Category Creation: How small companies disrupt massive industries

Prior to the 2000s, the entertainment industry had the same model for consumer consumption where people would buy or rent VHS tapes and DVDs at the local Blockbuster.

Enter Netflix

While a mere 925 titles released for a mailbox pay per rental model seemed like a meager threat during the time, Blockbuster was confident that they were way ahead, raising 465 million in their IPO in 1999.

Creating a new category

In the second half of the 2000s, Netflix created a new way to consume media launching its streaming platform. 

There are plenty of examples of breakthrough product innovations where new consumer trends were attributed to categories being created. 

Some examples of these new categories include the instance where consumers were willing to pay 10 times as much for a cup of coffee because it comes in a convenient pod, or when people started to willingly wear athletic wear in casual everyday settings calling it “athleisure.”

The examples show that instead of using the same tactics as the market leader, perhaps an even more lucrative opportunity is to change the way the customers think about an industry. 

According to research done by business intelligence resource EnsembleIQ, among the Fortune 100 fastest growing companies there were 13 companies considered “category creators” and those companies grew 4 times faster than the rest of the companies on the list.

With such a distinct finding, one can only wonder when is there an opportunity to create a category?

Poor user experience in the industry

When people become so used to a service that’s so fundamental to lives it creates a dependency. Yes, the public may have plenty of complaints and massive inconvenience but since there are no other options for the service the customer is forced to deal with the structure.

Until of course another company can come in and introduce a better user experience. Think of the experience of having to take the time out of your day to walk down to a bank and wait in line for a teller to do simple banking services like move money or send a wire.

Then companies like ING Direct come into the space offering all the banking solutions you need accessible from a mobile device. 

ATM fees? All covered.

Along with the highest interest rates for savings accounts on the market, ING went out of their way to cater to all of the pain points that traditional banks were refusing to acknowledge for their customers and offered an alternative for better user experience. 

This led to ING ripping away deposits from big banks at such high volumes that Scotia Bank bought them out for 3.1 Billion and rebrands them as Tangerine Bank.

Lack of distribution options

When there is a common experience of buying a product across an entire industry, the thought of offering new ways to get the product to the consumer is a massive opportunity. 

Take Gary Vaynerchuk’s family wine store that was a traditional brick and mortar store for instance, to spur growth he adopted the bricks and clicks business model purchasing to sell wine online across the United States.

No, Gary’s family business wasn’t a business behemoth like his competitors but nobody thought to try selling wine in an online store. 

While the market leaders might have scoffed at the idea of a family run shop capturing larger and larger shares of their market, Gary pioneered video content on Youtube as a lead nurturing and acquisition strategy by making Wine Library TV. 

Creating this video content bridged the gap of having that in person experience of wine recommendations while shopping that consumers craved, the experience that brick and mortar stores thought wasn’t possible to replicate if you were selling direct to consumer online. 

Doubling down on this strategy and offering a new way to buy and learn about wine paid off in the end, as Vaynerchuk scaled the family business from being a 3 million dollar company to being a 60 million dollar company.

Introducing new pricing structure and convenience

We’ve already talked about people being so used to a service because a lack of any other options that they just put up with the status quo, but what about introducing a way to get a product or service that you always associate with going to a store to buy but you offer a new pricing structure and sparing the trip to the store?

Nobody thought that the razor industry was ripe for disruption, but that didn’t stop the Dollar Shave Club becoming one of the quintessential examples of a subscription box service. 

The value prop was simple, Dollar Shave Club offered higher quality razors and were willing to ship the replacement blades directly to your door for a monthly subscription.

 Other skin care and related products were the upsells and with a little bit of creative video marketing that went viral they became a big player in the razor industry in a fairly short amount of time.

The company wasn’t necessarily solving some massive problem, but the fact that they could offer a high-quality product at such a cheap price point, paired with the convenience of a recurring billing model that takes away their need to make the trip to the store is what made the idea so attractive.

In conclusion

Companies that create new categories typically grow much faster than companies that choose to play by ground rules of the first movers.

 While from what we observed, smaller companies that are lean and able to move quick are typically the category creators this isn’t to say that larger companies cannot create categories as well; Keurig is a good example with the coffee pods. 

As a final note an industry leader’s complacency with their current success and lack of thirst to improve and innovate is what breeds opportunities for new players and category creation.

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