Episode 12 - How Disruptive Startups Embrace Category Design To Dominate Markets w/ Dave Peterson of Play Bigger

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Episode 12 - How Disruptive Startups Embrace Category Design to Dominate Markets w/ Dave Peterson of Play Bigger

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Dave Knox: I'm your host, Dave Knox, and this is Predicting The Turn. A show that helps business leaders meet their industry's inevitable disruption head on. Welcome to another episode of Predicting The Turn. Today, I am joined with Dave Peterson, one of my favorite guys in the world when it comes to the world of category creation. Dave, welcome to the show.

Dave Peterson: Hey Dave, thanks for having me. We're in Club Dave, so always excited to partner up with you on that.

Dave Knox: In deed. It's always a good club. Well, I want to dive right in, because I love starting with your story. How did a guy from the middle of Iowa end up in Silicon Valley helping some of the biggest names in technology to design and dominate categories that change the world works?

Dave Peterson: Yeah. Well, I think that's a generous [inaudible 00:00:53], but I'll do my best. It is funny though. You look back and say, "Wow, that was an unlikely path," which I think most of us follow in life and business and such. Yes, indeed. Can I start off? My whole world started off in a little town called Sheraton, Iowa in the middle of Lucas County, Iowa. And I didn't know it at the time, but even back then I was surrounded by categories, so it's kind of funny. Looking through this lens now I can realize even back then there were these great companies that were inventing new ways to solve problems. In particular, I remember when I just got out of college way back in '92, so that will age me properly, I was working for an ad agency or a marketing agency.

Dave Peterson: One of my clients was this company called Vermeer Manufacturing. If you ever seen that brush chipper on Fargo, that's the company that made that brush chipper. They were infamously associated with that movie scene, but Gary Vermeer has since passed. But he was this famous farmer who basically solved problems by inventing new categories of heavy duty equipment. Their shipper was the easy way to cut a tree. In particular, the other story I like to tell is that, if you ever drive through the Midwest, and you ever see those big round hay bales, well, that was Gary Vermeer. He realized the problem with baling hay was it required a crew of 20 people and backbreaking labor. [inaudible 00:02:24] wouldn't it be easier to use a tractor and one person? So, he created the one-person baling system, which basically changed the way the agricultural world works.

Dave Peterson: Again, it started with a simple problem, baling hay, it's too hard, and then turned into an entirely new category. I didn't look at the world back then like that, but I can circle back and see, even back then I was surrounded by categories and then the long story hopefully short is, somehow some way I had a connection with a friend who asked me to come out to the Silicon Valley in the mid 90s, right when the internet came out. I admit, I didn't even know how to use a web browser. I thought email was interoffice, I didn't know you can email people externally outside of AOL. I was about as big eyed and fresh faced as you could get. Somehow, I walked right into this whole category world at a company called Vantage Corporation. It was one of the early companies in the CRM space before there was CRM.

Dave Peterson: I got to work with the team there that was not just building a great company, it was also realizing we were in a category war with a bunch of other companies. Ultimately, the one that won that war was a company called Siebel Systems. It was really the first time I ever felt the impact of business of, no matter how hard you work, no matter how hard you sell, market, or no matter how good your products are, a category can defeat all of that hard work and great products.

Dave Peterson: And that's what Siebel Systems did when they rolled up all the subcategories and creating CRM. That was my big awakening moment, and then I always carried that lesson around early in my career and it sort of, weaved me through many, many operating jobs. I founded a company, I serve as the CMO in a lot of different companies, in different sizes, from publicly traded companies to startups. And then, one day I decided to stop working in one company at a time and see if I could help build a portfolio of companies. That's how we started Play Bigger back in 2011.

Dave Knox: Awesome. It's been a fun journey. Let's talk a little bit about Play Bigger. That is the name of the book that you helped to write, but it's also the advisory firm that you started. So, what is this concept of Category Design that has been that thread in your career and really is at the heart of Play Bigger?

