Category leaders capture the majority of the available profit pool, and investors seek to find future category leaders. Peter Thiel’s ‘Zero to One’ book is about how to build companies that create new things and eventually become a monopoly. Investors also look for new categories because it is virtually impossible for a startup to unseat a current category leader.
But how to create a new category?
Founders should look for a net new problem and they should devise a net new solution. The only way to find this new problem is by talking to customers.
Category creation requires developing a concept and planting a story in people's brains. Customers may not understand that they have a problem and therefore may not have a budget. A new point of view replaces the current customer point of view. And customers may be puzzled because they haven't thought about it. In fact, there may not be any easily identifiable customers and the ultimate act of category creation results in a new role in a company. Box's Aaron Levy said 'you need to find a demographic and a customer that no other software company is paying attention to in a modern way, and your job is to make them be heroes.'
Category creation requires developing a concept and planting a story in people's brains. Customers may not understand that they have a problem and therefore may not have a budget. A new point of view replaces the current customer point of view. And customers may be puzzled because they haven't thought about it. In fact, there may not be any easily identifiable customers and the ultimate act of category creation results in a new role in a company. Box's Aaron Levy said 'you need to find a demographic and a customer that no other software company is paying attention to in a modern way, and your job is to make them be heroes.'
The solution has to be not only better, but different and unique. Being different comes from proprietary insight and can be based on technology differentiation, network effects, or a structural competitive advantage. Peter Thiel asks founders one key question: ‘What important truth do very few people agree with you on?’
The existence of a band aided solution at the customer is a good sign that there is a category waiting to be productized. And a sufficiently large number of these cases is evidence that now is the perfect time for the category to be created.
The existence of a band aided solution at the customer is a good sign that there is a category waiting to be productized. And a sufficiently large number of these cases is evidence that now is the perfect time for the category to be created.
Talking to existing channels is unlikely to generate new insights since they serve current solutions and address known problems and customers.Advisory firms such as Gartner and others will only validate new software categories when a category has become large enough for their own customers and competitors are emerging.
Qualtrics realized that their customers started to tweak the software and use it as a customer experience and employee experience solution; the original market research use case dropped to the third rank. CMO Kylan Lundeen said 'We realized we were not in the survey business, we were in the business of helping people manage the experience they provide to their most important stakeholders.' Qualtrics was acquired for $8 billion by SAP in 2018.
The best categories have no or few competitors. There is little noise and there are no preexisting notions and once a new category has been identified the work only starts. The new category needs to be positioned and an ecosystem around it has to be created. The message needs to be authentic at scale for the users and customers to evangelize it. Leadership of this movement has to extend beyond the company and include the competition.
The best categories have no or few competitors. There is little noise and there are no preexisting notions and once a new category has been identified the work only starts. The new category needs to be positioned and an ecosystem around it has to be created. The message needs to be authentic at scale for the users and customers to evangelize it. Leadership of this movement has to extend beyond the company and include the competition.
Peter Thiel has said ‘... the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas’.
