139-Clever Pricing from Toys R Us

Toys R Us has created the “Great Trade-In” event. This event offers consumers who bring used cribs, car seats or other baby products into a Babies R Us or Toys R Us location a 20% discount on any new product from selected manufacturers in the store.

In a public relations explanation, the company calls this event an effort to keep potentially unsafe children’s items from being resold. But a more realistic spin on this event is that it is a trade-in discount that increases the company’s store traffic.

The trick with discounts always is to control the percentage of the market that qualifies for the discount while still giving the company credit for offering low prices. Companies do this by carefully selecting both the segments that qualify for the discount and the form of the discount itself.

A trade-in allowance is a form of discount. There are at least nine of these forms in common usage, including rebates, coupons, discounts in kind, and several others. Most of these forms reduce the effective cost of the discount for the company. These forms of discount, along with the segments that are eligible for the discount, help a company control the spread of the discount to specific customer segments. In our work to analyze pricing through discounts, we have found that there are at least eighteen common customer segments which companies use. This Toys R Us discount is a loss leader discount, which goes to customers who come to a store in order to get a low price on a product and then may stay to buy other, higher-margined, products.

For more on pricing, see StrategyStreet.com/Improve/Pricing/Brainstorming Ideas.

Posted 9/24/09

Update:

Throughout the 2000s, Toys “R” Us had a weakening Value proposition because it lagged the industry leaders on Function, Convenience and Price. On top of this declining value proposition the company lost share and was heavily burdened by debt incurred in a 2005 leveraged buyout. The combination of these factors led to the company’s bankruptcy in September 2017.

The company had already lost its leadership position by 1999. In that year Walmart surpassed Toys “R” Us in total toy sales. A few years later, Target also surpassed Toys “R” Us in toy sales. Toys “R” Us relied on the “big box” strategy of enormous choice (a Function benefit) at “everyday low prices”. Walmart and Target overcame that strategy by offering a Convenience benefit and even lower prices. These retailers succeeded by adding the most popular toys to its product offerings and then discounting the prices of these popular toys. A customer could get popular toys at the same place she bought groceries and other retail goods and got those toys at a discounted Price. These competitive benefits cut into the market share and margins of Toys “R” Us. The company became a relatively weak number three competitor in the industry.

To make matters worse, the company put Amazon in the toy business. In 2000, the company became Amazon’s exclusive toy supplier. Over the course of the next few years, Toys “R” Us taught Amazon how to succeed in the toy business. Toys “R” Us successfully broke this partnership but the damage was done. Amazon used its enormous customer base to offer the online customer even more choice of toys (a Function benefit) with the advantage of online shopping (a Convenience benefit). By 2005, Toys “R” Us was already at a significant Value disadvantage in the marketplace. It had also lost most of its Economies of Scale advantage.

In 2005, a group of private equity investors bought Toys “R” Us in a leveraged buyout with the intention of revitalizing the company. As is common in these kinds of transactions, Toys “R” Us became a heavily debt laden company. Its long-term debt rose from $1.9 billion in 2005 to $5.5 billion in 2006.

By 2017, the struggling company could no longer meet its debt obligations and sought Chapter 11 bankruptcy. Unfortunately, a few distressed company investment firms, who had advanced debtor in possession financing, decided that they would be better off if the company liquidated and forced the company into liquidating its assets.  The erstwhile industry leader was gone in a matter of months.

The companies attacking Toys “R” Us adopted shrewd strategies to cripple the market leader. Walmart and Target employed a Convenience innovation to reduce the customers’ use of the resource of time to purchase the most popular toys on the same shopping trip as they use to purchase groceries. See HERE and HERE for an explanation. Amazon took away the original key advantage of Toys “R” Us, an enormous choice of toys, a Function advantage. Amazon simply had more choices, again reducing its customers’ use of the resource of time. See HERE for an explanation of why Amazon’s Function innovation succeeded.

8/22

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