Talk to any retailer, any manufacturer—or kid for that matter—and you’ll hear versions of one thing: it all comes down to the individual product. While it’s important to understand the super categories covered in the previous chapter in order to have a grasp of the industry overall, it’s also obvious that there are many variations between products within a category. Just take vehicles, for instance. The category encompasses items that cost less than a dollar and several hundred. Yet what all successful toys have in common is that they deliver fun, and they deliver it to a sufficient number of people so that manufacturers and retailers can make a profit by it. In this chapter, we’ll take a look at the process by which products come to market.
Products may vary wildly, but the process of getting a product from an idea to a store shelf is fairly similar, whether it’s done by a major, publicly traded corporation or a couple of guys in the garage. The former may have formalized procedures and the latter may be more of a bootstrap operation, but the objective for both is identical. A company must produce a product that can be made and marketed for a cost that retailers will stock and consumers will buy. In that way, the toy industry is identical to any other manufacturing business.
But it wouldn’t be the toy industry if there weren’t some idiosyncratic twists and turns along the way. After all, the decision as to whether the product you or your company has invested time and money in is viable is often in the hands of a six-year-old child. These are not adult consumers making rational decisions. Children are almost completely unbridled in desiring something in the heat of the moment. Whereas most marketing can tout the features and benefits of a product, virtually all sales to children are based on emotion. (Sales to adults are often done on emotion, too, but there are usually left brain rationales for the decision, something that doesn’t happen with kids.)
So, let’s take a look at how a product gets from the drawing board to production. (We’ll talk about how it gets into the store and consumers hands subsequently.)
The Nature of the (Sometimes Cuddly Plush) Beast
As noted earlier, somewhat flippantly but accurately, toys and games are consumed by the youngest consumers, who are constantly changing and in control of success or failure. That requires a level of constant reinvention that one doesn’t see in a traditional consumer products company. A company that makes toothpaste or detergent can add newness by changing the formula, adding a bit of sparkle, something that the company can hang a marketing campaign on and get consumers to try. You can add an extra blade to a razor cartridge, but it’s still a razor. You know your customer is going to buy razors; you just have to make yours more attractive and give consumers a reason to try. Toys, on the other hand, are a completely discretionary purchase. No one needs to buy toys. The final purchase decisions have to do not with utility but with emotional gratification—whether it’s the giver or the receiver. Children grew and developed and became productive members of their societies for millennia before the advent of the contemporary toy business. Our cultural beliefs and traditions have created the perceived need for playthings. So to be completely blunt, the challenge is to come up with something no one needs and create a market for it and sell enough of it so that you can do it again—next year. Remember, we said earlier that approximately 40 percent of the toys on the shelves are new every year.
Concept
Every toy starts with a concept, an idea. This can be a brainstorm; it can be a brand extension. It can be internally developed or bought from an inventor. It can be a sketch on a napkin or a fully developed, computer generated schematic. The objective at this point in the process is to be able to communicate the idea and begin the process of determining viability while keeping costs as low as possible.
For the most part this stage will consist of sketches, write-ups, and so forth. The idea is to try to get enough down on paper so you can move to the next stage. At the same time, you’ll want to think through the play experience, whether this is a one-off product or one toy in an entire line. Should it be merchandised within a brand?
And, even though we’ve mentioned earlier that at the end of the day no one really needs toys, you need to consider what perceived need will it fill, or what entertainment value will it deliver.
In the case of a licensed property based on a TV show or movie, you’ll want to consider how the play experience complements the entertainment and can be delivered in a way that kids will want to play. The child will want to feel connected to the show and the characters, but there needs to be enough in the toy so that the play can be personally expressive for the individual child. That is, he or she has to bring it to life in the context of his or her own life and experience.
Finally, while it’s still in the early developmental stages, you’ll want to consider the retail price and where that will fall relative to the average for similar and competitive toys.
Internal Development Versus Working with Inventors
Research and development are expensive and time-consuming, and the results are not guaranteed. While major companies do have teams who work on product development, very often toy companies will turn to the inventor community for concepts. This does not mean that ideas are not developed internally at companies and the ratio to internally developed products versus those created by inventors varies widely by company, category, and brand.
