Toys You Can't Discount

One of the reasons for Amazon's success this past holiday was Melissa & Doug's failure to protect its brick and mortar retailers. Amazon was selling many (most?) Melissa & Doug items at or below wholesale. My customers could go to Amazon, order an easel, and have it shipped to their door for five dollars less than I paid for it! I have had repeated conversations with my rep trying to get some assurance that this won't happen again, but to no avail.

This is a very interesting topic, noted on several interesting blogs. My comment: At Shopatron, we work with over 500 branded manufacturers. In some markets, like scuba diving equipment, the local retailer plays a critical role in the health of the industry itself. Local dive stores are responsible for training the bulk of new divers. Those stores in good diving areas like Florida and California are primary inspectors and fillers of air cylinders. Stores not near good diving areas play key roles in organizing trips to diving destinations. The profit margins required to sustain a dive store providing these additional services to the dive industry are higher than the margins required to sustain an online dive retailing operation. Manufacturers have very little or no incentive to keep prices of their products artificially high. When you see many manufacturers moving to minimum pricing, it is often when they have seen a steady erosion of underlying strength in the user base of their products. The goal in helping retailers to sustain profit margins is driven by a realization that certain margins are required to provide services to users of the products, thus strengthening the user base. Some critics of minimum pricing argue that services can be charged for separately from products. In the ski industry, if you buy a pair of skis online, you likely can find a local retailer who will attach the bindings to the skis for a fee. Still, customers can prefer to have services bundled into product prices. Sometimes, services like initial training of divers must be loss leaders to get more people to give diving a try. If equipment sales don't follow the training provided as a loss leader, the local retailer cannot be healthy enough to advertise and drive user growth. The Supreme Court ruled along these lines, that it can be justified for a manufacturer to protect its underlying retailer base if profit margins are required on products to provide key services to customers. I'm comforted in knowing that manufacturers are unlikely to push prices up for fun. If they deem it essential that retailers need certain margins to drive sales and distribution, then it shouldn't hurt to let them do it. If the manufacturer pushes prices up for no good reason, competitors will gain market share. The Court ruling leaves it up to being determined case by case. If a manufacturer is abusing the consumer with bad pricing policies, they would be wrong to do so. (This comment was originally posted on the shop.org discussion thread on this topic)

I think that a standard price tag for a product category that represents mixed value presents difficulties to the consumer. This difficulty is represented in the variety of media outlets offering reviews to help shape customer expectations (sometimes with manufacturer guidance), the growth in the rental/pre-owned market (which fails to properly contribute to the manufacturer's bottom line in every way outside marketing) and piracy/counterfeiting (which will continue until it stops being profitable). I think that price fixing does a lot to help brick and mortar compete on a level playing field with Internet retailers. Some online specialty game retailers are providing discounts in excess of 30%, which is essentially impossible for the traditional store owner to match. In the end, the consumer has to be the winner. Greater efforts should be made to price product in relation to its value, and retain that value fairly. Undercutting the competition reduces the outlets by which a product can be brought to market, and implying that a product has greater value by price tag alone sells everybody short.

Hi Richard, Great post. I wanted to call out pricing restrictions I've noted in the video game industry and it's impact long-term on the business of video games. There's a fantastic book about the history of Nintendo called Game Over<</i> by David Sheff. In the book, the author describes how Nintendo mandated price controls over their products in the early years of video game industry (we're talking the 80s) so that discounting would never occur. If a retailer lowered the price of a game, even by a few pennies, or offered the sale of a product earlier than defined by Nintendo, the result would be that Nintendo would no longer supply those merchants with future product. When Nintendo video games were first taking off in the US, this meant big bucks for retailers, so most towed the line. Eventually Nintendo was slapped with an anti-trust suit in the US and they did lose in federal court. The Game Over book details these events quite well. Was Nintendo acting in a way that worked against free trade and put the retailer at a commercial disadvantage? Yes you could say so, but consider the following: There are a number of similarities between the early days of video game industry and the early days of the interactive CD-ROM business. When each industry started on its way, sales of these technologies were huge in the US. The difference between the two business sectors? One was largely shaped by price controls, the other was not. To this day, most major video game titles are still rolled out into the marketplace for no less than $40. Compared with the CD-ROM market in the early days, it was not uncommon to find a new title for $40 as well. In an effort to push through more unit sales, most companies began to undercut their prices. First to $19.95, then $14.95, then $9.95. As the average price per new title dropped, so did the quality. The term "shovel-ware" came into being to describe the quality of most CD-ROM tiles being rolled out in the waning days of the CD-ROM industry. Eventually, the CD-ROM industry died, never to recover. The video games industry? Well, today it’s stronger than ever. I look at the illegal price fixing actions of Nintendo in the early days as not only saving the video games industry in the US during the 80s, but also setting standards of practice and consumer expectations that allowed the industry to flourish today. I ask myself if discounting results in a race to the bottom at the expense of new toy category successes that could one day become major revenue generator for all involved in the toy biz. I don't have an answer, but spend a lot of time thinking about the question. Scott Traylor Chief KID 360KID www.360KID.com/blog/