Monday, August 19, 2013

The Pleygo Proposal

One of my jobs back when I worked in the financial services industry was to give analytic support to teams that came up with new products. I always enjoyed those meetings. It was fun listening to smart people dig their teeth into an interesting problem.

The recent gush of PR for Pleygo, the well-connected, well-funded company that claims to be able to extend the Netflix DVD-by-mail model to Legos got me thinking about those conversations. More than a dozen blogs and news sites, including heavy hitters like Time and Businessweek, ran what appeared to be lightly paraphrased versions of the same press release. They were depressingly similar both in what they said and in what they left out. What you didn't see were the kind of questions you would normally associate with product development brainstorming meetings and we're talking some fairly obvious questions.

Though this isn't my field and I don't bring any special expertise beyond a few years in marketing, here are some of the topics I'd expect to hear raised when people first heard about this model.

The Way Kids Play

One of the many great features of Lego is the way the interchangeability of the pieces allows children to recombine them in new and imaginative ways. Give kids a little time and pieces from that rented X-Wing will be thoroughly mixed with the permanent collection. The guns will be protecting the medieval castle, the radar dish will be helping Batman track the Joker and the engines will be making the train set look really cool.

Imagine trying to separate out the X-Wing pieces from all those other sets, keeping in mind that many of the components that look similar (say the windshield from the fighter and the windshield from the Batmobile) may be different enough not to be interchangeable. Now imagine going through this process every time you want to return a set to Pleygo.

Of course, even if users can keep the rented sets segregated, the model still run into a still bigger challenge, what you might call the duration of play problem. It generally takes about two to four hours to watch a DVD (possibly spread over two or three days). After viewing, the value of that DVD to the renter drops sharply; there no incentive to keep it around. This is one of the reasons why the rental model has worked so well for home video.  With toys, some are played with once while others are played with almost daily for months. If you're paying $25 dollars a month and your child keeps a $40 set for six weeks, you're not coming out ahead. (Actually, some kind of rent-to-own model might work better.)

A Niche of a Niche

So who's the target market here? With Netflix, it was pretty much everyone with a DVD player. With Pleygo, it's certainly much smaller. For the reasons mentioned above, it's probably not children who play with Legos in the conventional sense (play is problematic for this model). Instead I think we're mainly looking at the subset of non-collecting model builders. These people are certainly out there but are there enough of them to justify millions in start-up costs?

Dozens of Choices

Another factor to consider when thinking about the viability of a mail-order business, either rental or retail, is catalog depth. Going all of the way back to Montgomery Ward and the Sears Wish Book, one of the historic advantages of mail order is the ability to offer huge selections. No video store could ever offer the choices that Netflix could (By mail. Streaming is another story). This isn't the case with Pleygo which offers a selection not much better than Target and probably no better than the Lego store at the mall. (The Lego store also has bins of different sized bricks so you can mix and match exactly what you need -- a huge plus for Lego enthusiasts).

A Logistical Nightmare

One of the great insights of the original Netflix model was that shipping DVDs was surprisingly cheap, fast and convenient. Shipping packages is none of those things. Remember, the value for renters here comes from getting access to many more sets than you could get on a monthly budget of $15, $25 or $39 (the last making sense only if you're regularly ordering sets with more than 500 pieces). Even if we assume that most of the sets mailed to the $15 and $25 members fit in the smaller boxes, it's still difficult to see how Pleygo plans to break even on shipping costs if these customers if they order three or more sets a month.

And then there's handling. Once again, the Netflix comparison is instructive. To process an incoming DVD, you make sure the bar code matches the title then feed it into a machine that checks to see if it's still playable. With a box of Lego pieces, the process would entail sorting and checking hundreds of components, making sure that nothing was broken, that pieces from other sets hadn't been mixed in, and that moving parts (motors, gearboxes, switches) still worked. And this process would have to be flexible enough to work with dozens of different sets.

"Wait! There's More!"

There is a partial exception to the claim I made about these points not being raised in other coverage about Pleygo, but it's a depressing example because in this BusinessWeek article by Susan Berfield, the questions feel more like the patter of an infomercial than any kind of actual journalistic inquiry.
That’s great, but most customers have a more mundane concern: How does Pleygo keep track of all those pieces? [founder Elina] Furman says that actually hasn’t been much of a problem, though each set does arrive with a bag of spare parts. The bigger issue has been figuring out how to offer free and fast shipping. For now, the company uses priority shipping from the U.S. Postal Service. Pleygo needed its version of the red Netflix envelope, too. That turned out to be a custom-designed cardboard box that comes in two sizes: small and large.

Throughout the BW piece, I got the feeling that the writer was being fed the questions with the (implicit?) understanding that there would be no follow-ups. Furman has a huge incentive to keep the good news flowing until the IPO and this piece gave her the chance to issue a reassuring if not credible "we're on top of it" about logistic concerns without having to lay out specifics or release supporting data.

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