Most of the major toy companies have internal organizations whose job is to work with inventors, review concepts, and make recommendations for how an idea can be developed.
A manufacturer’s inventor group may, for example, put out a call that they are looking for a product in a certain category for a certain age group. Inventors present concepts and ideas, and potentially one is either bought, or more often, licensed.
Essentially, the manufacturer can outsource the concept development. However, the manufacturer will be intimately involved in the process of refining the product and tailoring it to their needs and determining production feasibility, fit within established lines or brands and so forth.
Perhaps one of the most famous examples of how an outside invention can be transformed into a hit is Tickle Me Elmo. When the product people from Tyco first saw the product, it was a monkey that giggled when it was hugged. Tyco, which at the time held the license for Sesame Street toys, felt that it would work as an Elmo character, since Elmo was known for its laugh and Tyco needed a lead item for the line. Later, the advertising agency suggested the vibration since the toy needed some visual hook for a TV commercial as well.
Every deal is different. Some inventors work on a royalty basis, with royalties varying from 5 to 7 percent, while others sell the concepts outright. As always, it depends on the toy and the situation.
Inventors specialize in specific product categories as well, and a couple of hits can make an inventor very wealthy, though many ideas never see the light of day. It’s a risky business, but an integral part of how one aspect of the contemporary toy business works.
Validation
If there is one stage of the process that too often gets short shrift, particularly among inexperienced independent inventors but also within large toy companies, it’s this one. And it’s the one that can be the most critical in determining the viability of a toy.
Sure, you have a great idea. Your mother loves it. Your friends think it’s cool. It’s on strategy for a line extension, in the case of a large company. And very often that’s all the validation people seek before starting to produce a toy. This is particularly true in the board game sector, where comparatively low production costs make it easy to get in.
But it’s not just the “little guys” who make this mistake. What seems like a good idea may not be when all things are considered, and toys that are not sufficiently validated often end up failing. While there will be times for research and revalidation up to a certain point throughout the production process, this early stage is critical.
The first thing you’ll have to do once you have your concept is consider the market. Who is this for? What is the age group? Does it fit into an established category? Does it fit into an established brand or product line? What does the competitive marketplace look like?
Defining your market is critical. The toy market is so diverse and so fragmented that having realistic assessment of the potential for a toy will determine the majority of the next steps you make.
The biggest mistake made at this stage is in targeting an age group that is too broad. While attaching a broad age to a toy appears to broaden the market potential, in actuality, toys have a very short life with the end consumer. Six months to a year is a very long time in the life of a child. Still, children develop at different paces, so a toy that some children have outgrown at five, others may find appropriate. The objective at this stage is to find the realistic “sweet spot.” A toy may potentially appeal to kids from three to six years old, for example, but the age at which the majority of your sales are going to be made may be four to five. This is where understanding children’s cognitive and physical development is critical. You can always put a broader age range on the package to accommodate variations, but knowing where the largest part of your potential market is key to later stages of development.
Fitting into an established category is not absolutely required, but it can be very helpful if you’re trying to sell into a retailer. They want to know where in the story to put it, for starters. In the current market, we’re seeing some level of flux in this stage of the process. And all retailers won’t always agree with your assessment. Wal-Mart may carry something in one aisle and Target in another and Toys “R” Us in yet another. Different buyers also cover different categories. At this stage of the process, however, you’ll want to know where your product fits in the industry as a whole, or begin the process of looking at alternative ways the product can be merchandised. (These will be discussed in the chapter on retailing.)
When you consider the competitive field, it’s important to look beyond just the toys that are directly competitive and to consider the entire range of toys that make up a child’s entertainment at any given time. Thus, a doll can be competitive with an arts and crafts set or an action figure is competitive with a game, a vehicle, or even a computer. What all toy manufacturers are competing for are kids’ leisure time. Moreover, it’s important to figure out what perceived need the toy is going to meet. Kids’ tastes and wants change rapidly, and it can be extremely challenging to try to forecast years, or even months, out from your on-shelf date.
Part of looking at the competitive market is also to identify holes in the marketplace, undermerchandised categories that could present opportunities. This may seem like an obvious merchandising strategy on the surface, but consider that in a year when the fashion dolls sector is lagging, the opportunity for new entries may be fewer and the barriers to entry higher in terms of advertising and marketing costs to drive a product into a tight and competitive market. If the overall market, in this example, is not responding to fashion dolls, retailers tend to go with what’s selling and minimize risk with new entries.