Dave Peterson: Yeah. If we were having a discussion about categories prior to the book coming out in 2016, it would have been a long discussion, very interesting, in the abstract around this notion that we look at the world through this lens of what we call "The magic triangle," which is company, category and products all move together. We feel like a lot of companies, at least in the tech space, really didn't pay attention or feel like they had any right to control or define their categories that they operated in. At a simple level, a category is ultimately the proxy to what problem you solve, and the categories are the way that people sort of navigate the world. One of the examples we give quite often is when we're talking about this is a grocery store.

Dave Peterson: If you're handed a big list, at least when I get handed a list from my wife to go cook dinner, you walk into a grocery store and the only way you can navigate a grocery store are categories. Due to the organic bread section you spent 15 bucks on a loaf of bread, or you have to get to all the different items inside the grocery store based on the categories. That makes sense in the consumer world, but it never really made sense in the tech world. So, after doing this as operators in 20 years and then after working pretty hard at Play Bigger from 2011 to about two thousand call-it 14, we just heard a lot of people say, "You guys have a lot of great ideas and you do a lot of good work, but why don't you write a book?"

Dave Peterson: And that is quite an endeavor and an easy thing to say and a hard thing to do. Then, a long story longer, we decided to write a book but we realized we couldn't do it on our own. Met a great guy named Kevin Maney who helped get all that shit out of our head and codified into a process that spilled out into those chapters you can now find embedded in the Play Bigger book. We had dreams and hopes that we sort of codified it in a different discipline you could apply right alongside all the things you are already doing in business. I think that's one of the perception questions we get, is category in addition to all the work I'm already doing. Is it a third job inside my very busy day or does it blend in to what I'm doing? We believe it blends in.

Dave Peterson: You're going to build a great company anyway. You're going to build great products anyway, why don't you take control of the category that will help value and make your products and company makes sense? Since that book has come out, it really is truly, the book title is Play Bigger, but it's all about Category Design and every single lesson we ever learned by our hands-on experience plus 150 to 200 interviews with CEOs, plus a bunch of research around how the economics work, we pushed it into that book and hoped, we joked, we open sourced it because we hoped the world could use it as a bit of a field guide and a manual for taking something back from the industry analysts and putting the steering wheel back into inside the business and build that muscle memory to create these categories for the businesses that you're building. There's been a lot of great companies we can point to that have had a lot of success doing that work since the book has come out.

Dave Knox: In that research we mentioned, one of the things you came across was this 6-10 law, as you can call it, related to the IPO sweet spot. That is important especially as private companies are staying private a lot longer today. Why is that concept the one the investors and founders and everyone else needs to pay attention to?

Dave Peterson: Yeah. Yeah. I really wish I could have a conversation with, as we all say 2006 Dave, because if I would've known back then what I know now, I would've changed my thoughts on how category timing works and ultimately how career timing can work. But the 6-10 law was something we discovered by accident. We had a whole bunch of questions about category economics and, how does a hundred different things like funding, money raised, time, how do these all correlate with how categories naturally developed? We were just doing the research to see if we could come up with some answers, and our data science team came up with this big question mark of like, "Wow," when we looked at funding rounds and the amount of money funded, it really didn't have any impact on the successful categories, or the companies that became category kings."

Dave Peterson: But the one thing that did stand out was, there was this time window, companies that basically went public in the six to 10-year time frame yielded all the economics. And then, if you went public earlier than six years, even if you had a successful IPO, in the long run, you'd be trading at a negative value. And if you went public after 10 years, again, you may have some positive results for your IPO, but in the long run, you would see those results dwindle away. So, all of a sudden we're looking at this giant spike of all the value created post IPO was living inside the companies that went public in the six to 10-year time frame. We were not sure about what were looking at, so we shopped that up and down, took the road with all the venture friends of ours that helped us really come to a conclusion as well as with the big investment banks.

Dave Peterson: Here's the part where I'll have to wave my hands and nobody can see me waving my hands, but there was a category curve model in the book that explains what happens, which is that six to 10-year period is when really a single leader for a category starts to emerge. That leader starts to take all the growth with them and you'll see it as the category economics rise in that category curve. And then that's when you start to see all the competition starting to fade way, which helps boost margins. Growth and margins are two of the things that are highly rewarded for publicly traded companies. We took that 6-10 year window and slapped it right over the top of the category evolution model, which says categories take anywhere from, call it five to 15 years, to evolve.

