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    Decoding the Pleygo Effect: Secondary Market Segmentation


    "You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes."

    These are the words of Morpheus, a prophet in the sci-fi thriller The Matrix, and I think they accurately describe the choice many Brickpicker members face early in their investing career. Should I try to learn and understand the Lego secondary market, or take it for granted that it will exist as it does now? This is not an easy decision since information about the aggregate market isn’t readily available. So taking the blue pill is simple: buy some sets people think are great and hope for the best. Taking the red pill is scarier: the more you learn about the market, the more daunting and wrought with peril it may seem. To be a savvy, profitable investor you must learn as much as you can about the market you seek to exploit. That way, you will be able to properly decipher threats to the market, and adjust your investing strategy as circumstances dictate.

    The most recent potential threat to the secondary market is Pleygo, an online Lego set rental company. Pleygo operates very similar to Netflix, the subscription movie delivery service that revolutionized the movie rental industry and killed brick and mortar movie rental companies. Pleygo appears to be quite user friendly. After signing up for a subscription, a new user adds sets to his Wish List, and Pleygo sends the first available set on the Wish List to him along with return postage. Once the user sends returns Lego set, Pleygo sends the next available set on the Wish List.

    Pleygo’s value proposition to parents is compelling: for a reasonable monthly fee, kids and adults can satisfy their "Lego fix" by building a variety of sets without the drawback of providing the space required for sets and boxes. Pleygo offers three levels of pricing, or “plans” that consumers may purchase: Fan, Super Fan and Mega Fan. The Fan package allows members to pick any small or medium sized Lego set, Super Fan’s may pick any small to large sized Lego set, and the Mega Fan plan will allow members to select any set in the Pleygo portfolio, including the enticing “huge” sized Lego sets that include Millennium Falcon (7965, not 10179 - sorry guys), Super Star Destroyer, Taj Mahal, etc. While there are only eleven “huge” sets to choose from, I’m sure Pleygo will add more as the business expands. Pleygo also emphasizes their commitment to safety and cleanliness by sanitizing every piece returned by a member.

    Pleygo sounds like a great concept, and indeed the business has already attracted venture capital funding, so a lot of smart people have bet on the future success of this business. If Pleygo succeeds, what effect will it have on the secondary investment market so important to Brickpicker members? To answer this, we must first determine whether Pleygo is a competitor to the secondary market. If it is, and the secondary market shrinks significantly because of Pleygo, Lego investors could be left holding millions in unsold inventory staring down the barrel of a significantly diminished market.

    To start, we must determine who buys Lego sets on the secondary market, and whether their Lego needs will be better satisfied with Pleygo. The clearest way to do this is to segment secondary market buyers. I believe secondary market buyers fall into one of two market segments: AFOLs or “Adult Fans of Lego”, and parents of children who insist on having certain sets.

     

    SecondaryMarket
     

    These market segments can be further segmented to properly illuminate the market. For the AFOL segment, secondary buyers include Lego collectors, MOCers, and casual adult Lego fans that typically purchase Lego sets for their kids rather than themselves.

     

    AFOL Market
     

    Among AFOLs, Pleygo may appeal to some in the Casuals and MOCers market segment, but MOCers will not forgo secondary market purchases for Pleygo. Those few Casuals that sign up for Pleygo themselves may stay with Plego instead of secondary market sets, but Casuals are the smallest segment of AFOL secondary buyers anyway and the few lost to Pleygo will likely not be significant. Collectors may want to use Pleygo to see whether they like a certain set before buying it, but I don’t see collectors buying fewer sets for their collections/displays because of this service. If anything, collectors may be encouraged to buy more sets since they can try out new ones frequently and cheaply with Pleygo.

    That leaves parents buying sets for their kids as the remaining possible market segment that could turn to Pleygo at the expense of the secondary market. Here is my simple segmentation of this market:

     

    ParentMarket
     

    The three market segments in the Parent Market are the Whiny Kid Buyer, the Lazy/Unsavvy Buyer and the Kid Collector Buyer. Everyone knows a parent like the Whiny Kid Buyer: they will drop untold amounts of money to keep their kids happy. These parents act at the whim of their child, and while Pleygo may be offered by Mom or Dad as an alternative to expensive sets demanded by “Little Whiny Johnny”, Johnny will not relent if he wants a retired Lego set. I see this remaining a strong segment for the secondary market. I believe the Kid Collector segment will maintain its connection to the secondary market for the same reasons the AFOL collector will. That leaves the Lazy/Unsavvy Buyer as the last remaining market segment to be stolen from secondary sellers. With proper marketing, Pleygo could make some inroads into this market segment, so the secondary market may feel a threat to this market segment from Pleygo.

