Issue No. 14: How Emerging Categories Work (and How to Win Them)

When my wife and I watched Jerry Seinfeld’s movie about Pop-Tarts last week, I didn’t expect a story about a highly-contested battle to win an emerging category. 

But the (highly fictionalized, but kind of true) saga of Kellogg’s and Post battling it out to see who could dominate the ready-to-eat, shelf-stable, breakfast pastry category is exactly what it was. A new opportunity, a winner, and a loser.

Turns out, though, battles to win emerging categories happen all the time (and in plenty of markets outside of breakfast foods).

So in this issue, I’ll unpack everything I’ve learned about how emerging categories work and how to come out ahead if you’re in that situation.

A Rising Tide Does Not Lift All Boats

I try not to get too academic in this newsletter.

But I’ll need you to bear with me, as I’m going to lean heavily on some research by a British economist named Paul Geroski to explain how emerging categories work. 

I promise it’ll at least be more interesting than learning about demand and supply curves back in Econ 101.

Anyway, Geroski studied how categories evolved. He looked at everything from automobile tires to semiconductors, televisions, and even beer. And he summarized his research in a book called The Evolution of New Markets. (If you think my work is nerdy, then you haven’t read this one yet).

He came away with one big “aha”: while new categories typically see a flurry of new entrants early on, the number of competitors tends to shrink as the market cap of the category grows.

Here’s how that looks:

You’ve heard the phrase “A rising tide lifts all boats.” Well that’s true, for a while. But at a certain point in a category’s life, some boats keep rising while others sink. Some all the way to Davey Jones’ Locker.

Obviously, there are going to be differences in how these curves play out, based on things like startup costs, access to technology, rate of market adoption, etc. Check out the stories of Stripe and Shopify for examples that took place after Geroski’s research.

(P.S. Thanks to my friends at Category Design Advisors for introducing me to Geroski’s research and for originating the ideas that link his work to category design. You’ll also find insights into his work from the book Play Bigger.)

Ignore Category Evolution at Your Own Risk

Geroski’s research may look simple, but if it’s sound, then it has five implications for how to think about surviving and winning an emerging category:

1. A lack of competitors could be a red flag

2. If you don’t have the “dominant design,” you’re toast

3. The status quo is your real competition

4. Don’t try to squash competitors too soon

5. Speed matters

If you want to unpack these together, keep reading (no more academia, I promise).

Implication #1: A Lack of Competitors Could Be a Red Flag

Geroski found that a rush of entrants to a new category is a good sign that you’re onto something. It means that other businesses have had a similar insight and believe this new category is worth pursuing, too.

But if no one else follows you into a new category, watch out. It could be a red flag that you’ve misread the scope of the problem or the market’s willingness to have it solved.

This happened to me at a blockchain startup I worked with a few years ago.

The vision was sound: help global businesses streamline things like payments and supply chain data using blockchain. But I soon noticed something strange. We didn’t have anyone following our lead. The market was interested, but not ready to buy. There were just too many unknowns.

That could have changed if we had other competitors playing the category. The category would have seen more press coverage and investor interest and potential buyers would have had more information about what was headed their way. All great things to generate excitement and legitimize the category.

Being the first mover (the category creator) might sound exciting, and there might even be situations where that’s advantageous. But if you’re too early, you may not be able to grow the category fast enough on your own. Even Apple has shifted its strategy from being a first mover:

Implication #2: If You Don’t Have the Dominant Design, You’re Toast

In a nascent category, most potential buyers are hesitant to make a purchase (have you bought your Vision Pro yet? I didn’t think so). Geroski says this happens because something he calls a “dominant design” hasn’t been established yet. By “dominant design” he means the widely accepted conventions for how products in the category work. 

Dominant designs are easy to spot today. Just look at your car. It has a steering wheel, pedals, four wheels, the driver’s seat is on one side, and it fits in a standard parking spot. But when cars were a novelty, all of that was undefined.

That’s where hesitation to buy comes in.

Before a dominant design is established, most buyers won’t purchase something that could soon become obsolete. Not to mention the fact that products in an emerging category can also be difficult to use, expensive, incompatible with other products, or have poor documentation. They can also introduce trade-offs that the buyer is unwilling to accept.

Buying a product when there’s no clear dominant design feels risky. And the more expensive that product is and the more essential to everyday life, the bigger the risk.