Dave Peterson: And there was a direct correlation with those two things. That's when we realized, "Wow, there is definitely a window of time that is burning our fuse that is lit when you're building your company and building your products." I won't say it's a finite law, as in there's not exceptions, but to the degree, it's something that's very relevant. And I think if companies looked at that research, they might be able to make some decisions about, we're not experts on taking companies public, but perhaps when you need to start thinking about really shaping and taking control of the category that you're in, because that's going to matter a lot when you start to approach the IPO window.

Dave Knox: Very cool. What's that mean for companies like Uber and Lyft and some of these unicorns that are getting past that 10-year mark today?

Dave Peterson: Yeah. Again, I can't speculate on what will happen with those IPOs. There's certainly some very successful companies that we've seen have a successful IPO outside that window. But the best take that we would give those companies that sort of stayed in the private world, and harvested the category economics while still staying private, you could argue that they're going to sort of come out public at the apex of the category economics. There's probably still some growth left in there that can be shared with the public investors, but it may not have the same ride as a company that started to climb that growth rate at an earlier point in time. And so, I'm guessing that those categories are still pretty big, and there's still some growth left in them, but one would question, will the ride-sharing category, is it a $50 billion category, is it a $250 billion category, and how much growth is left in that?

Dave Peterson: Then, ultimately, what category will start to form on the back end of that? I think there'll be some growth there. When we always look at it, we say, "Well, when will they hit the apex of that growth?" And that's the point when you go from category creation to category harvesting. We've seen that with great companies like Microsoft, they've been harvesting their category for 25 years, and they're not complaining about it, but it's a different type of situation at that point. Moves from solving problems, to harvesting economics of the problem that you solved.

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Dave Knox: When I look at Category Design, one of my favorite parts you guys talk about is Point Of View, because it requires a company really draw a line in the sand and take a stand for what they believe in. But getting your executive team, your investors, your board, your employees, all aligned to this Point Of View, is far from easy. How do you help companies navigate this to come out with something that is not just a safe water down Point Of View?

Dave Peterson: Yeah, it's a piece of the category-colored building blocks that sometimes get perhaps through a point watered down or even not recognized for the power of the Point Of View. We always look at, a strong category needs a thesis, a very strong definition of the problem, a category name that does its job, which is an intuitive place to sort of answer, where's the solution to the problem? Ride sharing is a very easy thing to understand. You don't have to sit there and wonder what that means. You know exactly what that means. But that all, as I like to say, speaks to the head. It makes sense. "Hey, I need to get from point A to point B. I'm going to use my ride sharing app to get an Uber or a Lyft," but the Point Of View speaks to the heart. It starts to help you help customers make almost an irrational decision.

Dave Peterson: To choose your company, and to basically ultimately become a fan of your company using this technique that we did not advance at all. The Point Of View is built around almost a debate framework of framing a problem up front, which plays off that anchoring bias, clearly articulating the ramifications of that problem, painting a picture for the future, and then explaining very clearly what to do now. This has been used in every debate since the beginning of time. It's been used in every infomercial that you've ever seen. A lot of traveling, stuck in a hotel room at three in the morning and, arguably, you can see Category Designers use this Point Of View framework to change the conversation from a PR product-led conversation, or a company-led conversation to a problem-led conversation. And that's the key.

Dave Peterson: A Point Of View allows you to talk about the problem first. Salesforce and Marc Benioff talked about the problem of software first, and he had that fame of no software logo on the end of software even though [inaudible 00:17:17] a software company. He attacked the old and brought the world to the new, and that was a fast model and cloud delivery of software. And when you bring a Point Of View into the mix, it can really, really speak to the heart and start to move people's behavior around, and make it really clear that the way the world worked in the old way, it's silly or stupid or dangerous, and the new way is something that you should enlist and embark on. I think one of the greatest Category Designers out there right now is, you can pick on his personality all you want, but Elon Musk is definitely bringing us to his world with his Point Of View on many things.

