According to Michel Feaster, a recent guest on the Predictable Revenue podcast, the ultimate expression of a category is when some analyst that moves the market (Gartner, Forrester, DCG) creates a new report following you. This would be the goal of category creation, and a destination to which there are 2 possible journeys. The first is to strategically reframe an existing problem, giving yourself the ability to shift buyer perception and reset the price point of an existing solution. The second is to find a net-new solution to a net new problem. Either way, the result is the creation of a very big, very independent software company. Michel used this framework to found Usermind, and to identify Apptio and Opsware as great companies to join.
THE RULE OF DISRUPTIONS
How do you know when you’ve found a potential new category? Michel has a simple rule of thumb: the rule of disruptions. What Michel looks for are 3 or more shifts that are hitting the same persona that you could build software for. A single shift, like virtualization, for example, is probably enough to build what Michel calls a “tuck in” company – a $100-$200M company founded on a problem that shift creates, though not enough to create a new category.
HOW TO VALIDATE A CATEGORY
Once identifying those multiple shifts happening to the same persona, Michel conducts interviews to gather information from the people on the ground. She meets with hundreds of the persona in question to conduct “day in the life” interviews – interviews that do not lead the witness down a path of assumption, but rather aim to gather basic, factual information about their day. Michel asked the exact same set of questions to everyone she interviewed, and made sure the volume of interviews was high enough that she would get some real data from the exercise.
What Michel aimed to capture through these interviews was a total picture of the persona’s tech landscape, their daily work flow, what they were responsible for in the company, and their challenges.
When you sit down with the data from your interviews and look for patterns of pain points or problems that have a value attached to them, and if a clear pattern of pain points emerges, you have validated this category. This is a great thing to do to validate any market or business – even an existing one.
3. BUSINESS IMPACT
Next, you need to determine the business value of your proposed solution. If you can improve this problem for your buyer, what’s the outcome? Will you increase CLV, minimize churn? Michel maintains that anytime you are thinking of building software to solve a tech problem, you need to look for ROI for the buyer.
Defining your TAM is both an art and a science. To define Usermind’s, Michel estimated what top line impact she thought her solution might have at each business, and validated it with each interviewee. Then, she took some rough guesses at what she thought businesses would pay for it, or how much spend they would redirect to it, with bottom-up and top-down TAM calculations. The key about estimating your TAM is it doesn’t have to be perfect – it’s a sum of ballpark figures and hunches you’ve confirmed when speaking with potential customers – it just has to be directionally accurate, and big enough to justify building your business and attract VC backing.
Over time, your approach to pricing and TAM will change. In the early days in a new category, Michel knows you can only convince people to pay for about 1% of the total value you provide them. But as your brand grows and you get more references, you begin to capture value better and better. This is why you, as their ability to command price increases over time, you see software companies increase.
We don’t use a tissue, we use Kleenex. The category king becomes Kleenex, and the goal of creating a category is to give yourself the opportunity to become the Kleenex of that space. But how?
Michel and her co-founder spent some time whiteboarding the technology needed to solve the problem they’d identified and boiled it down to 3 core capabilities. Now she needed to make sure it was differentiated. For Michel, differentiating comes down to 3 themes:
- Time Horizon
- Is anyone out there close to doing this? If you launch and 6 months later 20 competitors launch, you’re going to have a tough time breaking even.
- Do you have enough time to bake your differences and make them work? Being early to an idea or category means you can stay in stealth until your product is ready.
- Are people ready for the solution you’re offering? If you’re too early, people may love the idea of your solution but not be willing to pay for it.
- The most differentiated companies don’t just have a differentiated technology but a differentiated narrative. Your narrative to a buyer shows them why your solution is important and why they should care about it.
- Is your solution different enough from the existing ways people are dealing with this problem?
- How hard is it to copy?
- Can you stay in stealth long enough to keep your IT secret?
- Can you set the landscape?
- Can you define a narrative?