    From Pleygo’s perspective, their key market demographic is parents who want to reduce their cost outlay on Lego sets and save storage space in their home. Their target demo is evident in their value proposition: saving money and saving space satisfy parental needs, not children’s. Generally, young Lego enthusiasts would rather own a Lego set, but will accept Pleygo as an alternative to no Legos, so they aren’t really Pleygo’s target market. Typically, Pleygo’s target buyer wouldn’t be using the secondary market to buy sets for their children anyway, unless they fall into the small Lazy/Unsavvy Buyer segment.

    As a result, I don’t see Pleygo threatening the secondary market much. While it’s possible there could be some defection from the Lazy/Unsavvy Buyer segment to Pleygo, it will likely be limited as the Lazy/Unsavvy Buyer uses eBay because it’s easy and familiar, and Pleygo would be something different. I believe Pleygo could actually be good for the secondary market since it could stimulate sales to collectors that may not be familiar with or closed off to themes they can access cheaply through Pleygo. Interestingly, Pleygo also has links to Amazon third party resellers for sets that have been retired, so Brickpicker members that are third party Amazon sellers could actually have a new market opened to them by Pleygo.

    I can’t stress enough to Lego investors how important it is to learn about the market. Savvy investors know the Lego secondary market inside and out, and can foresee trends instead of being caught by them. I would hope every Brickpicker member would "take the red pill", and try to thoroughly understand the market you hope to capture. In the words of Morpheus, “No one can be told what the Matrix is. You have to see it for yourself.”

    "ED"itor's Notes: I have to agree Quacs on this one. Pleygo might be tempting to the casual LEGO fan, but any hardcore LEGO fan(...and that is most LEGO fans in my opinion) wants to collect every imaginable brick and LEGO set...and even multiples of sets. I know I am an extreme LEGO fan, but I think I speak for many LEGO fans of all ages when I say they want as many LEGO sets and pieces as possible and don't want to "return" anything. Not one piece. LEGO sets are not used video games. The bricks never go bad or get outdated. A twenty year old brick is the same as a new one and LEGO fans want more pieces to build bigger and better MOCs. I really think the creators of Pleygo misjudged LEGO fans in general. While it might work for some parents and LEGO fans on a budget, the kids will want to keep the set. In the long run, I see this failing as a business model. Just my two cents...
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    I would never give my kid a used Lego Toys (:  

    why?  i buy used Lego sets all the time for my son. e.g. i just picked up a slightly used complete 8097 Slave 1 for less than the 2010 retail price. all you need to do is use some bleach wipes.

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    What happens to lost pieces?  That would cost them a lot in replacement and time as a set is out of action until replacement parts are obtained.  I haven't seen the pricing plans but the costs of those things, plus cleaning, checking for missing parts (that would take ages), 2-way shipping etc must make their breakeven point pretty high. I'm with Ed - I won't be expecting them to survive long term.

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    I agree completely, this business will be quite a surprise if it ends up lasting for a relatively long while.

     

    Very interesting way to segment the market, by the way.

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    Nice article.  I couldn't imagine renting Lego.  To me they aren't a video game or movie I rent or temporarily enjoy.  To each their own though.

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    Given the venture capital they have attracted I would have to think that the viability of the business model has been vetted fairly well.  Cleaning could be automated at a relative low cost and the presence of missing pieces could be largely done by weight.  It sounds like they include a fair portion of extra pieces - I would be very surprised if they actually check for each piece upon return.  It's more likely they react to user feedback.  I suspect that most users will only utilize one set per month given the shipping time back and forth.

     

    There are many sets that I want to own and never sell, but I find the offering compelling.  I could see myself signing up in order to avoid opening some of my NIBs that I want to build, but not necessarily keep.  It would certainly be less hassle than buying a used set on Ebay and then re-selling it.  I don't think I would spend less on purchases, but I would likely have one more SSD to sell for example.  In that sense, I could see Pleygo decreasing actual "consumption" of expensive retired sets and thus increasing the supply of NIB sets in the secondary market.  Also, the possibility of having access to sets like 10179 which I will never own would be awesome.  

