Wanted: Compulsive Consumers

Taking their cue from the Beanie Babies mania, some start-ups hope to turn their products into a faddish fixation

Obsession is big business these days -- and no, we're not talking about the pungent Calvin Klein cologne. Such well-known companies as Martha Stewart Living Omnimedia, Krispy Kreme Doughnuts, eBay, and Ty Inc. (maker of Beanie Babies) have cultivated a decidedly devoted, frenzied, and often downright rabid fan base -- a significant competitive advantage. And then, of course, there's PokÉmon.

Now numerous start-ups are trying to copy the gotta-catch-'em-all strategy. "Since the success of Beanie Babies, everybody thinks that they might have the next big thing," says industry expert Kenn Viselman, chairman of New York City­based Itsy Bitsy Entertainment Co., the company that imported the Teletubbies craze to the United States from Britain.

Depending on your stomach for risk, milking a megatrend in this fashion is either foolish or fearless. But proponents argue that they prefer fanatical consumers and a huge spike in sales to deliberate incremental growth. "The risk is greater," says Toy Craze Inc. CEO Scott Harris, who hopes to turn his Cleveland-based company into just such an overnight sensation, "but I think the reward is also greater, both professionally and, hopefully, financially."

Practitioners of obsession marketing try to create a frenzy for their product because, well, it's exciting to be at the center of an obsession. Only two years ago, for example, Harris ran a dowdy distributor of toys, tools, and electronics. Now he thinks he may have the next PokÉmon on his hands. "One day I woke up and decided I was tired of doing me-too stuff," he explains. "I wanted to put together a team of people who were geared to hit the next home run."

The product that animates Harris's work life is Crazy Bones -- packs of small, brightly hued plastic figurines that are used to play a variety of games similar to jacks or marbles or dice. "Crazy Bones is a phenomenon," says Viselman, who chronicled his own Teletubbies success in the new book Global Domination in Eight Giant Steps (McGraw-Hill). "They've been able to take a very basic item and make it new."

Three years ago, when Harris was looking to start a new business, he discovered the European antecedent to his product. After watching his grandmother and his two young daughters play with Crazy Bones, he moved swiftly to obtain the U.S. rights to the trinkets. He even persuaded a manufacturer based in Barcelona to provide him with inventory for no money down in return for a 50% share of all future profits from Crazy Bones' U.S. sales. Later, as soon as he had profits to reinvest in the business, Harris renegotiated the deal; he now pays the manufacturer a royalty. In this way Harris launched his company with roughly $500,000 in capital -- a lot of money by most standards but a paltry sum for a national consumer-product rollout.

Yet Harris's company, which has grown to nearly $17 million in revenues in just two years, has thrived. Distribution is no longer terribly difficult because in this post-Beanie era, a network of independent gift and novelty stores across the country exists with the sole purpose of identifying and milking the next obsession-marketing cash cow. There's also the Internet, on which die-hard fans can set up sites to fuel their fixations and engage in speculative trading.

Another boon for Toy Craze has been its ability to keep marketing costs low -- no small feat for what is essentially just a marketing company. Though advertising and promotional expenses normally total 20% of sales in the toy industry, Toy Craze's costs in those areas have been close to 10%.

Here's how Harris pulled it off: In place of traditional print and television ads, Harris sends his staff on a demo tour of Boy Scout meetings and school playgrounds. Harris started his campaign in Ohio and New Jersey test markets. As the company succeeds in attracting young collectors in one area, its teams move on to other cities, traveling in colorful vans Harris calls "moving billboards." In each locale the two-person teams give kids free samples and then teach them games to play with Crazy Bones. To date, the company has distributed nearly 4 million free-sample packs of the product to kids in this fashion.

Harris cleverly creates lingering interest in the product even after the pitchmen have motored on to another city. Some of the games the Toy Craze folks teach kids are winner-takes-all. But if kids lose all their Crazy Bones pieces, Harris figures, they'll probably push their parents to buy them some more. And like Beanie Babies, each Crazy Bone has a different name and identity. Some pieces are produced in smaller batches than others, and such scarcity tactics enhance some of the pieces' street value. In addition, the product line consists of more than 300 characters in seven different series, including whole groups of aliens, mutants, and even characters from Disney's Toy Story.

Harris's in-house research suggests that once kids buy about three packs of Crazy Bones, they start looking for peers with whom they can trade. Those little bartering markets attract interest from other kids, who then start buying the product in order to have something to trade -- a textbook display of word-of-mouth marketing.

That grassroots interest has paid off. Recently, Toy Craze inked a promotional deal with McDonald's, the perfect partner for companies that want to transform a somewhat successful collectible into a national pop phenomenon. In October the fast-food chain's 13,000 North American restaurants will tuck two supersized Monster Crazy Bones pieces into each Happy Meal. Ty Inc. became the plush-toy giant it is today partly by leveraging a strategic relationship with McDonald's to distribute its Beanie Babies in Happy Meals.

The beauty of the McDonald's deal is that Toy Craze isn't saddled with any onerous contractual obligations. The restaurant behemoth will arrange to manufacture, distribute, and warehouse all the merchandise. At the same time Harris's 20-person outfit will collect a minimal licensing fee -- and get priceless marketing exposure. The CEO's only concern is whether his company will be able to satisfy its traditional retail accounts if, as he anticipates, the Happy Meal rollout stirs up sizzling consumer demand. Harris expects that the deal will help lift revenues skyward to $30 million.