It also bears repeating that, a central component to knowing where your toy is going to fit in the market and in the established retail mix, is to identify how your product is going to outperform what’s already being sold for a retailer to take a new product, another one has to go. Even with the nearly 40 percent turnover of products in a given year, toymakers need to be able to articulate a strategy around a product introduction, such as understanding where a competitive product is in its life cycle and being able to market effectively against that.
As we’ve seen repeatedly, however, there is an exception for every premise and practice. The foregoing assumes that your concept is something new. There is also a huge market in the toy industry for so-called “me too” products. In this case, similar products are deliberately launched into the marketplace to take advantage of momentum in a category and pick up a different, more price-sensitive sector of the market. Retailers may, in fact, request a company to come up with something similar in a category to drive competition and potentially deliver a higher margin. (This is not something that many toy companies are willing to discuss or that makes them very happy, as you might imagine.) In this sense, it is more likely for the market to validate a concept and spur new entries, rather than pure product innovation and originality. Given comparatively short lead times and the opportunistic nature of the business, that makes sense and can lead to successes, but it also presents a level of risk that is unlike many other industries.
Prototypes
So, let’s assume that you’ve done your homework, and your concept has survived the scrutiny and it’s gone through thus far. The next stage is usually to build prototypes. If you are making a simple toy, you may only have a prototype that looks like what you envision the finished product to be—at that time. However, most toys will have two kinds of prototypes, particularly if there is some kind of mechanism in the toy. Generally, the designers and engineers create “looks like” and “works like” models.
The names are pretty self-explanatory. The looks like model may be hand sculpted, the works like may be simply a mechanism at this stage and is really designed to see if the movement and performance of the concept is possible.
What follows are several rounds of development as the products are refined. At each stage, different elements are added as materials and components are selected for the finished product. At some point the two models merge, and what you have is what is typically called a “hand sample,” a version that closely approximates the finished toy, but is a one-of- a-kind, hand-built model.
It’s also during the prototype process that engineers begin to determine the cost of production. Assuming you’ve set your target retail price in the earliest stages of development, the challenge becomes determining if the concept can be executed within that cost range. Part of the costing includes making the margin. While margins can vary within the industry and between categories based on whether or not something is TV advertised, a good rule of thumb in the current market is to consider between a 30- and 35-percent margins on a toy.
Let’s look hypothetically, and in round numbers, at how that could work for a toy that you need to be able to retail for $30.
To make a 30-percent margin, the retailer needs to be able to purchase that toy for $21.
Ideally, the manufacturer can produce the toy for about $11.
That $11 unit cost has to include the product, packaging, shipping, advertising, licensing fees (if relevant), and all costs related to the production.
It will vary by product, but that means that the product component of that may be 50 percent or less, so the product needs to be produced for maximum of $5.50, including materials and labor.
So, the challenge at the prototype stage is to figure out if the product can feasibly be produced within the targeted structure. Very often, the materials are the least expensive part of the toy. Reducing costs, however, is a paramount concern, and the equation is fragile. In recent years, the increased costs of shipping, materials, labor, and even electricity in China have had an upward pressure on production costs, even as retailers have exerted downward pressure on pricing. Add to this that a toy may only have a single year in which to recoup its investment and turn a profit, and the challenge becomes even greater. What this means is that each toy must be addressed as a stand-alone endeavor, and so the prototyping process is all about trying to ensure that the toy is feasible within the cost parameters. This is true whether a toy is to be manufactured in a factory owned by a toy company (comparatively rare) or if it is being sent out to bid by different factories.
The costing process can often reveal inherent problems, as the initial concept may appear to be too expensive to produce anywhere close to the targeted retail price, and so the process of cost reduction begins. Yet again, toys are somewhat unique compared to other manufactured goods. Many products can be successfully cost-reduced without harming function. However, the risk in the toy industry is that in reducing costs, one also reduces play features, and it’s possible to end up with a toy that can be produced for a target cost but that doesn’t deliver the play experience. As Neil Friedman, CEO of Alex Brands has said repeatedly throughout his career, one should be careful not to cost reduce the magic out of a toy.
