Category Creators: Building a Market From Scratch
In creating new categories, entrepreneurs must identify an unmet market need, find a way to meet that need, and educate the public about the solution. Building a market from scratch can gives entrepreneurs an advantage that allows them to dominate their category.
The most successful entrepreneurs are often those that create new categories or segments: they identify an unmet market need, find a way to meet that need, educate the public about that solution, and build their market from the ground up. Sometimes the idea springs from personal experience; other times, it’s from identifying a problem in search of a solution. Sam Walton and Jack Stephens are prime examples of the latter. Madam CJ Walker and Chuck Williams embody the former.
Being a category creator often gives entrepreneurs an advantage that allows them to dominate their category. First movers can end up capturing more than 70% of the market value of their category, according to research by Play Bigger — a Silicon Valley-based consultancy that advises entrepreneurs, companies, and investors on building dominant market share.
To carve out a segment, it is critical to ensure you are properly capitalized for the long haul and that you control your expenses to be willing — and able — to navigate the “valley of death”
Al Ramadan, co-founder and partner of Play Bigger, says the reason that category creators tend to dominate the categories they build primarily comes down to “anchoring bias” — the common tendency for people to rely heavily on the first piece of information they receive when making decisions. “All the great category designers actually anchor the conversation around a problem,” according to Ramadan. Once you anchor the conversation around the problem and your vision of the solution, people start to adopt it.
Camp Bow Wow
Heidi Ganahl is the epitome of a category creator who identified her own need — and filled it. Ganahl is the founder of Camp Bow Wow, which was the first nationwide upscale dog daycare chain in the U.S. Ganahl tapped into the massive pet market — and the increasing “humanization of pets” trend that is powering this market. U.S. consumers spent $66.75 billion on their pets in 2016, according to the American Pet Products Assn. This figure has almost doubled over the past 10 years: it was sitting at $38.5 billion in 2006. The APPA estimates U.S. sales for pet products and services of $69.36 billion for calendar year 2017.
After being disappointed by the boarding opportunities for her own furry friends, Ganahl wrote a business plan in 1994 for an upscale doggy daycare center with a camp theme that incorporated boarding, training, and grooming. Ganahl and her brother launched the first Camp Bow Wow in downtown Denver in 2000.
After launching a second location, Ganahl began franchising the concept in 2003. “[Franchising] worked beautifully for me, because I didn’t have a lot of capital to build additional units, but I did have a great blueprint for how to build the business, and a lot of passion for building the brand,” she says. “I just needed the operators that wanted to run the individual units and that would invest their dollars into those individual units.”
The Camp Bow Wow brand now boasts 140-plus locations, more than 3.2 million annual dog visits, and more than $100 million in annual brand revenue. According to the company, it is the largest pet-care franchise in North America. Ganahl sold her stake about three years ago to animal healthcare firm VCA Inc.
For Ganahl, the secret to success in building a market from scratch is three-fold. “You must make sure you’ve got a very clear, concise idea about how you’re going to go to market and what problem you’re solving,” she says, or you could get lost in the weeds along the way. And, Ganahl adds, follow your passion. “You’ve got to find something you are completely passionate about and interested in,” she says, “because you’re going to spend every waking moment of your life working on it.”
BodeTree is the other kind of category creator: it identified an external need that wasn’t being met and created the solution to fill that gap. BodeTree started in 2010 as a technology platform to automate bookkeeping and provide analytics for small businesses. “Our goal was to bring the tools and insights of the Fortune 500 to what we call the Fortune 5 million,” explains Chris Myers, co-founder and CEO. “But they are very difficult to market to. So we made our first pivot, which was to go after institutional clients, like banks and insurance companies, that serve small businesses. That enabled us to get our customer acquisition costs down and to scale much faster.”
But it was the company’s next pivot that launched a new market — a package of financial technology and services for franchises. The sales cycle for selling fintech to franchises was much faster, says Myers. “There was so much untapped opportunity there, we decided to focus our efforts on the franchise market specifically.” In addition to its flagship software for finance and analytics, BodeTree acquired a franchise development company, and then created two verticals to service that market comprehensively, enabling franchisees to quickly and efficiently build up and manage their business.
The company now has four verticals: Insight, its original fintech platform; Velocity, the franchise development company; a funding network called Seed, through which BodeTree funds franchisees and uses data analytics to make that process faster and more efficient; and RPM — a real estate project management vertical, through which the firm helps franchisees to open their doors.
Designing a New Category
Creating a market from scratch has its unique challenges – but it ultimately has its advantages. When looking to expand a category that already exists, generating sales can be easier on the front end because the market already understands the basic concept. “But you are going to struggle to gain any kind of meaningful scale,” says Myers.
“On the flip side, if you try to create a new industry or segment for yourselves — the challenge is reversed,” continues Myers. There is a significant uphill battle in terms of awareness and education. “But once you do that and once you find the right niche, it is a land grab, because no one else is doing it.”
However, convincing investors that a new category is worthy of investment can be a major challenge. And finding the right kind of investor to support the company’s vision can be even more difficult. Traditional venture capital outfits often want their investments to prove the concept or fail relatively quickly. “We were fortunate to find a local VC firm that had a different kind of longer-term view,” notes Myers. “We also invested money ourselves and raised capital from high-net-worth individuals.”
To carve out a segment, it is critical to ensure you are properly capitalized for the long haul and that you control your expenses to be willing — and able — to navigate what Myers calls the “valley of death.”
Explains Myers: “This is that point when you are going out to the market, you have a product that is ready to rock and roll, and all you hear are ‘crickets.’” According to Myers, that is the point where most people give up. “But if you can navigate out of it, then you emerge on the other side with a clear path to gain market share.”
From Sam Walton and Madam CJ Walker to BodeTree and Camp Bow Wow, it is clear that while having first mover advantage and being a category creator may not be a guarantee of success, it positions entrepreneurs to leap-frog the inevitable competition.