In emerging categories, you have a very clear job to do: convince the market that you have the dominant design. The sooner you can get there, the sooner buyer hesitation will come down and the market cap of the category will grow.

By the way, now you know why the number of vendors in a category shrinks before the market cap of the category takes off: players that don’t adopt the dominant design have to exit.

Implication #3: The Status Quo Is Your Real Competition

An emerging category is no guarantee of a viable category. Some are like those TV pilots that never get the green light – interesting idea, but not viable. Here are some examples:

• The “information superhighway” was how everyone thought households would access the internet in their 90s. Instead, we got the World Wide Web. Turns out cable boxes were not a good substitute for a PC.

• My brother had a Samsung refrigerator that, due to its $4,000 price tag, had the unique capability of displaying a frozen, glitchy Twitter feed on the door. “Smart refrigerators” aren’t around anymore. 

• The jury is still out on whether cryptocurrency will mature into anything beyond an interesting math exercise or a cumbersome way to buy an orange in El Salvador. Oh, and remember NFTs? 

• And let’s not forget about new technology standards that never sustained themselves. R.I.P. HD-DVD, LaserDisk, and BetaMax! 🪦

Yes, competitors might make you lose sleep, but the main thing you should worry about is whether your nascent category will grow up to become a healthy, viable market where you can make money. 

You can see this playing out right now with GenAI. 

Do OpenAI, Anthropic, and Cohere all want to take the GenAI crown? Of course. But they also have to worry about things like:

• Making sure their technology doesn’t get legislated away

• Keeping their products from being misused 

• How to find the right investors for the next round of funding

• Creating the right revenue and profit models

• Finding the right partners to bring their tools to market

• Convincing the world that AI won’t take their jobs and/or kill them

All of these concerns have more to do with the health of the category than they do with competition. If you look at the OpenAI’s News page, there’s a reason why every bit of content is aimed at either establishing the category or making claims to the dominant design. You’ll find nothing aimed at taking competitors down a peg.

Implication #4: Don’t Try to Squash Competitors Too Soon

Here’s the trick with emerging categories: you eventually want to come out ahead of your competitors, but you don’t want to them wither prematurely either. 

That’s because evangelizing a new category on your own is hard work. My friend Sangram Vajre taught me about his time at Terminus, the company that created the account-based marketing software category. When I interviewed him a few years ago, he told me about his efforts to legitimize the category by bringing competitors together at industry conferences they hosted:

Terminus’s strategy worked. Account-based marketing became an established discipline that was much easier to practice with dedicated software. And that was largely because they weren’t the only brand talking about it.

For a while, Terminus was the go-to solution in the category. Unfortunately, they overlooked Geroski’s lesson about the dominant design. Eventually, account-based marketers needed a solution beyond what Terminus had conceived, and Terminus had to cede the leadership position to brands like 6sense and Demandbase.

Implication #5: Speed Matters

Research in HBR shows that category leaders tend to enjoy an unfair advantage when it comes to growth in revenue and market cap.

That’s why if your competitors are smart, they’ll be playing the same game you are. They’re all hoping for a healthy, growing category with plenty of demand. And they will also be hoping to beat you to the leadership spot. 

Where do you want to end up?

Move too slowly and the market will decide for you.

You Will Need This Strategy Sooner Or Later

Here’s my theory: every company with growth aspirations will compete in an emerging category at some point. 

Many startups begin life doing exactly that. But even if you’re a multi-billion dollar company already leading one category, you’ll probably need to play in a new category at some point. Brands like Salesforce, Apple, and P&G do this regularly.

This is why paying attention to your category strategy is always the first order of business. Winning an emerging category calls for a different game plan than creating a brand new category, and that’s still different from succeeding as a niche player or sustaining the leadership spot. 

If you haven’t reviewed The 6 Category Strategies yet, go check them out. Then read Issue No. 12 about when to create a new category. And stay tuned, as I’m publishing deep dives on the four remaining category strategies soon.

Thanks for reading.

If we haven’t met before, I own a consultancy called Flag & Frontier.

CMOs and CEOs hire me to align their executive teams around the right category strategy and strategic narrative.

If you want your brand to become the only obvious choice, then reply with “Obvious” and I’ll share more details on how I can help.

Cheers ✌️

John Rougeux
Founder, Flag & Frontier
[email protected]
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