The Magic Triangle: Why Category Design Is The Single Point Of Failure

No category, no meaningful company.

Arrrrr! 🏴‍☠️ Welcome to the free edition of Category Pirates. Every Wednesday, we publish radically different ideas with the goal of helping you create, design, and dominate your own category—in business and in life. If you enjoy this letter, we encourage you to check out some of our other favorites:

1. Miami & Austin Are Wreaking Category Violence On Silicon Valley

2. Tesla Superconsumers Are Making Millions—Because They Have An Information Advantage Wall Street Doesn’t

3. The Value Of Bitcoin Most People Can’t See

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Dear Friend, Subscriber, and fellow Category Pirate,

Have you ever noticed how often business and marketing content is stuffed with prescriptions? 

Stuff like, “The 7 Things Elon Musk Does Before Breakfast” and “Why Steve Jobs Wore Boxer Shorts, And You Should Too.” We’ve become a culture of quick tips, growth hacks, and short-term solutions where the primary value being given to the reader is the answer.

Not a reframing of the question.

In reality, the entrepreneurs, innovators, and artists moving the world forward are unconcerned with other people’s Tip Of The Day. They are thinkers who believe that thinking about thinking is the most important kind of thinking. They want to be given questions to consider (because questions spark thinking), not surface-level conclusions to nuanced and complicated problems.

And since we believe you are that sort of person (you are reading Category Pirates, after all), we do not want to sit here and try to give you quick-tip-answers.

Instead, we want to give you frameworks, mental models, and new ways of seeing the world. Becoming a Category Designer means thinking in orthogonal ways, which is why our goal with these letters is to help you consider new and different contexts to old and commonly accepted problems.

Previous letters covering various frameworks include:

• The Business Case For Becoming A Category Creator

• The Category Design Scorecard

• How To Design A Category Breakthrough

But today, we’d like to introduce you to a new lens for interpreting the business world.

A lens that can dramatically improve your odds of becoming a Category King or Queen yourself.

Because once you see the world through what we like to call “The Magic Triangle,” you’ll never see things the same way again.

“The Magic Triangle”

The Magic Triangle is the combination of product design, company design, and category design—each side with equal importance, ideally executed at the same time.

• Product Design: The purposeful building of a product and experience that solves the problem the category needs solved. The goal here is what the business world traditionally calls “product-market fit”—which we see as strategically flawed thinking. What you really want is “product/category fit” (which we’ll clarify later in this letter).

• Company Design: The purposeful creation of a business model and an organization with a culture and point of view that fits with the new category. The goal here is company/category fit, meaning you have engineered the right business model and missionary team for the problem you are looking to solve.

• Category Design: The mindful creation and development of a new market category, designed so the category will pull in customers who will then make the company its Queen. In marketing terms, this is about winning over popular opinion, and teaching the world to abandon the old and embrace the new.

All three elements—company design, product design, and category design—work together and balance each other to exert great force on a company’s success and value. And the legendary, enduring companies get the three elements of company design, product design, and category design in such a state of synchronicity that they reinforce each other.

Finally, the elite Category Kings & Queens recognize that each area of The Magic Triangle generates data about the future of the category. Most companies with data scientists focus on gathering data about the product to improve the product. Or, they gather data about the company to improve the company. Or, they do “deep data dives” on customer behavior for the myopic purpose of improving “customer experience.” But very few companies gather and leverage data naturally generated by their products and company to forecast the future of the category.

This is what we call the Data Flywheel, which creates momentum for all three sides of The Magic Triangle: 

• The product

• The company & underlying business model

• And the company’s leadership position in their chosen category

When entrepreneurs successfully prosecute this Magic Triangle, they change the world.  

The big question is, “How?”

Product Design

Great products, alone, rarely become category queens. 

