Pricing and value for category creation
Artist's concept illustrates a dusty planet-forming disk around a star. NASA/JPL-Caltech
By Steven Forth
Category creation is emerging as the preferred strategy of many high growth companies. In 2019 we had repeated conversations with companies who wanted to create not a business but a category, and who wanted to know how to price for this strategy. Category creation is for those with big ambitions, and it needs a rigorous framework to deliver.
The playbook chosen by several of these companies is Play Bigger: How Pirates, Dreamers, and Innovators Create and Dominate Markets by Al Ramadan, Dave Peterson, Christopher Lochhead and Kevin Maney. The first three of these are principles at the Play Bigger consultancy in Santa Clara. They have developed a process for category design that they are applying across industries and scales. The process is robust, see below, but it fails to address the critical connection between value drivers - value metrics - price metrics. This is where Ibbaka can help you.
Before diving into how to connect value to price in category creation, let’s walk through the plays in the Play Bigger playbook. This is just a quick tour, we encourage you to pick up the book and give it a read, then to find a group of fellow travellers online or in your community to trade ideas with.
The Play Bigger playbook walks you through five key plays you need to execute in order to create a new category.
Category Discovery
Developing a Point of View
Mobilizing Your Forces
Market Conditioning
Building a Flywheel
Category discovery is where you find the problem you will fall in love with.
This can’t be just any problem. The creative genius in category creation is in finding not just an unmet need, but an unrecognized need. One story told in the Play Bigger book is of Clarence Birdseye and frozen foods. While working in Labrador in the 1920s, he watched Inuit people catch fish and throw them on ice, where they froze almost immediately. The fish could be kept in a state almost like fresh caught for as long as they could be kept frozen. They tasted different, and Clarence thought better, than salt cured, smoked or pickled fish. He used this insight to create a whole new category, frozen food, and he sold the company he founded to do this into what was to become General Foods in 1929 for $22 million dollars (which was a lot of money at that time).
Developing a point of view on how to solve the problem is critical to category creation.
Category creators are not “me too” companies. They are not innovating by creating line extensions or by making incremental technical fixes. They have a new solution to a new problem. Google created the category of search advertising by leveraging the social structure of the World Wide Web itself to deliver better search results, unlike the indexing engines it replaced. By uncovering the graph of connections that stitches web content together, Google found a new way to solve search, an approach that no one has been able to displace to date.
Mobilizing your forces to communicate the new category is central to category creation.
Everyone in the company from investors to engineers to the people talking to potential customers has to be aligned on why the new category matters.
Once the message starts to get out, and people begin to show interest, it is critical to condition the market to understand how the pain they didn’t know they had was actually eating away at them and that there is now a solution. This is more like market shaping than conventional marketing. An example of this is what medical technology giant Becton Dickinson did with needle sticks and healthcare worker safety. Working with professionals, regulators and thought leaders they helped people understand the risks posed to healthcare workers by needle stick injuries, showed that these injuries are preventable, and then provided solutions to keep people safe and avoid enormous personal and financial costs.
Once the category is established, you need to build a system where the each part of the solution contributes to the others and drives category growth. You have to build a flywheel that builds momentum as it goes (see Design your pricing to keep that flywheel spinning). A category is truly established only when it becomes a system full of the positive feedback loops that drive sustainable growth.
This five step process is powerful, and the authors provide plenty of examples of how it can be applied. Yet as I read the book, I felt something was missing. A category only really comes into existence when a new form of value is created, and with that new value comes opportunities to create new pricing models.
Let’s go back to basics. A the heart of Ibbaka’s approach is the connection between value drivers, value metrics and pricing metrics.
This is the underlying model for how value drivers (how customers perceive value), value metrics (the unit of consumption by which value is delivered) and pricing metrics (the unit of consumption that is priced) are connected. Value drivers have economic, emotional and community aspects. The triple of Value Driver - Value Metric - Pricing Metric define the Market Segmentation and Pricing Model. Pricing Models are designed for target segments.
The key to category creation is to find a new way to connect value drivers, value metrics and pricing metrics and to drive this new way of thinking into the market.
“The place to start is with the value of the category as a whole.” This insight comes from Micah Litow, COO at Kalderos. Kalderos is one of the companies following the Play Bigger approach to category creation. In his work creating a new category, which Kalderos calls drug discount management, he has found that the critical first step is to define the value for solving the problem your category addresses, and not for any one solution in the category. This point bears repeating. “When designing pricing for a new category, begin by defining the value propositions for the category as a whole,” says Litow. “If you simply compare your solution to those of competitors, and are as a result tying your value proposition to a specific solution, then you are not creating a category, but rather are playing in an emerging or existing one.”
This will be a new approach for most pricing experts, who are trained to seek for differentiation between solutions. However, Micah points out “in the case of category creation, there are no alternative solutions to differentiate from.” Value propositions are the ways in which your category (note ‘category’ and NOT ‘solution’) creates value. Value drivers come in three flavors: economic, emotional and community (more on community or social value drivers coming this year). Of course, value drivers are only relevant if someone cares about them, and the challenge in category design is to discover a new set of connected value drivers that some group of people (buyers and users) cares about.
The key idea here is that the value drivers must be connected. They need to form a pattern that people can recognize amidst the noise of their day-to-day life. Value innovation, and category creation, occurs when value drivers are combined in novel ways. In platform businesses (multisided markets) the connection will often be between two or more groups. For example, AirBnB initially connected people with rooms to share with people travelling on a budget (yes, the connections exploded out from this). Connecting value drivers in new ways is the key to innovation.
Once you understand, and can convince people of the value propositions for your new category, you need to define the value metrics. These are the units of consumption that track value delivery. A common example is charging for the number of hours that a jet engine is propelling a plane (rather than for jet engines as pieces of machinery). Or the pay per click advertising model where the click is thought to signal interest and attention, and is thus a better proxy for value than impressions (the number of times people have been exposed to a message). Pricing innovation depends on closer connections of value metrics to pricing metrics.
Before moving on to solutions, it is important to segment the new category. This needs to be a value-based segmentation. One is looking for clusters of potential customers that get value (economic, emotional and community value) in the same way. Almost all categories will contain several different segments. Solutions are designed for segments, and not for the category as a whole. This is why pricing for category creation begins with understanding and communicating the value of the category, and not with coming up with a pricing model for a specific solution.
Once the category is defined in a way that people can care about it, has been segmented based on value, and segment specific solutions proposed, then one can begin working on pricing model design.
This is really a restatement of the classic approach to innovation and pricing, where one begins with value to the customer and ends at cost (and is why cost plus pricing fails when one is working to create a new category).
The Category Creation Value and Pricing Process
Connect value drivers in new ways (that are meaningful to some group of buyers and users) - these patterns define new categories
Segment the category using these value drivers (find clusters that experience value in the same way)
Develop solutions for the target segment(s) (different segments are likely to require different solutions, which is why it is a category and not just a market)
Identify value metrics and map to pricing metrics (the key to pricing innovation, good category innovation deserves pricing innovation)
Design a pricing model (which may be specific to the solution and target segment, but ideally is extensible to other segments and solutions)
Develop the category data model (this is the model that collects and organizes the data created in and about the category)
Understand the new skills that will be needed to make the category successful (these skills will be on the side of providers, buyers and users, and enablers
Deepen understanding of the value driver patterns that are evolving in the category and that connect it to other categories
Category creation is not for everyone. It entails risk, requires imagination, and forces you to ask hard questions about value. It is, though, the most compelling way to drive sustainable growth over time.