     

    Interesting article and its impact is definitely worth consideration.

     

    As far as threats go, most probably agree that the expanding investor base is the most significant.  I would like to see a survey done at BrickFair that asks everyone who attends:  (1)  Are you an Adult Fan of LEGO?  (2) Do you buy LEGO sets as investments?

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    Agreed, adewar. This business doesn't have a high break even point because of the VC involved. The business plan is viable, although maintaining a new subscriber rate higher than the burn rate will not be easy. I like the value proposition. I just think the subscriber model is riskier than they may believe.

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    You make a good point.  I would expect a high number of 1-2 month 'Mega Fans' who just want to build a couple of sets in particular.  

     

    I appreciate your Venn diagram analysis.  If I were to speculate as to the actual relative proportions of these groups, I suspect it may look something like this (with the 'investor' circle growing in proportion)

     

    [sharedmedia=gallery:images:319]

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    Yeah, if you can believe it, my first Venn diagrams had labels that said "not to scale", so you hit the nail on the head. Although, Pleygo probably believes that parent circle is a lot larger since their value proposition is really tailored to that group. I tend to side with yours.

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    The idea is enticing. Two things: I don't think their overhead costs (purchasing sets, shipment costs, labor to sort and clean, etc.) will allow them enough liquid capital to purchase even a portion of available sets. So they'll either sink immediately because of a lack of new customers, or they'll lose repeat customers faster than they can offer new sets. If they don't affect the market, then we can continue to purchase, build, display, and later sell to basically get our money back. In which case the rental is free and I can build whatever I want. Except a Taj Mahal, I can't afford that. Then again, Pleygo can probably only afford one, so they'll lose customers who lose patience waiting for their turn. My suggestion is I offer one of you guys 100 bucks to borrow your 10179 for two weeks. Any takers?

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    Nice article Quacs, but responding to the comment about VC...the presence of VC does not indicate a successful or even necessarily well-vetted business model. It indicates something at some point that might generate a return for the VC firm, but might not be a sustainable business model. VC firms do not necessarily care about long-term sustainable business models.

     

    Also, Stonehome Capital is really on the low end as far as VC firms go. Their max investment in a firm is $500k, which is really nothing in the VC world, and the investment in PleyGo is probably much much less than this.

     

    IMO this idea is DOA. I would put in some of my concerns, but Grolim already did. It's very similar to this: http://www.bagborroworsteal.com/ , which there have been several of for many years, none of which have really done very well in their respective markets.

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    I personally like the idea.  Our son gets excited with a new set, builds it quickly--plays with it for maybe a day or 2 for most things--then he could care less about it. 

     

    In theory, this would be perfect for us, as I hate having legos all over the house, pieces under foot, and sets mixed up and missing things.  In practice, the business will fail.  Most of the toys are hot for a little while (themes)--then are boring to all but the collectors/completionists--who are set owners in the first place--not renters. 

     

    The business will fail because using a checkweigher to verify part count is not accurate--the sets would need to be sorted--which is cost prohibitive.  If a page is missing from the manual, a part is missing, or a WRONG part is mixed in--the checkweigher will alert---but then what?   You pay someone to find which part is missing/extra/swapped?  We are pretty accurate at my house--and still miss/mix parts in our sets.  Imagine regular folks who don't care--especially since their policy is--"it's ok to lose a few pieces"

     

    Peer to peer might work.  I'd love to get into a local lego share club, where families loan out things to each other, and return when done.

     

    Did those video game and netflix services REALLY work?  They changed to a download model for a reason.  Lots of people ordered the new releases (some just to copy), then after a month--nobody wanted them.  Same thing will happen with this model.   People want the new sets--so they have to buy a lot of new sets to satisfy demand---then nobody will care after a few-6 months.  The only people who want the older retired sets are collectors.

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    @ willy431 I don't think that only the collectors want retired sets. Imaging the star wars UCS models. Almost every Lego-fans is waiting for good friend that owns a 10179 to borrow it, when he hasn't got the money to buy it for himself.

     

    I think the retired sets are even more atractive to the builders who have missed them and doesn't whant to spend more then the retail price for them.

     

    Buying a used set on ebay (hoping it is complete), builing it, admiring it at the shelf for 3-4 weeks and the selling it again on ebay (hoping, not to loose too much money on fees) is one possible way, but you have to pay for the set and the money is gone untill you have sold the set. And not everybody has the possibillity to 'park' 1000$ in set just for builing it once.