Prototypes also play a role in the sales process. While a retailer may have seen concept boards and presentations on a prospective product, the prototype stage is usually the point at which a retailer sees a version of what will eventually appear in store. While “works like and looks like” prototypes are expensive to produce, costing thousands to tens of thousands of dollars, the retailer feedback is critical at this stage and part of the ongoing dialogue between the retailer and the manufacturer.
Production and Testing
Assuming a toy can be produced at a target price point and that retailers have ordered it, the toy then goes into production. Depending on the toy, production can be everything from molding plastic to cutting and sewing fabric to printing. The manufacturing processes for toys are not much different than those for other consumer goods. Our purpose here is not to discuss basic manufacturing processes, but to highlight what one needs to consider about the toy industry as distinct from other manufacturing operations.
Because children play with toys, and because virtually all children under three-years-old will put things in their mouths, safety standards for toys are very strict. The U.S. Consumer Products Safety Commission and ASTM.org list the various requirements for materials and testing.
In addition to tests for shipping feasibility, toys undergo tests such as bite tests, drop tests, pull tests for buttons and strings, and other tests designed to simulate foreseeable use of a toy.
Relatively recent events such as excessive lead discovered in paint or the dangers of strong magnets coming off toys and being ingested by children have created heightened public attention to toy safety. In response, companies have heightened oversight and increased testing at different stages of manufacturing. For example, in some cases where paints were tested only when the toy was produced, now paints are being tested before production begins before they’ve been applied to the toys and again when the toy is finished. Toys sold in the United States must conform to voluntary safety standard ASTM-F963, which is regularly updated. In this case, the word “voluntary” means that the industry is self-policing, rather than having formal governmental regulation. These highly detailed standards are available to review online and are not our subject here.
At the same time, in addition to safety standards, many major retailers also require samples to be submitted for their own testing prior to accepting shipments. While this adds time and cost to the production process, it’s inevitable. It’s estimated by manufacturers that in recent years with heightened requirements and additional testing by retailers, testing has added as much as 15 percent to the cost of a toy. While these added costs have generally been absorbed into the production and costing process by 2017, they have impacted every stage of product development from costing to timing to production.
This is further complicated by the fact that there are no constant safety standards across different countries. The European Union has different standards than South America or even the United States, and toys must comply in the countries they’re being shipped to. The International Council of Toy Industries, which was formed in 1975, as a part of its mission to support the global toy business, eliminates barriers to trade and fosters social responsibility, and has addressed the need for global safety standards, but to date this has not been accomplished.
Manufacturing
With very few exceptions, most toys are manufactured overseas in Asia. Much manufacturing is concentrated in Guangzhou and Shenzhen in China, though there are manufacturing facilities in Vietnam, Cambodia, Sri Lanka, India, and other areas. The area of China outside of Shanghai is currently emerging as a manufacturing center for toys. In the case of large toy companies, these companies either own factories or have partnerships with established factories to make the toys. Smaller companies usually source manufacturing by finding companies that specialize in different manufacturing processes.
Toys run the gamut of manufacturing processes from sewing for dolls or doll clothes to various plastics molding processes to wood, metal fabrication, electronic components, and much more. In some cases, pieces are sourced from one manufacturer and put into a toy. For instance, rather than creating the molds and producing dice for a game, a game company may go to a factory that makes dice and either buy some already made or ask that company to make a customized set for the game. All of these elements figure into the costing process, with the overall objective to make the best toy possible for the least amount of money. Large toy companies may also buy futures, that is pay a set price for raw materials that have yet to be produced. This is particularly common with plastics that are petroleum based with costs that are variable. It’s certainly one way to hedge bets on cost increases. This is also a tactic that’s been used with computer chips.
Once the design has been finalized, the toy company’s production and operations teams go through the process of putting together the components of the product, scheduling the manufacturing and assembly. Depending on the product, this can take anywhere from three to six months, or more. Unforeseen shortages of computer chips, for example, can slow production. Safety concerns or engineering problems can similarly slow the process. Ultimately, though the product is complete and ready to ship. Of course, this is a gross simplification of the entire process, and further study of manufacturing is recommended for anyone in the product end of this business.