Episode #124: The Effect Of Skimpflation and Shrinkflation On Toy Creators
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All across the globe we are seeing a massive increase in prices and reduction in quality. In fact it’s so prevalent, it has a few nicknames. Shrinkflation and Skimpflation are two practices of reducing the quality of goods and services to maintain margin, and reducing the actual contents of goods and quality of services while increasing the cost. Customers have noticed the change in gas prices, groceries and now even our toys. If you are a new entrepreneur, inventor, or toy maker you may think that Shrinkflation doesn’t affect you, but you’d be wrong my friend, it certainly does!
When a company performs a cost reduction exercise under a normal economic climate, they take a look at their product and make small, simple changes. The goal is typically to reduce cost without affecting overall aesthetic or playability. But when companies have to make up for 10% or more in lost margin, there’s no way around affecting the size and sometimes the quality of a product. A lower margin industry wide, and changing consumer expectations is something you could stay acutely aware of over the next year.
As an inventor these monetary changes could affect the categories you focus on and as an entrepreneur or maker, it can affect the amount of components you need for your toy or game to stay competitive. If you want to maintain a cash-positive toy business you’ve got to look at the bottom line, and that means adjusting when margin and revenue take an unfortunate tumble.
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Click here to check out the Omni Margin Calculator mentioned in this episode.
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Read more on Shrinkflation and Skimpflation.
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[00:00:00] Azhelle Wade: You are listening to making it in the toy industry episode number 124.
[00:00:05] Well, Hey there toy people Azhelle Wade here, and welcome back to another episode of the toy coach podcast, making it in the toy industry. This is a weekly podcast brought to you by thetoycoach.com. All across the globe, we're seeing massive inflation. I'm sure you've seen the memes in the US about gas prices in California, or you've heard your friends or family talking about the rising cost of groceries. With costs going up, even in the toy industry, toy companies and retailers are struggling to maintain cushy margins. The days of Keystone margin pricing are gone, retailers are accepting 33% as opposed to 50.
[00:00:57] And manufacturers are now facing an uphill challenge and trying to reduce production costs while maintaining or even increasing retail price point. NPRs planet money podcast coined the term skimp inflation. And I recently saw Richard North, CEO of Wow Stuff Toys post about the term shrink flection. So that's what we're going to talk about today. If you are a new-ish entrepreneur and inventor or toy maker, you've got to pay attention to this now. And we're going to talk about how you should pay attention to it. What kind of moves you can make to prepare, and also why this is important.
[00:01:38] Now the year before I joined ToysRUs as a full-time employee, the company had undergone a year long exercise in reducing their cogs. So cogs is this acronym that stands for cost of goods sold. So this is essentially, the wholesale cost of a product. So when a company performs a cogs exercise under a normal economic climate, they take a look at their product and they make small, sometimes not noticeable changes. They might reduce the thickness of the cardboard of a box or turn a full color instruction sheet to a black and white one. They might reduce the number of custom fabrics used across a line of dolls.
[00:02:22] Or even consolidate the number of factories that they work with in an attempt to get a better deal by providing a higher number of volume orders to one or two factory partners. So the exercise of reducing the cogs is typically done to maintain a retail price point to maintain perceived value or to increase margin, which will then increase overall profit. Right. But today with the rising cost of materials and manufacturing, reducing the cost of your toys goods can no longer just be this siloed exercise that you do without looking at the market as a whole. And it's no longer an exercise you do just to increase profit.
[00:03:07] Instead of looking internally at your own company, sales and margins companies have to look externally at new market standards and customer expectations. So what does all this mean for you if you're an independent toy maker or an entrepreneur selling direct to consumer on your website or on Etsy? What does this mean for you if you're an inventor? Well, we're going to dive into that. So starting with our toy makers and entrepreneurs that sell on their own sites or that sell on Etsy, or maybe even you are lucky enough to have gotten your store, your product into a toy store or two.
[00:03:48] Well, you've got to know that large companies have teams dedicated to paying attention to their bottom line. Teams that are looking at margin numbers, year over year, quarter over quarter. And if you don't know what margin is, it's that profit that you make off of selling your toy. Now, these teams are dedicated, you know, they'll have quarterly meetings scheduled to review those numbers. So if you are already a toy maker and you're someone that just sells your product on a site like Etsy or your own website, or you're lucky enough to have gotten some toy store orders and intend to be deep in the creative side of your business and maybe overlook or don't look at that financial side until maybe have to do taxes.