In Silicon Valley, there is a disproportionate amount of emphasis placed on product design. Companies that believe in mantras like “the only thing that matters is having the best product” are often the ones that fall into category comparisons. They compete in existing market categories, unconsciously playing a game designed by someone else (and their own respective POV of the rules of the category). As a result, they become great “next-best” alternatives, but rarely innovate in a way that forces customers to leave the legacy category behind and become loyal customers or users of a radically new and different category of product.

The latest iteration of this type of lunacy is what founders and investors are now calling “Product-Led Growth.” The idea here being that if your product is “good enough” (to which we would yell back: “IN COMPARISON TO WHAT?”), marketing will “take care of itself.”

And the reason we think this-type-of-thinking (remember: thinking about thinking is the most important type of thinking) is flawed is because history tells us so.

Arguably the most consequential product ever invented was the wheel. 

What most people don’t realize is that it took over 300 years (and, as Pirate Christopher likes to say, “And a bottle of whiskey Jack and a bag of Mary Jane”) for somebody to tilt the thing on its side and use the wheel for transportation. Before that, the wheel was only used for pottery. So, if the greatest product ever could not speak for itself, then what makes today’s entrepreneurs think their product (in and of itself) will drive its own growth? 

More importantly, why leave it to chance?

One more “the best product always wins” cautionary tale before we move on:

Segway

You know the saying, “Don’t reinvent the wheel?” 

That’s just another way of saying, “Don’t just build a better-faster-cheaper-smarter product.”

In 2001, TIME wrote a piece titled, ironically, Reinventing The Wheel. The article was an interview with Segway founder, Dean Kamen, who ambitiously predicted that Segway Co. would be “the fastest outfit in history to reach $1 billion in sales” and would “be to the car what the car was to the horse and buggy.” And, to be fair, Segway’s patented, non-medical, self-balancing technology was considered a breakthrough innovation.

But if Product-Led Growth is such a truism, why didn’t the Segway take off?

In the context of The Magic Triangle, Segway might have created a breakthrough product, but the company certainly wasn’t innovating on the business model side. The company was a far cry from the business models of Bird or Lime scooters that would emerge 15 years later, allowing passers-by to unlock a nearby scooter with an app, get charged automatically to their credit card for each minute or mile, and then freely leave the scooter for the next person at their destination. Instead, Segway was trying to sell each scooter individually for anywhere from $3,000 for the consumer model, all the way up to $8,000 for industrial-strength models for institutions like the U.S. Postal Service, General Electric, and even National Parks. 

That was problem number one.

Problem number two was that Segway had no category design.

Nobody knew what to call “this new category” of transportation.

Was it a replacement for a car? Well, no, because you can’t take a Segway on the highway. Was it a replacement for a bike? Well, no, because although it had tremendously powerful self-balancing technology, it wasn’t suitable for most biking adventures. Was it a replacement for a scooter? Supposedly, considering it was often referred to in the press as a “superscooter” and lobbyists had been hired by the company to “persuade state legislatures to rewrite their laws to permit Segway scooters to operate on city sidewalks.” Which meant the product wasn’t actually evangelizing a new category. It was just a “better, faster, smarter, stronger” attempt at product innovation aimed within the existing scooter category.

No new category design. 

No new POV. 

And no framing, naming, and claiming of a new and different future for customers.

Company/Business Model Design

In addition to building a breakthrough product, there also has to be some sort of innovation on the company/business model side that allows the product to remain separate from any direct competition. 

Here’s a good way to think about whether or not you’re innovating on the company/business model side of The Magic Triangle:

• Do you make money when good things happen to your customers/consumers/users?

• Or do you make money when bad things happen to your customers/consumers/users?

When you forget that you’ve overdrawn your bank account and Bank of America or Wells Fargo charges you for that mistake, that means the company is making money when bad things happen. Very little innovation happening there—and reveals an exploitable vulnerability in this legacy category. 

Meanwhile, when you order Indian food for dinner and it arrives at your door within a reasonable amount of time, hot, well-packaged and ready to serve, DoorDash makes money. The restaurant who sold you the food through DoorDash makes money. And you (the customer), are happy. Lots of innovation happening there—making it an exciting, emerging category with potential for other category designers to add even more value to the supply chain.

