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The Pros And Cons Of Being a Category Creator In the Business World Companies like Netflix, Google, Amazon, Salesforce and HubSpot are all global examples of brands that created a new category and achieved success in it

By S Shanthi

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Solving problems we didn't know we had. That's what makes businesses do, especially startups. Companies like Netflix, Google, Airbnb, Uber, Amazon, Salesforce and HubSpot are all global examples of brands that created a new category and achieved success in it. But there are also many businesses that have vanished into thin air because they were too ahead of their times. For instance, Tesla is today the most popular electric car company. But, the first electric car was created by Robert Anderson in 1832.

Often, large companies with huge resources, capabilities, and growth aspirations also stay away from creating newer categories or business models for the same reason. According to Nielsen's Breakthrough Innovation report, only 13 per cent of the world's leading consumer product companies introduced a breakthrough innovation from 2008 to 2010—and even fewer created a breakthrough business model as well. These companies often wait for startups to innovate and acquire them for that. So, is category creation an advantage or disadvantage?

We spoke to some experts to understand the pros and cons and this is what they said.

Advantages

The term category creation was coined by the authors of Play Bigger. This means companies or brands address the needs of customers that they didn't previously know they had. For instance, nobody knew how Amazon could cater to their shopping needs from the comfort of their home until they tried it for the first time. Or, customers didn't think commuting would become so simple that they may even stop owning a car until they tried an Uber, or Ola in the Indian context.

This also means these companies don't have to deal with a competitor, at least for a few years till they establish themselves and others see it as a lucrative space with more room for others. However, by then these players would have grown very big in their business.

The biggest advantage of being a category creator is leaving behind the competition, said Padmaja Ruparel, co-founder, IAN and founding partner, IAN Fund. "It is especially true for over-crowded categories where a clear differentiation becomes crucial for survival. If successful, such businesses will also have the upper hand in attracting customer attention without incurring heavy marketing costs," she added.

If the business market works out, the market gets so wide open, that they also end up having a price advantage. "The differentiator for category creator is its very proposition & can almost, demand the price (at least till competition gets going)," said Jinesh Shah, managing partner, Omnivore.

When category creators experience faster growth, they also receive much higher valuations from investors. They have an edge in the way investors look at them as compared to those that only bring newer innovations to the category.

Disadvantages

On the downside, there is a risk of failure. It need not always be lucrative. "If a company is trying to create a market for a product, the demand forecast is highly speculative, which increases the risk of failure. Furthermore, due to the niche nature of the offering, pivoting quickly to meet customer needs is more challenging, as is scaling up without a supporting ecosystem. On the other hand, a new category in an existing market means convincing customers to switch from their current choices, a costly and time-consuming affair," said Ruparel.

Another disadvantage is creating awareness. Companies have to spend a lot on marketing to make consumers understand that the product or service they are selling is not a want product, but rather a need product that are unaware about. And, more often than not, the awareness is created years later. A good example here would be Swiggy and Zomato. They may be the leading players in the space today, there were many others who tried a similar business model but failed terribly just because they were ahead of time.

"Customers will need to be educated about the need for the category creator's product, and why the offered product could solve or ease their problem. As soon as the category creator's product works, competition shall start brewing, learning from the first mover. Hence, the category creator's challenge will be to become category leader," said Shah.

Category creation is a high-risk adventure that can lead to great success stories or expensive failures, sums up Ruparel.

S Shanthi

Former Senior Assistant Editor

Shanthi specializes in writing sector-specific trends, interviews and startup profiles. She has worked as a feature writer for over a decade in several print and digital media companies. 

 

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