[00:04:31] Well, now is the time that you need to stop and take notice of market changes, because if you don't, you might be at the end of the year, realizing that your profit has dropped dramatically and your business could be in trouble. Now in my program, Toy Creators Academy, the very first module is dedicated to learning about the toy market, to learning about the price points and box sizes that already exist so that you know what your ideal target market is comfortable with. So that is going to be very important for you to do over and over again. Every couple of months during this time where price points are changing.
[00:05:09] So it's called strategic market research. And to do that, you've got to go out to toy stores. You've got to look online at where people are buying these products online and because of inflation, shrink inflation, what customers are getting and expecting for their money is changing. If you want to maintain a cash positive toy business than likely you're going to need to change what you have to offer as well. And it's best to start this early, so you can maintain the integrity of your product while you maintain your margin so you can stay in business. So, where should you start? How should you start?
[00:05:52] We know when you should start right now, but how should you start and where? So you're going to do your own internal cogs initiative, right? It's going to be a few steps. We're going to talk about them briefly right now. Okay. First you're going to analyze your existing product. And when a company performs a cogs exercise, they analyse their existing products, how you want to do this? You want to get an Excel sheet. If you don't already have one and you should, that lists all of your products. It should list on this Excel sheet, your product name, your factory costs, your wholesale cost. If you're selling it to retailers and your retail costs, if you're selling it direct to consumer.
[00:06:30] Now you should also be calculating in this Excel sheet your margin. If you don't know how to do that, you can use an online tool like the Omni margin calculator, which I will add the link to in the show notes of this episode, so that you can calculate your margin on your wholesale and your retail sales. To get that link, head over to thetoycoach.com/124. Once you have all that information in an Excel sheet, you want to filter this sheet and sort that Excel sheet so that your lowest margin item comes to the top. And if you want to take it a step further, you can actually add another column to a list, the quantity of sales.
[00:07:10] So maybe you have like monthly sales coming in, or maybe you have a yearly sale that you want to look at. You can sort that already sorted list by monthly sales or weekly sales To determine what has the highest rate of sale out of your lowest margin products. That's what you want to attack first, what you're selling the most of and making the least amount of profit on. Now, depending on how complex your item is, whatever item it is that comes out to the top, you might choose maybe just that one item or maybe you'll choose two items to start with. Now, whatever items you start with the next step is for you to make a list of all of the components that are included with that item.
[00:07:52] If you develop that item with a factory then you should already have like a BOM or a bill of materials that lists all of the components of the item and the cost. If you handmade this item and you haven't already, you should create your own BOM or bill of materials. So this BOM should list everything. Everything that it costs to make this item ready for sale. If you handmade it, that means you might have things like 20 yards of yarn and two cardboard sheets, or polyfill, 10 inch pieces of wood, whatever it takes. If the item was made in a factory, your BOM might be simpler. Like one doll body, one head, three piece outfit with custom prints.
[00:08:33] You even want to include your instruction sheets if you have one. The labor that it takes to create your item, especially if it's something you are hand-making yourself and every component should have a price next to it. If you don't know the price, ask your factory. If it's a labor cost and you're struggling to figure that out, just multiply the value of your time or the time of whoever is making the item by how much time it's made. So $10 an hour by three hours, you got $30 add that is your labor costs. It should not be that high, but I am giving an example. Now, once you have a clear and updated list of what it costs to make your product component by component and labor, it is time to do some market research.
[00:09:16] So your next step is to do this market research. I actually already have a pretty in-depth podcast episode about how to do market research. So if you want some more information on that, I really want to direct you back to episode one of this podcast after we're done here today and to go there not yet, but when you're ready to go to thetoycoach.com/1. Now, when you perform this market research, I want you to look at product that is your direct competitor. You need to look at the product that your ideal customer or target market would buy instead of your product if they ever did something as terrible as that, but what would they buy to replace your product?
[00:10:02] You want to get as close to your product as possible. If you can afford it, purchase some items of that product, because what you're going to do once you get home is examine all the components that are included in that box, examine the box itself. Now, hopefully you've been keeping up with your market research of your competitors, and you've been doing this type of work every couple of months. So at that point, being in the store, looking at their product, looking over their product online, if you choose to do this online, You already might notice some changes. You might notice a price change. You might notice a packaging material change.