As mentioned above, TAM is constantly evolving, and you may not get it right before you launch your product. Michel likens it to constantly turning a rubix cube to improve your business model, find different verticals, increase value capture. You have to go to market, see where you get traction in the real world, and adjust accordingly. From these learnings, your price point and sales channels/methods will emerge.
OVERVIEW + EXAMPLE
That was a lot to take in, so let’s take a look at that framework in the context of building Usermind. “Usermind, the leader in Experience Orchestration (XO), is changing the way enterprises use what they know about customers to actively shape experiences in real-time. With Usermind’s XO Platform, enterprises can monitor customers and orchestrate 1:1 experiences across channels, systems and teams.” (LinkedIn)
Disruptions: The multiple changes happening to the same persona back in 2013 were:
- Mid-market businesses were buying a lot of software
- SaaS software all had APIs
- There were new operations teams being formed to manage all of the tech
Interviews: Michel held over 300 interviews with mid-market ops personas in varying industries to identify a common pain. She asked the same series of questions including:
“When you walk in in the morning, what is the first thing you do every day?”
“How many applications do you log into on a given day?”
“Which applications do you love and why?”
“If there was a problem I could solve for you, what would it be and why?”
“Who do you report to?”
“What are your MBOs?” (Management by objectives)
Pain: Every day these personas had to log into 6 or 7 different systems and the data didn’t connect together. So mission-critical journeys like customer onboarding didn’t live anywhere in particular.
Business Impact: If Usermind could consolidate those systems to improve the customer onboarding journey, buyers could decrease churn by 2% and increase CLV.
TAM: Michel estimated mid-market companies would pay up to $25k for this, and companies 10x their size would pay up to 5x for it. Because this problem was prevalent and vertical agnostic, they had a large TAM.
So they had a high-value product with a large ACV, and a large TAM, Michel knew the category was validated and the product was worth building.
Differentiating: Usermind’s software contained a differentiated stack. The architecture was complicated enough that it would be difficult for other companies to replicate if they did decide to pivot into this new category. The core capabilities of the software were:
- Integration software that would connect various systems together
- Event-driven workflow engine: smart software doing a lot of the manual steps
- Experimentation, optimizing on an ongoing basis: analytics and optimization platform
BONUS: Identifying what kind of early-stage company you should join
If you have an established career, joining an early-stage company is high risk. If you are assessing multiple opportunities, Michel suggests you look for 3 things at each company:
The quality of the money. Who backs this company? What is the quality of the money the team, product, and market have attracted? If it has venture funding from a top 20 VC, smarter minds than yours have already assessed the startup for you and determined it a worthy investment. If the funding comes from a VC outside the top 20, what were the founder’s motives behind taking the money?
The market. Michel sees this as a combination of the TAM and the go-to-market strategy. If a company can’t explain these things in detail, they don’t know their market.
The team. How experienced are the people? Do the leaders know how to raise money, hire, and sell? Answer these questions to determine why this team will be successful.
As you peel this back you’ll find the opportunities for your skillset and discover whether you want to join or not join this company. If you’re early in your career, the answer is slightly different. In this case, Michel suggests you join a big company to learn how to work and learn what success looks like. Associate yourself with great brands early in your career and you’ll always get an interview wherever else you go.
Michel has used this framework to build and join multiple highly successful software companies and to identify the fast-growing startups to which she should lend her expertise. Her ideas go one step beyond product-market fit, to category creation. While the paths to category creation may vary (either creating a net-new solution, or reframing an existing one) the ultimate goal and ultimate result is building a huge, public, independent software company followed by analysts. If you keep this framework in your back pocket you’ll be equipped to build a product that shakes up entire industries or to find the most promising startups to join.
More resources on product-market fit:
NO TIME TO READ?
Experience and a lot of testing have shown us that it is possible to create email templates that people actually resonate with.
You don’t have to figure it out alone, whether you’re starting off as a sales representative, looking to improve your game or providing your team with expert advice, we have your back!