Dave Peterson: But, to a certain degree, there's a fine line between a mad scientist and somebody who's going to get us to Mars and back. Every time he launches something into space we are sort of rooting for him, because we know through that Point Of View, that he has a vision that we can get to Mars and back someday. Therefore, it's not a failed rocket scientist, it's an innovator that's going to change the way that part of our world works. And that Point Of View is the way to have that story start working for your company and your products and it sets a context around the problem that gets people sort of mad or sad or excited or fearful.

Dave Peterson: It really is an effective more than a tool, effective strategy to incorporate. And we are always amazed, I think it's just because the technology industry is such product-first mentality. You make sure you sell shit and everything else is bullshit. So, by bringing a Point Of View in to bear, it sort of says the product and the company are important, but the problem is the most important thing. And if you don't like that problem, you should consider our company and product to solve it.

Dave Knox: Throughout our conversation here, you've talked about CRM. It's where you started your career and you've referenced Siebel and Salesforce and one of the concepts of Play Bigger is that categories of evolve over time. This hits on an idea I've been playing around with called "continuous beta," and it's basically this idea that both companies and people need to be continuously evolving, and they can't get comfortable with success at any point in their career or their company lifespan. So, how have you seen companies and people for that matter, that make up those companies, practice this concept to stay ahead of the change?

Dave Peterson: Yeah, I think it's super relevant. I would argue, one of the most important rule of thumb, and it's not just categories, business, when we say today's solution create tomorrow's problems. Every time you find yourself in a particular category, you got to understand that that category has a natural curve to it. It starts off with everybody thinking you're crazy, and then all of a sudden there's this massive surge of adoption and all of a sudden a bunch of VC money comes rolling in and a bunch of companies emerge. And then, eventually one company starts to rise and become this category leader. Whereas that curve reaches its apex, there's always another curve right behind it. And the best way to explain that, I'm even going back to the CRM example, I think the modern-day example that today is what EC Qualtrics is doing with experienced management.

Dave Peterson: But if you were standing around in 1996, and you work for an SFA company or a field service company or a help desk company or call center company, and by that time if your particular, the big industry show back then it was called DCI and I think there were 20 to 25 publicly-traded companies and all of those industries, or subcategories now that we call them subcategories of CRM, but at the time they didn't consider themselves subcategories. They were all on a curve. What they didn't realize at the time, it's easy looking back to realize this, is that these curves sort of feed each other. If you go back to the history of CRM, the whole thing started with contact management. It started with moving a Rolodex and a Franklin planner into Goldmine and [inaudible 00:21:38]. That was a curve, and those two companies are on that curve for quite a while.

Dave Peterson: They were very successful. But then all along came FFA and said, "Well, hey, if you're going to digitize all your contacts, why don't we start taking notes and capture what was being said on these calls?" And that was a curve. And that SFA curve yielded a lot of successful companies, a lot of economics there. But, lo and behold, SFA was just a subcategory inside of something called CRM. And that's when Tom Siebel said, "Hey, it's not about SFA call center help desk, it's all about centralizing all your customer data into one spot, and having a unified CRM system that feeds all of those things." When he did that, that marginalized the value of all the subcategories called SFA and call centers, et cetera, and turned it into a [inaudible 00:22:25] category called CRM.

Dave Peterson: Then at that point in time you would have said, "War is over, battles are finished, put down your weapons, it's over." Then all of a sudden, the problem shifted underneath Siebel. The problem didn't move from needing a CRM system, the problem move to, "You can't implement that stuff if your life depended on it." I worked at a company called Mercury and we used to test that stuff and there was this great keynote speech that I forget who gave, it was one of the industry gurus. He said, "You have a better chance of surviving a heart replacement surgery, then you do implementing Siebel Systems.

Dave Peterson: And so, the problem was Siebel Systems was impossible to implement. Along came Marc Benioff and said, "Well, why don't we start to consume software in a completely different way using what they call an application service provider, which is now known as the cloud?" He attacked on the premise software and moved the entire category over to the cloud as we know it now. Again, that was another category curve. There was nobody in the industry, I think, that would have said there's any chance that Siebel was going to go down. Ultimately, it wasn't based off the problem they were solving to automate the sales process or the CRM workflow, it was built around a different problem that moved the entire industry to a different place. If you understand that this whole world is a raging river, and it sort of never stops moving, then you can really get ahead of the game.