[00:10:39] But if you haven't been keeping up and you can't notice changes at first glance, you're going to do some digging, right? You're going to hopefully buy the product or just turn over the box and read through the components oftentime they're listed on the back of the box. Then you're going to take a photo, write all that stuff down. Make note of any differences you might see in this product. Now it's always going to be better if you can purchase the item. So you can really open up the box because when companies have to reduce costs, they first try to reduce it from areas that you don't notice at store level. And they try to reduce it from areas that necessarily don't affect the products perceived value or hopefully the play value.
[00:11:23] So that's why you really want to get it home, to see all of the cost reduction, like in the box, what's happening in the box. When you do that, you can feel the thickness of the cardboard. When you open it up, you can see if there are instructions in the box or if they've been maybe changed or maybe there's nothing in the box. What you want to prepare after performing this market research is a side by side comparison of components. I like Excel for this. And your goal is to directly compare your competitor's product to your own. So you would create an Excel sheet with these columns, right?
[00:12:01] Columns would be, you know, I mean the product name will have to be there, but the columns will be component quantity included, quality score, material, package, size, and retail price. So when you create all those columns per product, you're going to fill out this Excel sheet with your product information and with your competitor information. So the component column is going to be like a name. So it might be doll body. It might be, you know, a car, body or something like that. The quantity included is how many pieces come in that box. Now the quality score is a little bit subjective.
[00:12:37] So try to be as objective as possible, rating 10 as the highest quality material available for this particular type of product and one as the lowest quality material available. Cause we just want to compare what is available on the market. And eventually we'll compare this to the price point because what you're going to start to learn is okay. Is the market okay with a quality eight fabric if they're getting a cut on the price? That's why it's important to rate that quality. Now in the material column, you just want to list the material might be wood, paper, colored paper, if you know the type of plastic list that there and the package size self-explanatory, what is the size of that package?
[00:13:22] It's also helpful if you could state, what type of package is there? A window? And is that window completely open or does it actually have plastic over it? Cause that's an additional cost as well. And additionally, you're going to write that retail price point. So it could be a retail price point in store. It could be a retail price point online. You might have both of those price points. You might want to list boasts of both of those. Once you do that comparison, you can directly compare. You can see if your competitor has more or less pieces than you. If they have a higher or lower quality product than your product, and you can just do this direct comparison and contrasting.
[00:13:59] I would recommend you keep an Excel sheet like this, you date those numbers and those findings so that you can actually continually update it because this is just the beginning, right, of our shrink inflation or shrink phenomics wherever would call it, so that you can continually update it. And you can keep an eye on the consumer behavior of product pricing in our industry. Now, If you're selling a product on Etsy, there's a really great tool you can use to analyze, prices across different products and even analyze search terms and that product or that site is called Marma lead. So that link will also be in the show notes. So make sure you check that out at thetoycoach.com/124.
[00:14:41] Okay. So next thing that you have to do after you do all of that comparison from your market research is you're gonna experiment with solutions. So that might mean researching new materials to make your product. It might mean simplifying your design, using open market fabrics, which are not custom fabrics it's fabrics, the factory might already have and be selling to other people. Or you might decide to use open market toy pieces. And what you found in the comparison stage should greatly influence what solutions you experiment with. For example, if you notice your competitors don't have instruction sheets in any of their products, and instead they print a QR code on the interior of the box where the customer can access the instructions online.
[00:15:29] You can do that and save 20 cents. If you notice your competitors switch to polypropylene plastic from abs plastic, you might consider making that change as well. Whereas, you know, there is a higher quality in abs, you know, that it's a stronger, more durable plastic for that type of toy. You might say, ah, it looks like the consumer doesn't really care. So should I really be paying more to create this when all it's going to do is reduce my margin? And eventually kick up my price point. If you can't tell what material a company is using, but you do know that it's different. You can always reach out to your factory and just ask about a material alternative for your product right.
[00:16:08] Now, if your item is a game that includes something like a thick booklet of papers that you might have players use to mark down their scores over many games. And maybe it's like a 50 page book because you want them to play the game tons of times you might actually decide to swap out that printed booklet for a reusable alternative, like a whiteboard. So, what do you do once you've kind of gotten some ideas on things to switch up. You've reached out to your factory. Maybe you've come to a couple of good solutions. The next thing you need to do is decide whether or not you want to launch a new product or update an old one.
