The third step is determining your genre. (Mostly from tvtropes)
[More of the Same]: Telling a complete story in the existing canon with the same general subject matter, style, pacing, etc. as an installment of the original work. These stories don't usually include any major changes to the situation; instead, they merely attempt to create further adventures in a favorite series.
The stories may take place after the end of the series, in between canon events, or at an unspecified time. This format is usually applied to series that are highly episodic, with each story or episode having a self-contained plot that is wrapped up by the end.
[Something Completely Different]: Sometimes, you just want to use the characters as a Commedia dell'Arte troupe, or have something that doesn't fit in any other area. Stories like this usually take an idea or concept in the series proper and avert, subvert, invert, or just plain mess with it. Either that, or it takes the established characters/world as very loose guidelines. Very closely linked to the Alternate Universe or Divergence methods of fic writing, but can conceivably work in any style.
Some fic tends to break down into this on the way to Dead Fic territory as well. This is the hardest one to pull off, as it requires the breaking of certain literary/characterization/canon rules. However, if you want to play with the story and its characters; this can take you to great heights (or at the very least, get you some interesting reviews). Personal take here, be careful of making the hero into a villain without warning your readers at the start.
[Versus]: Sometimes, you just want to explore what would happen if Character A were to square off against Character B. This could be a crossover, or they might be two characters from the same canon who never got to throw down (to your satisfaction, anyway.) Some readers will be satisfied with nothing but a contest where their favored character dominates, but a good Versus fic ought to present a good reason for A and B to have their duel/mecha battle/cooking contest/card game/whatever, come up with a plausible outcome and show the results of their contact.
Does it change the course of the story? How do they feel about the outcome? If the characters are from different canons, will they stay in contact? You'll find that even something as simple as "A vs B" raises a lot of questions.
[Day in The Lime Light]: Maybe you aren't interested in writing more about the hero, and would rather explore the motivations of the Ensemble Dark Horse, or the wacky escapades of the resident Terrible Trio. If so, go ahead and give them their own story; even the Alpha Bitch has some fans, and a little Character Development never hurt anyone. For the daring, you could even try separating them from the main cast and replacing them with an Original Generation supporting cast.
The biggest problem though is that if you like your character too much, they may be at risk of becoming a Possession Sue, especially if they end up gaining superpowers or something. And even if you avoid that, your Alternate Character Interpretation may rub some readers the wrong way if it's too divergent from Canon.
[Romance]: Focusing on the relationships of the canon characters in ways the main plot does not address. Easily the most common genre within fanfiction these days, it has received a lot of flak for often missing the point. Most of these have very little connection to their canons. This is not to say that it is an invalid genre, but aiming exclusively for romance does not distinguish oneself too far.
[18+ Station]: Personal take here, this is unfortunately the most profitable genre, so it's easy to fall into the allure of money and forsake any respect and morality towards your readers. Give the proper warnings always. Smut, fetish and everything that involves sex with little to no regard for feelings and love build-up is included here. Often a subgenre of romance. Excuse Plot, No Plot? No Problem! and Porn Without Plot can be included in this.
There are of course more genres, but I believe these are the most important and polemic ones that needed to be addressed. If you are having trouble in another genre, search it on google.