Dave Peterson: We always, certainly a long winded answer here, but that's why we get excited when you look at companies like Amazon. We call it The Flywheel. If you understand that the problems you solve today create new opportunities tomorrow, and then you jump on the opportunity you create, that's what we think Amazon does. Jeff Bezos is just brilliant at this, he makes it look easy, moving from books to all retail to now acquiring Whole Foods. But he is the master and that company is the master at understanding how these new evolutions, these new curves are going to emerge and he jumps on those curves and monetizes them and takes control of them. That's the part that [Allan 00:24:41] and I, my partner Allan at Play Bigger and I call the Strike Ops.

Dave Peterson: If you can get into the longterm chess match, and start to anticipate, "If we're successful here, what do we need to be thinking about two, three down the road," you can really start to, not be risque, but really start to create your own opportunities out there, and start to see almost around corners. And start to predict, no pun intended with your podcast but, start to predict when that next category is going to start to emerge, and then how you want to leverage your current strengths in the category you're in, and use that to start to define and control that next category that's going to start to pop up in the wake of your success.

Dave Knox: That's really tough for companies to do, but it's even more difficult probably for people to do, because it takes conviction of believing where something is going and maybe changing your career and what you're doing. How do you help people that might be at a big company, a Siebel at that moment, that they're on top, [inaudible 00:25:44] realize that curve is coming and they need to change?

Dave Peterson: At the end of the day. There's a whole other topic around sort of how this whole notion of category impacts your career and things like that. We can dig into that a bit later if you want. But, at the end of the day, I think it still lives in the hands with the CEO, and really deciding at some point, did we hit the apex of the category we're in. And if we stick around too long without extending, evolving or expanding this category, are we going to start to slow down? And then eventually our relevancy and urgency and our position and priority for our business, it's going to start to wane. I wish I could say how, but I do know that there have been many companies that really have done a great job of realizing, "Hey, the starting category that we built our business on, was the beginning of the beginning, not necessarily the end.

Dave Peterson: "It's not the only thing we're going to do. In fact, it's the bedrock that's going to allow us to do these things." I think one of the greatest examples today in the enterprise space is what Qualtrics did, a company up in Utah or over in Utah. I guess in California geography. We had the pleasure of working with these guys, but the real story is, if you look back and rewind the clock to three years ago and look at Qualtrics, they were a massively successful company, and they were doing some really cool work in market research. If you were an academic in a university, you were using Qualtrics to do really advanced analytics and research and development, and you would use the Qualtrics engine to get basically anything you needed to get done, done. To analyze cohorts and do a lot of feedback, review and analysis.

Dave Peterson: At the time, Qualtrics was doing great. You could have argued, they should just stay right in the space that they're in. Why bother, why mess with a good thing? At the time too, if you peel back and look down at the industry, Qualtrics was sitting neck and neck right next to two other companies that did something similar. A company called Medallia, that did something around almost like a managed service for customer experience. They sat next to another company called SurveyMonkey, who many of us have used to run surveys for arguably free inside your business. All those companies at the time were worth about a billion dollars in their market cap. You can argue, they should just keep doing what they're doing, but you've got to give Qualtrics credit. They realized, "Hey, this market research foundation that we built is, critical."

Dave Peterson: But it was just the beginning of the beginning. This was bedrock for them to go take down a bigger problem, which was ultimately, how do you start to manage the full range of experiences that really have a material impact on your business? They went from being a market research company, we call it their CRN move, and they expanded their category to something called "experienced management." And they realize just like CRM that they had their hands, it's platform captures something called experiencing data or X data. All of a sudden, what if you could basically use that as a platform to manage your customer experience, your employee experience, your product experience, and your brand experience? They made it almost silly to think of those things as separate from each other, because a grouchy employee could create a grouchy customer, or a bad product could create a bad brand, and all the experiences are almost glued together.

Dave Peterson: If you use this sort of notion of X data, you can have a better grasp by understanding how to control, manage, and close these gaps around experiences in all of these four areas, customer, employee, product, and brand. They launched this new category, a new way to think about how to manage experiences in business. Again, at the time, a lot of people were like, "Well, why would they do that?" They were so successful in market research, but the problem that they started, by the way, they used the Point Of View around experience gaps that all companies have, and not all companies manage those gaps. They moved their business from being a market research leader, to the category kings of experienced management. That was a long journey. It took about two, two and a half years. If you track their progress, they were recently acquired by SAP for $8 billion.

