How Startups Create a New Product Category

Someone recently approached me about a new product idea.

It was a company called Favordrop that helps car dealers give away gift cards as a marketing ploy to increase the likelihood that someone would buy a car.

As an entrepreneur, here is my first thought: Do car dealers already do this?

Why? Why not?

They told me they don’t do this and my industry connections also told me no.

Hmm?🤔

As an experienced entrepreneur, this is always the point where you have to stop and dig deeper.

Does nobody do this because it doesn’t work? Everyone tried and failed?

Is this truly a unique idea nobody has done before?

Is this a new product category?

Is this a golden ticket opportunity, or should I run away?

Being the first to market in a new product category is exciting and could be deeply rewarding.

It is also a little terrifying.

Imagine selling ice to Eskimos who don’t have any money. (That is how it feels most of the time early on!)

How do you convince people to try your new fangled idea?

Today, we will discuss some tips for creating a new product category.

I have started 3 SaaS companies. They were all products that were in brand new product categories. I have a few battle scars from this.

Trust Me, You Need This!

In any industry, there is a wide array of products and services available, which are grouped into unique product categories.

When a company successfully creates a new product category, it can reshape an entire industry, as Airbnb did with the vacation rental market.

When Airbnb first started, renting someone else’s house for a day sounded bizarre. Nobody was shopping for that, and consumers didn’t even know it was an option.

Trying to convince people to do something new is hard.

Let’s return to my example of Favordrop and its gift card promotions.

How do they convince a car dealer that this works and that they should divert their marketing budget from other things that potentially already work to this radical new idea?

You start by convincing a couple of early adopters to do it.

The good news is you can almost always find a few people who like trying new things. However, probably 90% of people won’t!

Educating a market on a new product category takes a long time. One key to success is creating case studies that you can use to market to the next batch of customers.

It can be challenging to go from early adopters to cross the chasm to broad market acceptance. This is true for any company and product, but it is profoundly harder when creating a new product category.

There is a famous book on this topic: Crossing the Chasm.

You Do WHAT??

The hardest part can be figuring out the positioning and how even to explain the benefits and use cases of your new product.

As entrepreneurs, we often invent new things that people could use, but we struggle with who the target market is and how to even describe it.

We invented dinglehoppers, but we aren’t sure if they are for hair or food. We are also terrible at naming things.

Many entrepreneurs even struggle to give a quick elevator pitch about what they do. The struggle is real, especially for new products.

I recently had Charity Majors on the podcast and we talked about this exact issue. Her company Honeycomb was one of the first companies to coin the term “observability” in regards to software application monitoring.

I find it pretty cool that ChatGPT even supports this claim.

Charity and her co-founder didn't just create a new product category. They named it and changed the industry forever. That is pretty incredible.

It didn’t start easy, though. Charity even told me, "I would actually say that the hardest problem we had was trying to figure out how to talk about what we were building."

It can be very difficult for entrepreneurs to nail down the right messaging and positioning in a company's early days. Partly because you are still trying to figure out the product and who you are selling it to.

You check out the entire podcast episode with her here:

Market Timing

Timing is one of the most crucial aspects of creating a new product category.

Launching a product or service at the right time, when the market is ready to adopt a new solution, can make all the difference between success and failure.

Being too early can mean that the market isn't ready for your offering while being too late can result in missed opportunities and increased competition.

Charity’s company, Honeycomb, was able to ride the wave of everything moving to the cloud, containerization, serverless, and Open Telemetry. They uniquely understood and foresaw the industry problems that all those trends created.

They nailed the timing and helped create an entirely new product category. Since then, they have raised $148M and are a market leader in their space.

Generative AI is creating a bunch of new product categories, and more are popping up every week.

However, the companies growing like crazy from all the AI frenzy right now aren’t the ones that started in 2023.

Companies like Jasper started using AI in 2019. They spent three years building a product and brand before ChatGPT arrived in November 2022, and the world went crazy.

Convincing people to use AI to create marketing copy before 2022 was probably a hard sell, and I bet it didn’t work as well as it does today.

Then ChatGPT was released, and everything changed.

Suddenly, everyone was looking for a product like theirs.

They were ready when the market went looking for solutions and I’m sure LLM advancements have dramatically improved their product. They are now one of the leaders of that new product category that nobody had heard of before 2022.

Jasper was very fortunate with market timing.

So did I!

At my first company, VinSolutions, I built a mobile app in 2004 that car dealers could use to take pictures of their cars and upload them to the Internet.

There was one big problem. The iPhone and Android didn’t exist, and the 1-megapixel camera quality was beyond terrible. The hardware wasn’t ready for it.

Back then, online shopping for cars wasn’t common. Most shoppers also looked at grocery store magazines like Auto Trader and the Sunday newspaper.

We were ahead of the time.

We kept building and eventually built a CRM system perectly designed to handle internet-based leads for car dealers.

Like it did for Jasper, everything changed due to major market changes.

The recession from 2008 to 2009 helped eliminate expensive newspaper and magazine advertising, and everything finally went to online shopping.

Who was ready for it? We were! 🚀

Our company exploded in growth and that product is still the #1 CRM in automotive. We ironically sold our high tech marketing company to the grocery story magazine company that is now AutoTrader.com!

We were helped by the market shift to online shopping and a recession.

Lead, Don’t Follow!

If you are creating a new product category, you have to be a thought leader, and you will need industry leaders on your side.

You have to convince the world why this bold new idea is a good idea.

That is also the challenge.

Charity at Honeycomb has had incredible success growing her company from her X (Twitter) account.

She constantly posted about what they were doing, why it was different, and why it mattered. Her thought leadership has a lot to do with their success.

Marketing is critical for any business, but it is even more important when creating an entirely new product category that nobody has ever heard of.

You have to educate the entire market. You need other industry leaders also to recognize what you are doing and get them talking about it.

Picking an Ocean

Have you heard of the blue ocean vs red ocean strategy?

Creating a new product category puts you in a blue ocean with little competition. You have the freedom to grow, and there aren’t many predators chasing you.

It is highly appealing compared to a red ocean where the competition is fierce, and everyone is stealing each other’s customers back and forth.

The good news about highly competitive markets is they are well understood. How they sell the product, who they sell to, and many other details are well-known by lots of existing industry experts.

When you are creating a new product category in a wide open blue ocean, nobody has any idea how to do any of this.

That is part of the excitement and also why it is incredibly difficult.

What are my top suggestions?

• Market research - You must understand the market and thoroughly validate your ideas. Test those assumptions!

• Be the expert - You need to become the expert at your customers problems. You need to understand them better than they do.

• Differentiation - If you are really creating a new product category, you need to focus on being different and you need to own it.

• Get help - Favordrop contacted me because I know automotive. Find people who can help you make fewer mistakes and learn quicker.

• Listen - Listen to the market and what early prospects are telling you. Be ready to pivot, and don’t be stuck. Fail fast if you need to.

Creating a brand new product category is exciting.

The biggest pitfall for most entrepreneurs is they spend too much time innovating on their fancy new product and not enough time marketing it.

Your hardest job is educating the market on why they need this new thing.

Most startups are working in new product categories. That is what makes them high risk and high reward.