     

    So a defined rental-fee could be more interesting for some builders. You know what you pay and you don't have to pay for the whole set.

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    Rentabrick - thanks for checking in. I think both Willy an I agree the concept is great. Willy's concern is that logistically it will be difficult to maintain quality control on a large scale, and I happen to think he's right. However, Pleygo could very well have a simple, elegant way to maintain QC that nobody has seen. I believe the rent/mail return model is really difficult to maintain in practice because in order to grow the business, you need to keep your new subscriber rate higher than your attrition rate. That's a tough order for niche businesses over the long haul.

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    QC is very important to keep the customers. If you have a accurate laboratory scale you can check the returning set for missing pieces (as stated above: of course you cannot find the replacement of a sandgreen by a green stone). I own a scale that accurateness is 1/50 gramm. the smallest Lego-part weighs 1/10 gramm. If I would weigh the whole set I could detect if there is a missing part. If pleygo offers a high quality service they have to check every set with the partlist for missing parts. This needs a lot of manpower, or  they use sets just once and sell them after each rental at ebay (writing in the description: "...it has hundreds of small parts, so we are not able to say if the set is complete..."). When they are able to buy a great number of sets very cheap, it could be better (cost effective) not to spend any manpower in counting but in selling the used sets.

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    [quote name="rentabrick" timestamp="1372001677"]... When they are able to buy a great number of sets very cheap, it could be better (cost effective) not to spend any manpower in counting but in selling the used sets.[/quote] This is another interesting aspect of the strategy that could make the business model less risky, and probably why they were able to attract some venture capital - there is value in liquidating their assets if the business flops. If they were to sell every set that came back a different weight than when it left, that could seriously affect the secondary market. If this practice became widely known, unscrupulous Pleygo members could steal a piece, and then buy the set they stole the piece from! Definitely an interesting idea. If I remember correctly, you are trying to set up a Lego lending group in Germany correct? How is that going?

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    At the moment I am setting up a new server for the shop software. Untill the webshop is online I'm just lending the sets in my local area. The concept is working for a smal number of sets - because quality is one of the main pillars in my business - so I count every set every time it returns and replace the few missing pieces. As my wife and I spend severall evenings in building new bought Lego-Sets to make the product photos and counting the returning sets, we don't need any employees at the moment. But if we lend more sets it could be nessessary to employ someone for the counting part (and we will have to make the calculation: if this is better for us or staying small).

    btw. I just received a couple of building instructions from making hardcover books. Just check my gallery to see a photo.

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    Guest TabbyBoy

    Posted

    i don't think we have anything to worry about as Pleygo will soon get lots of complaints when bricks go missing.  It'll also tie up a lot of their time sorting/replenishing fixing sets before re-rent or re-sale if incomplete.  It even may help us by making Lego even more popular than it is now.  Pleygo is not cheap and not in the UK yet.  MISB owners are safe.

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    This blog currently has 775 views and 21 comments. Impressive. I think there's more interest in this concept than some investors would care to admit. Conversely, most of that interest probably comes with the hope of renting 10179 or 10189. Even if Pleygo is a success, it'll be a long wait to fulfill all those hopes. Expensive for Pleygo, too.

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    Thanks for the article, but yah, same as others, I don't see this business model lasting long at all -- but like they say, people like to watch a car crash.

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    I wonder how long the waiting list is for the real popular sets? I could see paying the monthly fee for the sole purpose of getting to build large sets that I can't afford to buy - the Death Star, Green Grocer, etc.  $39 bucks is well worth it to me to be able to build each of those sets, take a few pics, display it for a month, then send it back.  But if you're waiting for like 8 months and in the meantime stuck with small Chima sets, the value proposition goes down the tube (for me).

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    I wonder how long the waiting list is for the real popular sets? I could see paying the monthly fee for the sole purpose of getting to build large sets that I can't afford to buy - the Death Star, Green Grocer, etc.  $39 bucks is well worth it to me to be able to build each of those sets, take a few pics, display it for a month, then send it back.  But if you're waiting for like 8 months and in the meantime stuck with small Chima sets, the value proposition goes down the tube (for me).

     

    Great question, Matt.  I would guess their reasoning is, "If we have enough subscribers to delay set delivery, we should have enough money to add more inventory from our increased subscriber fees."  Whether it works out that way or not remains to be seen...

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