So much of the onus placed upon the shoulders of founders, executives, and participating investors is focused on product innovation, when company/business model innovation can be just as powerful (and exponentially more so when combined with the other sides of The Magic Triangle). 

• Netflix charging per month (with no late fees) versus Blockbuster charging per rental (and making money off late fees) was a business model innovation. 

• Salesforce charging companies a subscription fee instead of selling higher-ticket, one-time products (which was the status quo in the late ‘90s and early 2000s) was another. 

• Tesla refusing to partner with car dealerships and sell their vehicles at fixed, easy to understand prices was a third.

The list goes on.

The key here is to approach the business model with a missionary mindset opposed to a mercenary one.

Missionaries see the future category as a land wherein “everyone wins,” and strive to create something completely new that unlocks abundance for all parties involved: customers, employees, and investors. Mercenaries, on the other hand, just look to maximize money, and seek to monetize and exploit.

Said differently, Category Designers look to make money in fundamentally different ways than other businesses in their industry. They innovate in the gaps between where the category is and where it should be, and add value in places others failed to see (or decided were inconsequential). We see this today, more than ever, by the amount of entrepreneurs and Category Designers who are as focused on “impact” or conscious capital as they are building a profitable business. In this sense, they are prosecuting The Magic Triangle in a radically generous way.

Doing this, in addition to breakthrough product design, is what allows you to separate yourself further and further from any and all competition—creating the perception of being irreplaceable. 

Category Design

The third and most important side of The Magic Triangle is the foundation upon which breakthrough product innovation and breakthrough company/business model innovation stand.

Your company needs a category to market itself within.

This idea has become terribly misunderstood over the years, so let us clarify:

You DO NOT want to market within an EXISTING market.

Instead, you want to create a NEW and DIFFERENT category/market, which you now have free reign to market WITHIN.

Conventional startup wisdom goes like this: 

1. Take a big market

2. Go after a proven or growing niche with a “Be The Best” product strategy

3. Create an MVP (Minimum Viable Product)

4. Validate customers want this product (any desirable metric will do)

5. Load up on funding & out-spend your competitors, convincing customers to use your “We’re The Best” product instead of everyone else’s

We would argue this is an unfathomable waste of time, usually money, and creativity.

Product-market fit is one of the most dangerous ideas in entrepreneurial history. It tricks people into thinking that success is about “fitting” INTO a market. Or worse, that the path to success is about making a product, showing it to people, and if they like it/buy it, continuing on in that direction. (“If the dogs eat the food, we’ve got a winner. Right?”)

But that’s not the path legendary people and companies take.

The world didn’t know it wanted a computer in their cell phone—until Steve Jobs showed them the world through that new and radically different lens. Those of us who grew up in the 70s, 80s, and 90s remember our parents telling us, “Don’t get in a car with strangers.” Today, we pay strange cars to come get us (with our expensive, easily stealable cell phones) and get frustrated when they don’t arrive fast enough. Legendary companies, legendary innovations, and legendary category designers do not care one iota about “fitting” into an existing market—so they don’t even try.

For market-share-chasing private equity investors, this sounds terrifying (“We’re going to waste a bunch of money creating something we don’t even know if people will want!”).

But for trailblazing venture capitalists and angel investors, this is music to their ears. 

Legendary investors back entrepreneurs in zero-billion categories. 

What you are trying to achieve is Maximum Viable Category.

Or, as we’re now going to call it, MVC.

Listen to the words “Minimum Viable Product.” Say it slowly.

Minimum.

Viable.

Product.

Imagine using those words in any other context. 

Imagine telling your significant other, “I’d really like to create a Minimally Viable Relationship. I hope we can raise Minimally Viable Children.” Imagine telling your boss, co-worker, or co-founder, “I’m going to do a Minimally Viable Job today.” Imagine telling your family you plan on cooking a Minimally Viable Thanksgiving dinner this year. 