Even without the McDonald's bump, however, Crazy Bones has found an impressive national following. A recent scan of eBay revealed 166 listings from aftermarket sellers peddling unopened packs. Still, that's only a blip on the obsession-marketing radar compared with, say, PokÉmon, which accounted for some 33,795 auctions on eBay during the same period. However, consumers are fickle -- they will drop one fad and embrace another very quickly. That's one hard fact that businesses publishing Beanie Babies newsletters or making Beanie accessories have had to learn, and they've either changed their product mix or shut down.

Even a fairly healthy, debt-free business like Toy Craze has plenty of difficulties to navigate. If the company can keep costs low, for example, so can its competitors, which means that barriers to entry are few. With a lot of entrepreneurs jockeying for school-yard preeminence, Harris could gear up for a big boost in sales only to see demand for his company's products wane abruptly. It has happened once already: Toy Craze's fourth-quarter sales last year fell below projections. Harris believes the drop-off resulted from the bonanza of interest in PokÉmon, which cut into kids' spending on Crazy Bones.

Yet despite that disappointing period, Harris says, he won't rethink the bizarrely high expectations for his tiny enterprise. "We've decided that we'll either be the next big thing or we'll keep trying," he says. In fact, Harris will keep trying even if Crazy Bones does make it to the pinnacle of faddish consumerism. He's already working to hatch a product that will be the next next big thing. "I want to have a string of these," he says.

Mike Hofman is a staff writer at Inc.

Buying John Malkovich

The Internet is especially conducive to developing consumer cults, but it also creates other kinds of opportunities. Consider HSX Inc., based in Santa Monica, Calif. The company enjoys an intensely obsessed following and yet offers its customers virtually nothing but an entertaining site. Even so, the company has already racked up annual sales of more than $5 million.

HSX's flagship product is an online-trading community called the Hollywood Stock Exchange -- a fantasy rotisserie-like league that entertains, aggregates, and ultimately obsesses pop-culture junkies. The site enables rabid movie and music fans to buy and sell imaginary stocks or bonds in various film projects and music and movie stars. For example, you can own 200 shares of the Dixie Chicks or 1,000 shares of the recently released summer movie X-Men. As in any market, the traders determine the valuations of those stocks and bonds, with the actual earnings of a particular film, performer, or band factored in as well.

This faux stock market now has 550,000 registered traders who routinely visit for an average of 10 minutes several times a week. Competition is fierce, and some top HSX portfolios are actually auctioned off on eBay, netting their owners as much as $1,250. Yet each Hollywood Stock portfolio is a postmodern wonder: it's worth nothing more than the status it affords the owner as a Tinseltown know-it-all.

Like any company born on the Net, HSX sells banner ads and sponsorships. HSX also hopes to build out a portfolio of media properties: it already produces a radio show that covers its own Hollywood Stock Exchange in the same way that CNBC covers the Nasdaq. "The HSX heat index is like a Bloomberg," says company president David Herman, referring to the business-information publisher.

HSX is now getting into the business of selling research reports to corporate customers. In other words, the company is repackaging and selling information from its proprietary -- albeit fictional -- market in the same way that Jupiter Communications and Forrester Research sell real stock-market information. The new division will soon account for as much as 50% of the company's revenues, Herman predicts, by providing consulting services to advertising and promotion agencies, entertainment companies, and even institutional investors that traffic in entertainment-company stocks.

Herman admits that obsessed customers present particular challenges. Most notably, they're service nightmares. "If our site goes down, we hear about it," he deadpans.


Welcome to the Dollhouse

Kenn Viselman knows all about the next big thing. He's been responsible for marketing several popular British entertainment properties in the United States, including Thomas the Tank Engine and Teletubbies. Now he's working on the renaissance of Kay Thompson's popular children's book character, Eloise. Viselman has some words of advice for any small company trying to create the next consumer fad.

Inc.: Is it feasible for a small company to create a huge consumer craze like PokÉmon?

Viselman: It's more than feasible -- it happens all the time. Every major licensing deal to hit it big in the past 10 years has been done by a small start-up company -- Barney, Thomas the Tank Engine, Teenage Mutant Ninja Turtles, Cabbage Patch Kids, Beanie Babies. This is the secret that big studios and big companies don't want you to know. Keep in mind that these ideas are usually very simple. And start-up companies are usually the ones that have the big success, because they are simple, too. A start-up can't create the next atom bomb, so it creates the Pet Rock instead.

Inc.: But what about managing this kind of sensation?

Viselman: What usually happens after the fact is that the big companies come in and ruin it. Inevitably, the bigger company has better distribution, and it buys into the trend. That usually signals the beginning of the end of the trend. Big companies aren't as innovative when it comes to a property like this. They don't treat it with love.

Inc.: Can a start-up get distribution without becoming beholden to a big company?

Viselman: With all the mergers in retail, every big retailer is looking for something exclusive to differentiate itself. So you could, in theory, go to a retailer and offer it the exclusive rights to an idea you have. I have one new line that I'm doing exclusively with FAO Schwarz for six months, and then I'll be able to distribute it elsewhere.

Inc.: You've dealt with McDonald's in the past. What's your advice for Toy Craze?

Viselman: It's an amazing opportunity to get exposure. A lot of people think you get rich from a deal like that, but that's not true. It's really the ad dollars that big companies spend that help you. McDonald's has its formula down. The folks there know how many people will come to buy Happy Meals for your product. They know how many will go to a toy store after they've had the Happy Meal to buy more products. And they know how many will not buy a Happy Meal but will go to the toy store to buy your product. But a lot of people do this sort of deal too early in their life cycle, before they have enough items out on retail floors around the country to maximize this type of promotion.

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Published on: Aug 1, 2000