it and told me I had to try it. She actually bought me a HydraFacial as a gift, so I tried it and loved it! It wasn’t even a birthday gift or anything. My sister just loved it and was determined that I try it too. The experience itself was so relaxing, I thought I was going to fall asleep. It didn’t hurt at all. My skin felt amazing—very clean and hydrated. And my skin was glowing for days after. After the second day of glow, HydraFacial sealed the deal with me.”
Part of how HydraFacial leveraged this natural word of mouth was through a clever local “business to consumer to business” (B2C2B) marketing strategy.
HydraFacial focused heavily on local marketing, and did so by decking out a tour bus with numerous HydraFacial machines. The HydraFacial “world tour” took the bus to numerous cities around the US, and once they got to a city, they let their Superconsumers know via Instagram and social media they were in town. Then, rather than telling consumers how good a HydraFacial was, they showed consumers by offering it for free. Hundreds of consumers lined up waiting for their free HydraFacial, posting their glowing faces on Instagram and Facebook.
HydraFacial also invited their doctors, practice owners, and hotel/fitness executives to come and see the festivities. They all witnessed the power of the “HydraFacial nation” firsthand, and often immediately purchased their first, second, or third delivery system. Consumers with glowing faces—not just from the product, but from HydraFacial’s generosity—shared their experiences on social media.
All of this happened so quickly that HydraFacial realized a 4x return on their marketing within 9 months of their nation-wide tour (we know this from Rosemarie Holcomb, Head of Marketing for HydraFacial).
It was B2B2C marketing at its best: marketing that was radically different than anything you would typically find in traditional beauty and skin care.
When you’ve successfully created a new category and you’re the category queen, you’re the only one.
Which is what makes your marketing and messaging efforts so powerful.
You speak with a different level of authority when you're royalty.
The reality is, no customer likes to be sold to. And when you put the brand first, you’re selling. When you try to “hook” customers with clever marketing, you’re selling. But when you market the category, and the category is something people have never heard of before—and it’s new, is radically different, provides transformational outcomes, etc.—suddenly you are seen as authentic. You are seen as educational. You are a missionary on a mission. You’re the O.G., the real deal.
Instead of talking about yourself (brand/company), you want to talk about the customer in the context of this new and different problem (evangelizing the category).
Of which you happen to be the only solution.
Lever 8: Radically Different Profit Model
“How can we make money that is radically different from others?”
Lever 8 is the lever with the least amount of differentiation for the vast majority of companies.
Ford vs. Ferrari was a great contrast that made for a fun movie, but while the companies, products, brands and executives are radically different, their profit models are identical. They make cars and sell them. The same is true for Tiffany & Co. and Zales, Opus One and Charles Shaw (Two Buck Chuck) wines, a 3-star Michelin restaurant and McDonald’s—make food, sell food.
Given that, Lever 8 may also be the most powerful way to differentiate.
For example, Steven Spielberg’s production company just signed a deal with Netflix. How is it possible that one of the world’s greatest and most successful movie makers signed a deal with Netflix? It’s because Netflix has a subscription profit model whereas the movie industry is fundamentally a transaction based model. Steven Spielberg can make movies the way he wants to without worrying about the “box office” at all. That’s radically different.
Or, why does Starbucks try to get you to use your app to pay for its coffee? Because it allows the global coffee retailer to create a financial services profit model. Consumers collectively give Starbucks $1.4 billion to hold, making Starbucks a good sized regional bank. For context as to how radically different and powerful of a profit model this is, in fiscal year 2019 Starbucks earned $141 million dollars on “breakage” (money on gift cards that went unused by the consumer and could be recognized as revenue). Said differently, Starbucks earned 10% on an interest-free loan from its consumers.
Is Starbucks a coffee company? Or a bank?
The answer is yes.
What can we learn from Netflix, Costco and Starbucks vis-a-vis profit models?
If you have the same profit model as everyone else, you’re doomed to commoditization.
If you only have ONE profit model versus multiple, you’re as screwed as a boxer trying to fight an MMA fighter (as we wrote about here in HBR).