Minimum Viable Anything is a waste of time—and sets you up for playing a comparison game in the market. “How does this compare to what you’re currently using? Do you think, if we keep making this better, you’ll make the switch?” (And remember, every time you say “better,” you’re asking to be compared.)

Instead, your goal—as an early-stage startup founder, or executive within a large organization looking for new ways to grow—is to play the game of category discovery (we will explain this in more detail in a future letter).

1. What new niche within an industry where we have strong interest/expertise hasn’t been created yet? 

2. Is this niche compelling? Do we have data or insight telling us there is a strong headwind blowing in this direction?

3. Is this niche specific enough to customers? Are we drilling into what exactly this new and different problem is? Will they “get it?” What POV will educate them so they do “get it?”

4. Does this niche have growth potential? What if we’re right? What might the world look like if this niche becomes the new and commonly accepted way of doing things?

Starting with these types of questions (unconstrained by any existing market) and playing “The VC Game” will help you design a category breakthrough.

Then, once you’ve determined where there is an opportunity to CREATE (not “compete”) a new and different future for customers/consumers/users, of course be smart about product development. Create an alpha version. Expose it to a small number of people you trust—ideally your “superconsumers.” Make improvements. Add features. Launch a beta program. Expand the number of people using/testing the product. Etc. And then, once you’ve refined the problem you are solving and the radically different solution you are creating for the world, THEN launch a Maximum Legendary Product in a new category that differentiates your breakthrough product. 

But please, pretty please (with tequila on top) do not fall into the mental trap of product-market fit.

That is the stupidity that kills startups and innovations.

The Data Flywheel

If you are successful at prosecuting all 3 sides of The Magic Triangle, you will unlock a company’s most valuable asset: your data flywheel.

Technology is one of the most common ways of achieving radical differentiation. ”It’s not just a refrigerator, it’s a smart refrigerator!” Unfortunately, entrepreneurs and executives alike make the mistake of thinking “data” can only be leveraged within a “technology company”. 

This couldn’t be further from the case. Every company is a technology company now.

Data is the culmination of insights you capture from your category, customers, competition, and your opportunistic lens on how to best use those insights to expand your category, create a new category, and/or partner with other companies in order to achieve one of these two outcomes. (Data flywheels are also how you can anticipate the direction of future headwinds and tailwinds.)

And it goes round and round.

1. A breakthrough product, combined with an innovative business model, framed within a new and different future for the customer/consumer/user has the highest likelihood of becoming a Category King or Queen.

2. Once a Category Queen is established, data accumulation creates an “unfair advantage” for the company.

3. This “unfair advantage” means the Category King or Queen is best positioned to take advantage of the next “category creation” opportunity.

And so on, and so forth. 

Let us give you a perfect case-in-point of how a company’s data flywheel can create massive category advantages.

In Harvard Business Review, we wrote about a company called Axon Enterprise, Inc. (which may not be well known, but it’s breakthrough product—the TASER—is well known). 

This is the device used by law enforcement that shoots electrified wires to stun and disable a subject. Axon’s mission is to make bullets obsolete—that’s the company’s unique POV. To realize this vision, and to move law enforcement as an industry from the way it was (“Bullets are the only way to stop a subject”) to the way they believed it could be (“What if we could temporarily stun them using electricity instead?”), they created a breakthrough product, the TASER M26, and hired a former Marine named Hans Marrero to demonstrate and personally sell it. 

And by 2004, Axon had successfully created this new category of law enforcement (non-lethal weapons), gone public, and reached $60 million in revenue.

Then, something exciting happened. 

In 2008, Axon Enterprise, Inc. unveiled its newest innovation: the Axon Pro. 

No longer only creating in the “non-lethal weapons” category, the Axon Pro was a head-mounted body camera with capabilities to upload footage to the company’s web-based service, Evidence.com. This was a step forward for the company, using their expertise in one category to inform how they would continue redesigning adjacent categories.

