Every major market category consists of subcategories. These subcategories are usually dominated by different players. If you’re like many companies you tend to focus on market share within the larger category. But unless you’re among the top 3-5 players this approach may not pay off. Another approach to consider is pursuing ownership of one of the subcategories. So while a big player may dominate a market category, you can be the leader in the subcategory. Some experts believe creating your own category is the best route to market success and revenue growth. Category ownership provides an additional metric of Marketing performance.
Defining Category Ownership
Before we discuss how you might measure category ownership, let’s be clear about what constitutes a major category and its subcategories. A category is the space in which you compete. Category is the second law in the book, The 22 Immutable Laws of Marketing, by Al Ries and Jack Trout. For many companies, being among the top three is a category is vital to remaining in a category. Jack Welch when he ran GE declared they will only stay in markets where they are number one or number two. For him and many other CEOs, the ultimate game and measure of performance is category ownership.
Let’s illustrate the concept. For example oral care products is a major market category and some of its subcategories are mouth rinses, toothbrushes, toothpastes, and dental floss. So while Colgate-Palmolive is the worldwide leader in Oral Care, Oral B (a Gillette brand) is the leader in the toothbrush category. We can see this same scenario in other categories, such as the retail market, where Wal-Mart with 6,000 outlets and more than $250 billion in sales, dominates the overall category but Amazon owns the online retailer space and iTunes is the number one music retailer in the world. The software market provides another illustration of the concept of category ownership. Microsoft can lay claim to the larger software category, but Oracle can claim ownership of the database software category, SAP can claim ownership in ERP software and Intuit owns financial software.
The message here is that you do not have to have significant market share in the major category in order to become a category owner. While a subcategory initially can be very small, a niche that meets a key market and customer need has significant growth potential.
Category Ownership is a Significant Marketing Metric
The Key to Category Ownership
The key to category ownership is to redefine how customers or businesses use a product in order to establish a category. If you are the first to create a category (no easy feat) you will be in the best position to own it. It is very expensive to create and develop a category, but once you establish your company as the category owner the ROI is substantial. When you are evaluating a subcategory consider establishing the subcategory around how it will be viewed by the customers- both users and buyers- in terms of their needs, concerns, and buying requirements. Once you have a category you will want to define how you measure your ownership and the role Marketing will play.
Initial Category Ownership Metrics
There are two initial metrics that may be the easiest to use to monitor changes in ownership that Marketing can affect:
- Your percentage of the category’s sales
- Your percentage of the customer usage rate
These are good metrics to start with but as you become more sophisticated about how you measure ownership you may want to go beyond monitoring ownership in terms of current sales and use category ownership strength as a metric.
Determine how well you are performing in your category.
Metrics for Measuring Your Strength in the Category
Let’s examine two metrics worth considering as a way to measure your performance int the category: category strength and the category development index (CDI).
Category Strength as a metric accounts for three variables: competitors, your degree of risk and your market relevance. These variables require examining more than your sales but also your product innovation and customer relationships. If you are already a category owner now may be time to develop and use category ownership strength as a metric.
The Category Development Index (CDI) also measures your performance in a category. CDI measures your sales performance in a category of goods or services for a specific group, compared with the average performance among all customers.
The purpose of CDI is to help identify strong and weak segments. By creating a category development index you can understand specific customer segments relative to the market as a whole. The index can then be used to compare performance among customers and/or market segments. To create a category development segment you will need a precise definition of the segment.
The calculation to create the CDI is rather simple once you have the data. You will need to know three things to calculate CDI:
- Your sales in the category
- The total number of customers in the category and
- The total number of sales in the category to all customers
Once you have these three data points you can calculate CDI using the following equation.
CDI = Your sales to the Group / Total number of customers in the group divided by the total sales in the category divided by the total number of customers.
By tracking the CDI for each category and/or segment you can calculate your relative performance within specific customer groups and make decisions accordingly.
You will need data to create this index. Some of this date you may have at your fingertips in your existing systems, other data you may need to purchase.
The point of having the index is to make strategic and investment decisions; which categories to pursue, which to abandon. You will need a strategy and a plan for those categories you decide to stay in or pursue.