If your profit model is based on transactions vs. lifetime value, you’ll always worry about your customers leaving you for a handsomer, younger, and richer version of you.
If you don’t know and aren’t in the 9 other categories your Supers are also Supers in, your marketing will always be a cost center versus a profit center.
If you don’t have a strategy to turn every line-item expense into a revenue generator like Amazon, you will always be looking over your shoulder for Amazon to take away your business.
In an analogy, your profit model is the Royce Gracie of the early days of the UFC. Without differentiation, you will be submitted into tapping out regardless of how big, strong, and good you are at your one fighting style.
Can any retailer compete with Amazon? No, because they don’t have AWS.
Can any movie company compete with Netflix? No, because subscriptions allow you to monetize your content over decades, not just a few weeks at the box office.
Can any car company compete with Tesla? No, because Tesla makes money in a half-dozen ways, not just by after-market servicing and replacement parts like legacy ICE manufacturers.
Lever 8 makes other companies say, “That’s not fair.”
And they are right. Which means for your differentiation moat to be the defensive force you hope it to be, you have to get this lever right.
How you make the money, matters.
Each one of these levers creates a little bit of distance between you and the legacy category.
Notice we are not saying, “Between you and the legacy brand” or “You and your competitors.” Your goal is not to out-compete the competition. That’s a race to the bottom. Your goal is to clearly, articulately, and specifically differentiate yourself from the legacy category—and then widen the distance between the old and new in these 8 core areas.
Think of these 8 levers as extensions of your category point of view, and as a powerful mechanism to move the world from the way it is, to the way you want it to be.
*Note, you don’t necessarily have to solve for each of the 8 levers. Start with a few key levers, especially ones that give you the most leverage in the near term, and look for the levers your category Superconsumers will pay a premium for. Try to have at least one lever on 1-4 and another lever on 5-8, so you have both a breakthrough offer and breakthrough business model levers working in conjunction. And always revisit Lever 8 (profit model) to see what else is possible.
Then once you have momentum, systematically differentiate every other lever.
And if you really want to get meta with us, look at these 8 levers as core business functions that have the potential to be re-designed through a category lens. When you do that, everything changes when you talk about Manufacturing or Pricing or Distribution, for example.
The seminal mindset here is when you look at any function in your business, ask yourself, “How does this function contribute to us designing and dominating a radically new category?”
If you don’t find a good answer, it might be time to re-evaluate the function.
Let us give you one final example.
Years ago, Pirate Christopher was advising a software company that sold directly to users as well as large corporate licenses.
This is what many in Tech call “land and expand.” The small individual sales are seeds that can turn into major enterprise deals.
For several quarters this company’s direct-to-users business was declining. The CEO became frustrated. He decided to spend some time with the inside sales team to see if he could spot the problem. Then BOOM. It became very clear, very fast. The company had hired a new finance manager, and that manager thought he was doing his job when he made the credit application process more rigorous—with the goal of decreasing accounts receivable write-offs.
But without realizing it, the finance team had created a revenue prevention process.
Approximately 20% of prospects chose not to buy after getting their credit check documents.
So, the CEO immediately changed the process. No more credit check. “When customers want to buy, let’s ship it to them! The more people using our software, the better. So what if a few of our customers don’t pay their bill!”
In this case, the CEO understood his job was to expand the category and thus the long-term revenue potential for the company. The more people using their stuff, faster, the better off they’d be in the long term (even if a few didn’t pay). Which shows us how even finance can change when looked at through the category lens.
The more levers you push and pull, the more water in your moat, the further you distance yourself from any and all competition. Because you don’t do what they do.
You’ve forced a choice. Not a comparison.
Now, all this might sound overwhelming (“How am I supposed to have all 8 of these levers figured out day one!?”). It’s worth noting that most companies don’t start with all 8 levers firing on all cylinders. Instead, category designers start with focusing on the problem and the two most important levers—Benefit & Experience—and then start to drive differentiation from there.