[00:16:49] It's one of the biggest questions you're likely to have. If the changes that you have decided to make, or you're experimenting with making don't affect the way your Toy or game can be played with, then you can update your old product. What you want to avoid is public customer complaints that your product is not what's advertised. So sure you can definitely update your packaging to reflect, let's say your toy bear no longer has 10 freezes, he now has three. Yes. You can totally update your packaging and the language on your site to express that. And you should, but depending on the popularity that your product already has.
[00:17:32] Your potential consumers may already have an expectation of that product and may be disappointed if they get a cost reduced version. So be sure to update everywhere possible that your product is sold, that your contents have changed, but that is also why some people choose to just phase out, let's say a more expensive version of their product and then bring in as a new skew with a slightly different name, the new version of their product. Larger companies don't tend to worry about this as much, but for smaller toy makers, I know how much at T reviews or Amazon reviews mean to you and how impactful they can be to your business and how one bad review can just like, feel like the end of the world.
[00:18:17] So that's where you want to be really careful about changing the materials and quality of your product without adequately notifying your potential consumers. Especially if it's a product that someone ends up ordering more than once, and they're expecting one thing and get another. Okay. Last thing let's talk about being an inventor in this new world. What does shrink fallacious and skin inflation mean for you? Do you, as an inventor need to pay attention to the market differently? Well, I would say yes, there are a few things to consider three, to be exact.
[00:18:50] Number one, as an inventor, let's talk about simplifying your mechanisms. You know, as an inventor, you're going to be asking and negotiating for a cut of four to 7% of whatever ideas you license. And now, you know, that companies are struggling to maintain their margins. Say they're getting a 35% margin down from about 10% of what they're used to. What does that mean to you? It means that they're going to have less room to give you the inventor a piece. So while that might mean that you are facing lower percentages, it also means that you have to simplify your invention so that they are appealing in costs.
[00:19:32] So I would say the old term kiss, keep it simple, stupid. When you're innovating toy and game inventions for a market stressed for margin, you got to keep it simple. So that means simplify your invention, your mechanisms as much as you can simplify, remove electronics and make things mechanical whenever possible. So let's say you have an electronic device that activates a movement of a toy. Well, the benefit of it being electronic might be ease of use and maybe the size of it, but the downfall might be the extra cost of materials that it would require, and it can make your invention cost prohibitive.
[00:20:11] And the difference between making something electronic versus mechanical is just having moving parts. Electronics will typically just not require any moving parts to activate. Whereas the mechanical toy will have like physical movements, like years to complete an action. So this specific recommendation comes from an experience that I had with a student of mine in a pitch event.
[00:20:31] To call this student Jack to protect his identity. Really talented guy, talented engineer created a clever game with awesome surprise elements that were driven by an electronic steel heavy, magnet heavy system. So after pitching the idea Jack received a lot of praise for the concept itself and the way the concept was presented, but there was cause for concern at the cost of his invention. So that's when Jack said no problem, this entire build can be done mechanically. So as an inventor, Consider shrink inflation as you're inventing your products before you pitch reduce it to the simplest form of the mechanism as possible.
[00:21:13] Aside from how complicated your mechanism is you've also got to consider the sizing of your product. Pay attention to the new box sizes that are coming out now, and the new sizes that will continue to come out in the coming months. If companies are simplifying and reducing their box size, don't pitch a concept that's too large to fit in a standard six by eight inch by two inch box size for example. This reminds me of another story of a student of TCA. Let's call this student Ashley after my middle name. So Ashley developed a really cool game. But the main component of her game, which was made out of a paper material was way too big to be able to go into a box, to sit on a shelf at any toy retailer.
[00:21:58] I'm talking like four times too big. Ashley and I worked together to reduce her box size with a few really clever score lines and score just kind of means like fold lines. We were able to reduce her box size by about 75% and actually make her product a workable size without that reduction. Even if a company loved that idea, they couldn't move forward with it because it will not work for their margins or their spacing, the new size box they have to work with. The last thing I want to say as an inventor to think about in this kind of skim inflation economy, is consider really focusing on high margin categories while inflation is increasing right.
