Popular Christmas toys are notoriously difficult to buy, and not because you started your festive shopping too late.
Money Mysteries is a column by Ryan Ong that explores the odd world of money. Where does it all go when you give it to a bank? Why does a potato sometimes cost S$200, or shipping a sofa sometimes cost S$1.99? Why is art so expensive, and how do people (legally) rip off casinos? Every week we answer these questions and investigate a new Money Mystery.
There you are racing down the aisles, trying to grab the Plastic Flying Thingamajig that your cousin so desperately wants. But as you reach the shelves, horror sets in: all of them are gone. There goes your intended Christmas present. How come, no matter how early you seem, you keep missing the hot toy? There’s an insidious secret.
In the Business of Manufacturing Demand
At the risk of sounding glib, toy companies manufacture demand. And by that, we don’t just mean they have good marketing.
If you’ve spent a zillion dollars marketing a particular toy, you’d want to produce lots and lots of it come Christmas time, right? After all, demand is through the roof; and that’s why you spent so much on marketing it anyway.
That used to be how toy companies worked, until they realised they should sometimes do the opposite. That’s a strategy called “artificial scarcity”.
Creating Demand Sometimes Means Causing Scarcity
Now here’s the dirty secret: There aren’t enough of that hot toy to go around, because the producer has deliberately caused the shortage.
In 2016 this tactic was tried was with Hatchimals, some kind of plush toy that comes in an egg (don’t ask us, we don’t get it either). It worked to ramp up demand to insane levels, and some of them sold for three times the price on Ebay.
More recently, Nintendo was accused of attempting this strategy with its Nintendo Switch console (although it turns out they just couldn’t make them fast enough).
But why would a company deliberately create an undersupply? Well, there are three reasons:
- It lowers risk for the manufacturer
- It prolongs the sales surge
- It helps to move alternative products
It Lowers Risk for the Manufacturer
Despite the fun exterior, making toys are a very high risk business. The logistical complexities involved are also through the roof.
A toy manufacturer needs to work out deals with distributors (giving them a big cut), spend millions to make a product that they don’t know will sell, and some live on two profitable months every year (November and December).
While they’re not a toy company, note that major toy chain Toys ‘r’ Us makes 40 per cent of its revenue in the last quarter of every year; that’s probably why they’re filing for bankruptcy protection in the United States.
A toy company can’t afford to spend millions on making a product, and then discovering it’s not selling as well as expected. If that happens, there’s going to be a few hundred (or thousand) layoffs from the factories and offices.
It’s better to under-produce the toy, while jacking up the price. Remember your economics? When demand exceeds supply, prices rise.
Also, they don’t really “lose out” on sales, because under-production can help to prolong the surge.
It Prolongs the Surge
Let’s say you fail to get the hot toy for your daughter this month. If you think she’ll forget about it by January, then you don’t know children, or how long they can pine for something.
To prevent madness from settling in, most parents will give up and buy the toy for their child anyway in January – even if Christmas is long over. In this way, there’s a continued demand for the toy for another month or so. But in the meantime, the company still makes money on Christmas anyway, even if they didn’t sell as much of the hot toy as they could.
It Helps Move Alternative Products
If you can’t get the hottest toy for your child this Christmas, well…you still need a Christmas gift right? You’ll probably buy a close alternative, which is likely to be from the same toy line (read: made by the same manufacturer).
This also helps toy companies to please their distributors, as it moves out the old stock.
You now end up buying a second-rate alternative that you would never have spent money on, plus you’re probably going to buy that hot toy anyway, the moment it comes back on the market (see point 2).
And that, dear readers, is why the hottest toys of the year always seem to be out of stock.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.