New Subcategories: The Path to Real Growth
Subcategory innovators account for a disproportionate percentage of revenue growth and market capitalization.
In my book, Brand Relevance, I argue that the only path to real growth, with rare exceptions, is to engage in transformational or substantial innovation that creates “must-haves” that define new subcategories (or categories). In virtually any product arena that you examine over a long period of time, from water to banking to computers, any growth spurt, (again, with rare exceptions) can be associated with such an innovation. For example, in the Japanese beer market, the market share trajectories changed only four times in over 40 years. In three of those instances new subcategories were formed, and in the fourth two subcategories were repositioned.
In a recent article in the Harvard Business Review, Eddie Yoon and Linda Deeken provide more evidence of this phenomenon. They observed that if you analyze Fortune’s lists of the 100 fastest-growing U.S. companies from 2009 to 2011, 13 of those companies were instrumental in creating a new category or subcategory. These 13 firms accounted for 53 percent of the incremental revenue growth and 74 percent of the incremental market capitalization growth over those three years. Such innovators benefit from higher growth in part because they can expand the marketplace. Chobani, for example, created a new subcategory of thick, creamy, high-protein yogurt that is now in excess of $1 billion in part by attracting new customers into the yogurt world.
These subcategories or categories can be created by substantial innovations that do not alter the basic business model. In the article, Yoon and Deeken point to Sara Blakely’s creation of Spanx slimming apparel and Kevin Plank’s development of Under Armour’s moisture-wicking apparel for athletes, both $1 billion brands, as examples. Another is Crest’s Spinbrush, which created a new subcategory between the regular toothbrush and the expensive electric versions. All these products use the same marketing and distribution strategy as before, they just now contain a new “must-have.”
A category or subcategory that innovates can also involve a change in the basic business model. Yoon and Deeken describe several examples. Keurig pioneered the “cup-at-a-time” pod-style brewing in the 1990s as an alternative to the existing coffee pot for the office, and later for the home. With a business model around selling K-cups, which come in 200 flavors and sell for around 50 cents, they have created a U.S. business approaching $4 billion. Redbox DVD kiosks, which offered rentals in other stores, were transformational as was Microsoft’s Xbox Live gaming system which added a subscription-based online service to a video game console.
“Firms under-invest in “big” innovation and the product and market research that would support it and over-invest in incremental innovation.”
Transformational innovation can actually be easier to develop and implement than a substantial innovation. You have to have a lot of resources and luck to come up with the innovations that led to Spanx, Under Armor and the Spinbrush. But it just takes insight and creativity to offer a reward program that helps cell phones users in Africa earn life insurance benefits, like MTN. Or for a cell phone maker in China (Xiaomi) sells phones directly by bypassing the telecom firms (think of Dell bypassing the retailers). Both were transformational innovations because they altered the marketplace.
In my view, firms under-invest in “big” innovation and the product and market research that would support it and over-invest in incremental innovation. Yoon and Deeken note that Nielsen’s Breakthrough Innovation Report finds that only 13% of the world’s leading consumer product companies introduced a breakthrough innovation from 2008 to 2010.
It should be more. I don’t know how much more, but more. It is a “big” innovation that moves the needle.