[00:22:44] While costs are increasing across the world and companies are getting more sensitive about their margin, pay attention to the categories with high price points and low margins, games and puzzles. I've always been the go-to for that. Right. And even somewhat outdoor toys pay attention to categories of toy and games where there's smaller or lightweight boxes or even larger, but lightweight boxes for higher retail price points. Whenever you see that combination of like the lightweight and the higher retail price point, and it actually sells, those are the categories that have this intrinsic value that gives leeway for a higher retail price point without affecting sales.
[00:23:28] Even if they have a smaller box size or a super light weight box. So likely that's going to be any kind of like group toys or games, family related products, mini toy brands, because they're like miniature versions while saving so much on that box size and some simple electronic toys or game pieces. So when you take a look at it, that way we can assume high margin categories are likely to have the most success for inventors during inflation, because those will be the categories that actually have room for you to get percentage in an already decreased margin. Okay. So the last thing I want to kind of focus on, which I don't talk about too often on this podcast is, service providing toy entrepreneurs.
[00:24:21] So if you're doing like PR or marketing or anything like that, what do you need to consider with shrink relation? Well, like anything, the cost of your services might need to change. How can you perform a cogs on your own services when it's not a physical product that you can actually reduce the components on, but it's your time. So you might want to do something like offering a deal for a bundle of services. Offering a deal if they commit to working with you for a certain amount of time. Or sell digital goods that can generate recurring income that doesn't fill your calendar with new clients or, or break the banks of already hard pressed toy makers and entrepreneurs.
[00:25:05] While things like copywriting, budgets and marketing budgets might get cut back. Those companies still need those services done. So instead of offering full, done for you services that might cost them, you know, a couple hundred dollars or a thousand dollars a month consider offering pre-made templates for social media posts, for email articles, for blog articles, or other downloadable resources that can help them DIY some of the work that they might not be able to afford to outsource, more than ever. I believe we're about to reenter a little bit of a DIY economy with entrepreneurs wearing more hats than ever as everyone's going to be trying to reduce their overall business costs to offset the lower margins and keep a cash positive toy business.
[00:25:59] Now, before I jump into my quick summary of today's episode, I'd like to take a quick break and give a shout out to Terry Nichelle Bradley of brown toy box. If you don't know, brown toy box is steam kits, toys, books, and content designed to create the next generation of black innovators, thinkers and creatives. Brown toy box currently has six kits sold at Target stores and on target.com. Terry is a founding alumni of Toy Creators Academy but honestly, I got to say this toy creator came on this podcast and shared lessons in funding, your toy business that she did before the toy creators academy program. And you are going to want to listen to that episode, my friend.
[00:26:46] So head over to thetoycoach.com/55 and learn how you can start funding your toy business with local marketing and local accelerator programs. Terry, congratulations on all of your success. I'm really happy to have you in this network. Wishing you much continued growth. Okay. Let's quickly recap what we learned today. So skin inflation and shrink inflation are terms you've got to know. It's the many ways companies just cut corners in order to account for increased prices of materials and manufacturing to maintain margin. It also accounts for rising prices. It is directly tied to a changing economy, labor market and issues with our supply chain.
[00:27:34] Now what you have to do about it. So what to do about it as a toy maker, a toy entrepreneur, a toy inventor, or a service provider. You got to pay attention to the market, continue analyzing the market. Refamiliarize yourself with how price point is starting to relate to box size as we go into this new era of toys. What is the new normal and expectation of consumers? They might be complaining now, consumers are noticing that things are more expensive, that boxes are smaller, but eventually it's going to become the new norm. And you don't want yourself stuck with really low margins because you aren't adapting and changing your product to meet the new standards.
[00:28:14] You want to perform an internal cogs assessment on your materials and labor to reduce your own cost and maintain a competitive product and a product of integrity while you continue to sell your toy product, but keep a positive cashflow toy business. And inventors, we talked about how you might want to simplify your inventions, think mechanical and you might consider focusing on high margin categories. Now, I've got a couple of articles I would love for you to read up on skim flirtation and shrink flirtation. And don't feel like you are not allowed to change and evolve your product.
[00:28:55] I know it can be hard and scary when you go out there and you change something about your business. And you're afraid of how your followers or your market will react. But that's why you want to keep a finger on the pulse of what is the norm in the market today. And we want to change little by little alongside the market as a whole so that we don't have to do a random Netflix style price jump. Am I right? Okay. As always, thank you so much for spending this time with me today. I know that your time is so valuable and that there are a ton of podcasts out there. So it really means the world to me that you tune into this one. Until next week. I'll see you later toy people.
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