Their thesis was simple: law enforcement and everyday people didn’t just want safer weapons. 

They wanted transparency. 

They wanted to know what happened in the final seconds of a controversial moment between a police officer and a suspect. And most of all—judges, especially—wanted a better way of solving the classic case of “he said/she said” and the age-old argument of self-defense.

By 2015, Axon Enterprises, Inc. had come to realize this second, adjacent, new category of law enforcement transparency had even more potential for growth than even non-lethal weapons (discovered through the insights they were gathering internally—their data flywheel). On-body cameras and the data they captured as a result were a weapon for good, and Axon Enterprises, Inc. was the company creating, designing, and defining what this category of weapons should look like, along with its measures and metrics for success. 

With more than 600,000 TASER weapons in place, 100+ patents, and 200,000 lives saved from death or serious injury using non-lethal weapons instead of traditional guns, Axon was able to leverage their category dominance to create and own more than 80% of the adjacent, newly designed, body camera market share among police departments. This has enabled them to grow revenues from $268 million to $420 million from 2016 to 2018, at a 15% EBITDA margin. Axon also has a $3.5 billion-dollar valuation—7x revenue and 159x EBITDA. And this might seem insane to the average banker, until you realize their total addressable market (TAM) is $8.4 billion, of which they are unquestionably the Category Queen. 

Now, could someone else come up with a “better stun gun?”

Sure, but it won’t matter unless they can replicate or create a superior flywheel to anticipate where this category (of which Axon has the strongest leadership position) should move next. 

More importantly, this new competitor would need to executive all three sides of The Magic Triangle—breakthrough product innovation, breakthrough company/business model innovation, and breakthrough data flywheel giving insight into the future of the category—all at the same time. 

Highly unlikely. 

Which is what makes beating Category Kings and Queens at their own game an insurmountable obstacle, regardless of whether or not they were the first mover—so long as the framing of their category holds true.

The Magic Triangle: Why Category Design Is The Single Point Of Failure

Now, let’s tie this all together.

Every company faces 3 risks when forging their way in the world:

• Execution Risk (“Can we create a meaningful product in the time frame that matters?”)

• Competition Risk (“Are we the team and business capable of winning the category battle?”)

• Category Risk (“Are we Naming & Claiming the category wherein we are the undisputed King or Queen?”)

However, when it comes to prosecuting The Magic Triangle, there is only one single point of failure. 

You can get the product wrong and tweak it over time. You can get the company/team/business model wrong and tweak it over time. But if you get the category wrong, you’re finished. 

Let us give you one final example.

Lululemon is a sub-par company with a largely undifferentiated product.

Leggings have been around since 14th century Scotland.

What changed over history wasn’t just the product itself, but the context—that is to say, the category.

• Leggings for dancing

• Leggings for casual outings at the beach

• Leggings for workout classes

• Leggings for yoga

• Etc.

When Lululemon was founded in 1998, “leggings for yoga” was the category. But then an interesting thing started happening: yoga practitioners would wear their yoga pants after class to go grab a smoothie, or a coffee, or lunch down the street. The pants had left the building. Now, they weren’t just “yoga pants.” So, what were they?

Lululemon framed this specific problem (“What do I wear that is both functional for exercise and suitable for leisure activities?”), and designed a category around it by Naming & Claiming their products as “Athleisure”—and the rest is history.

Meanwhile, here’s what DIDN’T cause the company to fail: 

1. Lululemon founder Chip Wilson saying on Bloomberg that “some women’s bodies don’t work for it” and how, if your thighs are too big, you aren’t Lululemon’s target customer.

Nevermind the fact that Lululemon, one of the most successful women’s clothing brands in the world, was started by a white misogynist male (Victoria’s Secret syndrome). Or the fact that Chip Wilson, the company’s founder and CEO for the first 15 years, had to step down in 2013 due to the impact his insensitive remarks towards women were having on the perception of the company. (Business Insider even felt the need to curate his most outrageous remarks in an article titled, “8 Outrageous Remarks By Lululemon Founder Chip Wilson.”)