Dave Peterson: I guess maybe it's not a how-do-you-do-it day, but why would you do it? And I think the "why" is really clear because, at one point Qualtrics, Medallia and SurveyMonkey were all worth about the same amount, about a billion dollars a piece. Qualtrics raised, the category economic speak for themselves. They moved to a completely different world and a completely different economic set and ultimately were acquired for 8 billion. And I think if you check the evaluation of the SurveyMonkey and Medallia, they're probably still floating around a billion, maybe 2 billion. And so, the "why would you do it" is very important. And that touches on that point you made earlier about, is the category we're in market research, are we at the apex of that or do we still need to stay in here and, grow this category? Or is it time to use our strength in this category, to leverage a bigger play? And that's exactly what we saw Qualtrics do.

Dave Knox: That's perfect. Final question for you on this whole concept of Category Design is that, Category Design is not just for technology companies, even though we've talked about that a lot. You and I have talked about that CPG, consumer package goods, in many ways used to be the biggest practitioners and maybe even the creators of Category Design, if you think back to your example bird's eye that you talk about in the book. So, what do you think happened to big CPG that made them stop playing bigger over the last call it 10, 15 years?

Dave Peterson: Yeah. Yeah. We actually have, behind the scenes of Play Bigger, we're in this conversation quite a bit. Obviously, for those who know as we work in the tech industry, because I would argue you got to go where the problem is, and the problem in tech industry is this notion of category. It wasn't anything that was taught in the business schools, so they were very thirsty and arguably starving for this so that we just plan to build in to all their day jobs of building the company, building the products. The only thing I can say about CPG is perhaps, that is how that world works. They were, and you know better than me, but a lot of the folks in that space, were sort of brought into the world thinking category first, and perhaps because it's not thought of as innovative, and it's almost like breathing air, if you work for a clothing manufacturer, you think categories. You have to, because that's how the world sorts out the differences between high-end adventure gear and low-end jackets you could buy at Target.

Dave Peterson: Perhaps because it's so normal and not new, the thought that that could be a huge differentiating strategic advantage in this world, is maybe an afterthought. The only other thing I think of, and this is sort of possibly a non sequitur, and I promise I'm not just doing this because he's my buddy, but a coauthor of Play Bigger, Kevin Maney did another book after Play Bigger called Unscaled. It was really a fascinating view on how the world's moving to this more bespoke model, where the world is no longer required to operate in this small, medium, large, extra-large world. And you can actually create industries like Warby Parker, [inaudible 00:33:43] give example where you can just go right after what people need, pick all the cross out of it and serve a population that just really wants high-quality eyewear but doesn't want to pay the brand price for it.

Dave Peterson: I think if you look at like Warby Parker, you feel that all these great new fashion brands that are coming out with real bespoke purposes, like really awesome shoes that actually feel good, fit good, and are our purpose built, I think that's where the industry's going. And if the old-school CPG world doesn't catch on, this new school will. And I do think there's a new school out there, and I'm a big fan of Warby Parker. I can't stop buying their stuff, because it's like I can buy a whole bunch of different things that suit my personality and my mood versus buying one pair of glasses that I have to wear for the 15 years because the costumer. I think that's where I think our prediction here would be, "Look out for more Warby Parkers because I think these companies are going to turn the whole industry upside down." And then I think that's where you're going to see the innovation in the consumer sector.

Dave Knox: I love it. Well, thank you so much, Dave. Every time we have a conversation it always leaves me thinking differently about the world. I really appreciate you sharing it with the Predicting The Turn audience.

Dave Peterson: You got it, man. Thank you for having me on, and I really hope some of those discussion will be helpful for your audience.

Dave Knox: I appreciate it. We'll talk soon, my friend.

Dave Peterson: Okay, take care.

Dave Knox: Thanks so much for listening. If you liked the show, hit that rating and make sure to subscribe so you don't miss a single episode. For more resources, head over to predictingtheturn.com.