How Your Differentiation Can Lead to Failure

Many of the HCM tech startups we meet with want to create a new category and then dominate that category. Last year, we came across maybe five companies out of 500 that would truly benefit from creating a new category and who also have the financial power to do so.

Category creation is a thorny issue. The desire to position one’s solution within a new category often flows from a lack of experience and knowledge about the contemporary HCM ecosystem (as described above) or a strong distaste for the shortcomings of the category one naturally belongs in.


Here’s the thing about creating a new category. First of all, it costs a lot of money. Companies that seek to create a new category double their marketing expense, at least. They need to spend money to create recognition for the category, then they need to spend additional money to position themselves as the leaders within the category. Second of all, only early adopters buy from new categories. That means a company needs to have enough gas in the tank to stay in business until the market tips from early adopters to mainstream buyers. That can take years!

We encourage companies to position themselves within existing categories, even when they are so strongly differentiated as to be virtually unrecognizable within the category.

We worked with a company recently that approaches performance management in a really unique way — so unique that it’s difficult to compare it with other performance management companies. Because of this company’s overwhelming distaste for traditional performance management solutions, it had a strong desire to create a new category that would more accurately convey its essential value and unique approach.

The problem is that a lot of buyers are currently looking for performance management solutions that are better than the ones they bought five years ago, and are even open to new approaches to performance management. Not many buyers are looking for something they have never heard of. For this company, it ended up being much more effective to say, “Yes, we are a performance management company; now let me tell you how we are different and better than conventional performance management solutions that rely on performance reviews.”

This approach worked a lot better than saying, “No, we are not a performance management company; we are something completely different! Let me try to explain to you what we are and why you don’t need performance management.” It’s also important to note that this company didn’t get many opportunities to tell that “new category” story because no one could find it.

Action: Practice Patience, Domination Takes Time

Think of your category based on the problems that you solve or the category you’re trying to disrupt rather than the features of your product. Don’t get hung up on the fact that you approach the problem in such a unique manner that you don’t seem to fit into the existing category at all. That’s a good thing! That means you have a true differentiation. Start by trying as hard as you can to fit into an existing category and then frame the unique features of your solution as differentiators. If you truly can’t find an existing category to fit into, then make sure you have plenty of money and plenty of support from your board, including a deep understanding that it may take several years for the market to validate your new category. And then buckle up for a long ride.