Even still, the business dominated the athleisure category for more than two decades—and today is the undisputed Category Queen—despite the monumental problems it has faced on the company side of The Magic Triangle.

Because once people “see” the new category, and come to the conclusion they want it, they can’t unsee or unwant it.

Even from a lousy company.

2. Lululemon’s products being largely undifferentiated—and at the same time, more expensive.

When all you have is product differentiation, it’s very difficult to maintain a leadership position.

Finding a Lululemon knockoff is not difficult. Do a Google search and you’ll find lists like “The 10 Best Lululemon Dupes You Can Score On Amazon”. So then why are customers loyal to Lululemon? More importantly, why are customers willing to pay a premium? Is it because of their amazing, honorable, female-empowerment-focused brand? Well, we know that can’t be true because of point number one. Chip Wilson was hardly “the hero women needed,” and Lululemon as a business hardly stands for anything meaningful in the world. 

This is the other side of The Magic Triangle: product design. And while it’s important, knockoff competitors are inevitable in nearly every industry. If all you have is “the best” product today, what do you do when someone else comes out with an even-better product tomorrow?

Or, as they so eloquently put it in Something About Mary, “You heard of 8-minute abs? Well this is gonna blow that out of the water: 7-minute abs. Think about it. You walk into a video store. You see 8-minute abs sitting there. There’s 7-minute abs right beside it. Which one you gonna pick, man?” 

“That’s good, that’s good. Unless, of course, somebody comes up with 6-minute abs. Then you’re in trouble, huh.”

(A stunning number of founders and CEOs are in the 7-minute abs race to the bottom.)

3. Lululemon regularly missing quarterly earnings projections and underperforming investor expectations.

Lululemon went public in 2007. 

A year later and there was already a feeling of “Starbucks Syndrome.” Investors started calling it “the most overvalued stock in the retail universe” (a neon sign showing how Wall Street does not price companies through a lens of “existing market share viability” and not category potential). At the time, Lululemon’s stock had “surged to a high of $60.70” before plummeting down to $30. 

7 years later, the company’s stock price had climbed back into the $50-$66 range, but general consensus wasn’t much better. 

In 2015, Fortune wrote, “Lululemon Athletic reported a lower-than-expected quarterly profit as bloated inventories and spending on international expansion squeezed margins. The Vancouver-based company’s sportswear, once popular with health conscious ‘yoga moms,’ has been losing out to companies such as Nike (NKE) and Under Armour (UA) that are focusing on the athleisure trend.”

But fast forward, and we see how despite these mistakes (both on the product side and the company/business model side), the company’s category design won out.

According to CNBC, “A $1,000 investment in Lululemon in 2009 would be worth nearly $20,300 as of September, 2019, for a total return of 1,929%. In the same time frame, by comparison, the S&P 500 earned a total return of nearly 260%.” The share price of Lululemon at the time of that writing was $197.

Today, Lululemon’s stock is at $326, with a market cap of $44 billion.

When you have clarity on the category you are trying to create and design, breakthrough product innovations and breakthrough business models innovations are good but, to be blunt, not always essential.

But when you don’t have clarity on the category, no amount of product-tweaking or business-model-banging is going to make a difference.

Legendary entrepreneurs and innovators design new categories for their breakthrough products and business models to live within.

• No Cubism, no Picasso.

• No Reggae, no Bob Marley.

• No Electric Vehicles, no Tesla.

• No Athleisure, no Lululemon.

Arrrrrrr,

Category Pirates

Eddie Yoon

Nicolas Cole

Christopher Lochhead

PS -- Next week, we’re going to be digging into another important framework which Pirate Eddie wrote about in his book, Superconsumers. The idea being, although small in number, the superconsumers of your company (~10% of total consumers) can drive anywhere from 30% to 70% of sales, and are usually willing to spend considerably more than the average consumer. Stay tuned for next week, because this letter is going to be 🤯🤯🤯.