Create and Dominate: How To Tap Into New Markets With Category Creation
There's only one way to guarantee domination in a product category—by creating a new category altogether.
Category creation is the process of creating a new market segment or product category that did not exist before. It's an approach to product innovation aimed at delivering new and exciting value propositions to your target customers.
The creation of a new category not only allows you to carve out a competitive advantage but also serves as a key driver for growth and market dominance. Of course, category creation is challenging, as it requires a significant investment of time and resources, as well as a deep understanding of the target market, and focus on many different, new aspects of your company at once.
Is it worth the hustle? I'll let you be the judge.
Why should you become a category creator?
The straightforward answer is: “Position yourself or be positioned."
What do you think is a more stable business: owning a lucrative, even small niche where you hardly have any competition and a huge upside—let's say, owning a gondola shipyard in Venice—or being one among many companies in a cut-throat business field, like a Tier-2 automotive supplier where you have to calculate your rates down to the 1/10th of a cent?
The more poetic answer is: “Category design is about increasing the odds that your work matters."
(Full disclosure, I lifted that quote from Al Ramadan's book Play Bigger, a must-read for aspiring category creators.)
More than ever before people will be paid for successful thinking rather than doing, which will increasingly be done by machines—even in white-collar domains. That’s why category design is becoming more important than ever if you want to thrive in today’s business world. Focusing on good thinking will make you a champion, whereas focusing on good doing will only make you more efficient in your race to the bottom.
How does category creation work?
If you can take only one learning from this article about what category creation means, it would be the following:
To become a category king, you have to successfully bring together 3 things:
- Category design: This means that your new product will successfully live in a new category that has not been successfully occupied by the competition yet. For example, Uber was the first company that got the “taxi service + platform-based internet app” right.
- Product design: This is possibly the easiest part—you just need an excellent product designer or UX designer.
- Company design: This is possibly the toughest part, especially if you are creating a category from within an existing company. More about that later.
The second element that is relevant for category creation is the FROTO principle. It stands for “From - To”, and means that whatever you do, you have to think through the entire path from the current situation to the desired, future state.
Thirdly, the basic equation for kicking off category design is:
- Take deep market insights
- Add deep technology insights
- Transfer them into a new category that promises big growth once you go-to-market.
In our Uber example, the initial idea started when one of the to-be founders of Uber was looking for a cab in Paris one night, wondering why he couldn’t order one with an app. The app would show the nearest cab and guide the cabbie to the caller. This a neat example of market insight (there is always a need for cabs in a metropolis, especially for tourists on rainy nights) and technology insight (the internet, GPS, and online payment systems capabilities of smartphones) shaking hands.
The 3 Myths Of Category Creation
There are 3 common “myths” of category creation, but if you’re clever, you can leverage them in your favor—even if you’re not a startup!
A recent HBR paper carried out a survey among senior executives, asking them why their company does not engage in category creation.
The answers are typical for the “play it safe”-mentality of established companies who love not to avoid uncharted territory without commissioning extensive studies, proofs of concept, business cases, et cetera—but then enter a panic-driven spending spiral once a competitor blindsides them with a winning product.
Let's have a look at how you can challenge the 3 most quoted answers from that survey and convince your stakeholders that category creation is the way to move things forward.
Myth 1: “Our market is mature; our customers don’t want to try new things!"
Correction: customers are not interested in trying new STUPID things.
Otherwise, customers are very much interested in trying new things—as long as they're appealing.
For example, when Amazon launched the Kindle e-reader in 2007, there was little or no demand for such a product. However, through its innovative design, user-friendly interface, and the convenience of being able to carry thousands of books in one device, Amazon created a new category and captured a never-before-seen market share in the book-reading ecosystem.
This is another playbook example of “market insight” converging with “technological insight."
The market insight was that people generally like to read books or journals, but they don’t like clumsy devices. They also like to read many different things, even in parallel, but they don’t like to carry around a ton of books and pay heaps of money for hard copies.
The technological insight was that the new generation of “e-paper” gives the reader a sufficiently well-designed substitute for paper. And around that, a device like the Kindle could be built (light, thin, long battery life, etc.) at an acceptable cost. The icing on the cake was, of course, the overall business model and marketing strategy of Amazon, with access to thousands and millions of e-book titles and a constant supply of new books by self-published authors.
Myth 2: “We can’t afford to do this.”
Au contraire—you can't afford not to.
Some people think that money is a finite resource. Nothing can be further from the truth. Money is not a resource—it’s a priority. Money is the fuel of the economy. The moment you make a compelling business case, your case becomes a priority.
As I pointed out in my article on lean startup methodology, there are intelligent approaches for testing the water before undertaking a big investment into the unknown.
The cost of successful category creation can (and should!) be offset by the benefits that come with being a market leader in a new category. By creating a new category, you are set to establish yourself as a market leader and achieve a significant competitive advantage. This will result in increased revenue, higher brand recognition, and a stronger position in the market.
Moreover, being a market leader in a new category creates new product marketing opportunities for future growth and product innovation, further offsetting the cost of category creation.
What I'd never recommend is putting all your eggs in one basket and cutting off your existing income streams.
Adding new income streams is the only way you will evolve. In business, standstill is death—evolving is life. This is a fundamental principle. The company graveyard is full of dinosaurs who thought they didn't need to evolve. If you think of the brands that are flourishing and dominating their markets, they are the companies that continuously re-invent themselves and bring adopters to their new categories.
Myth 3 “Start-ups are better at creating breakthrough innovations.”
The most often quoted assumption from corporate executives is that start-ups are better at creating breakthrough innovations than established companies. When you see category creation as a nuisance, you will of course do anything to fend off any category creation efforts.
People outside of startups assume that freshly-minted companies are more nimble and have a more entrepreneurial culture, making them better suited to take risks and pursue new ideas. Startups may have the advantage of being more agile, but like every one of us, they also have their challenges: startups usually have fewer resources, limited expertise, and a fraction of the combined experience of established companies. They also often lack the customer base and brand recognition that established companies have, which can make it difficult for them to gain traction and reach their target market.
So why do startups still punch well above their weight when it comes to innovation power, new products, or category design in general?
As we said before, a category king has to juggle category design, product design, and company design at once, the latter being the most difficult one. And as a startup is starting from scratch, it is much easier to instill a category-championing culture into the company than if the company is already established.
Whatever your company size, as long as you know what problem you have to solve, you can make a plan for how to do it.
The key is to select the right team, give them the right incentives and metrics, and put them into a startup-similar environment so that they can truly take on the role of entrepreneurs. By mimicking the cultural environment of a startup, a larger enterprise can nurture category-creation projects much more effectively than a startup surviving on seed money.
In other words, you can leverage your company’s existing resources, expertise, and customer relationships to create new products and become a category leader. For example, Apple, a well-established company, created the smartphone category with the launch of the iPhone in 2007, revolutionizing the way people communicate and interact with technology.
Established companies are just as capable of creating new categories as start-ups.
The throne is yours to build.
It's unlikely that you'll become a category king by creating solutions for non-problems or doing what has already been done successfully. For the most part, new categories are born from an existing market trend that converges with the most novel abilities of cutting-edge tech. So, be observant. Experiment. Be willing to fail. It's a crown worth fighting for.
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