A CASE STUDY REPORT

ON

Passion for Learning

IN PARTIAL COMPLETION OF THE COURSE

NEW PRODUCT DEVELOPMENT
AT

INDIAN INSTITUTE OF MANAGEMENT, BANGALORE

(March, 2014)
Submitted by
Group P

Introduction
Passion for Learning (PFL), founded by an HBS graduate Andrew Popell is a direct-mail toy
company offering 100% educational products for 6-12 year old children. Its first catalog mail in
1994 resulted in a disappointing response rate of 0.77% which resulted in a net loss of $145,000
on revenues of $54,000. Moreover, the company is facing increasing competition from specialty
chains focused on educational toys like Leaningsmith, Noodle Kidoodle, Zany Brainy,
Imaginarium etc. and big discount retailers like Toys R Us which were also focusing on
educational toys.
Popell now needs to develop a strategy for the design of PFLs 1995 holiday catalog,
repositioning of the company and expansion of its customer base with the objective of breakeven
in the short term and sustained profits in the long term. Three options for repositioning include
(1) differentiation on service: remaining a direct-mail company at its core, but building
relationships with elementary schools, learning centers and retail outlets over time (2) highvolume low-cost provider of toys of all categories for children of all ages, and (3) specializing in
science/action toys and manufacture as well as market them. A combination of these options can
also be considered. Finally, the option of folding up the company may also be considered upon
evaluation of industry conditions in both toys and direct mail and expected cash flows in the
future.

Key Recommendations
1) Continued focus on educational toys: PFL has existing brand value as the only directmail company that offers 100% educational toys for 6 - 12 year olds. Further, nearly twothirds of adults surveyed believed that educational value was the most important factor
in selecting toys and games for children under the age of 12. The company should also
promote childrens software and technology products.
2) Focused product mix: In order to survive in an industry dominated by national chains,
PFL should differentiate itself by offering unique products made by small manufacturers.
It should also avoid fad toys which tend to lose popularity quickly and have taken several
companies under in the past. It can increase focus on categories like scientific, crafts, and
action-oriented products which were its best-selling items in 1994, while ensuring that
they have educational value, which is PHLs key brand proposition. Software products
and books which have lower margins can be excluded.
3) Relationships with elementary schools: For sustained competitive advantage, it is
important to regularly introduce new product concepts. PFL should reach out extensively
to elementary schools teaching students in its target age bracket and work in collaboration
with them to develop product concepts that would substantiate the classroom teaching.
This would not only render the benefits of crowd-sourcing spurring innovation, but
also create a ready market of the chain of schools across the US. Additionally, PFL can
open learning/ action centers in playschools and elementary schools, which would be
instrumental in developing a brand connect with children from a very young age. 40% of
buyers indicated that brand was extremely or very important for toys. Further, as per a

study, over two-thirds of the children know in advance which toys they would purchase,
which is even more likely if children connect with PHL products so strongly, much like
they do with Barbies. Further, teachers and students can be allowed to sell PFL products
on consignment.
4) Chain of retail outlets: PFL should leverage its relationships with local advisory panels to
open a chain of independent specialty stores. Its key competitors in the educational toys
space are rapidly expanding their retail presence. Learningsmith has expanded to 25
stores, Noodle Kidoodle is expected to have 25 by 1996 etc. In light of the criticality of
interactive hands-on-toys displays and a fun purchase experience in this industry, PHL
will be placed at a competitive disadvantage if it restricts its distribution channel to
direct-mail. Further, specialty stores command better margins than large discount stores.
Toys R Us had an aggregate gross margin of about 30% while independent specialty
stores had gross margins as high as 100%. Further, Toys R Us had sales of $220 per
square foot in 1994 in sharp contrast to $540 per square foot in Learningsmith.
5) Reinvent customer purchase experience: Educational toys do not sell quickly unless the
purchase process itself is fun. Further, building a strong connect with children is key to
success as children have strong buying power in the toys segment. As per a study, only
28% believed that parents influenced their purchase decisions. To the extent that parents
still have an important role in the buying process as well, it would help a lot to convince
them of the educational value of PHLs products. Both the objectives can be achieved by
hands-on-toy displays and in-house learning/ action centers where buyers can actually
spend time assisted by a knowledgeable sales staff. This can be substantiated with artsand-crafts shows, science demonstrations which can be stepped up between September
and December (holiday season) when 70% of toy sales in the US take place. As per a
trade association report, children of 4-12 years of age accounted for $2.4 billion of retail
toy sales during the holiday season. Such efforts would go a long way in attracting first
time buyers through word-of-mouth endorsement while increasing the scope for repeat
purchasing through a strong brand engagement.
6) Increased pricing: Buyers of educational toys are relatively less sensitive to prices. The
typical buyer of educational toys is a college-educated female of 25-44 years of age.
More than half had household income above $40,000 and a quarter above $60,000. Per
capita expenditure on toys has been rising as well. PHL can thus afford to charge a
premium on its products as it serves a niche market.
7) Redesigning catalogues: Owing to the increased cost of ink, PFL could consider printing
only the front and back pages of the catalogue with a glossy finish, while using normal
coated paper for the inner pages. Also, the company should focus the attention on its best
sellers in the catalogue, through pictures and ratings.

Criteria for Evaluation

The recommendations can be primarily evaluated on the following four criteria which are the key
indicators of current and future profitability:

1)
2)
3)
4)
5)

Net Present Value

Customer Acquisition
Customer Retention/ Repeat Purchases
Enhanced Brand Equity
Long-term relationships with key stakeholders

Alternatives Considered
1) High Volume/ Low Cost: PFL has existing brand value in the educational toys segment.
This strategy would require the company to introduce non educational toys and games as
well which would require investment. Moreover, this is unlikely to pay off as this space is
highly dominated by large toy discount stores like Toys R Us which advertised everyday-low-prices. The top 5 stores alone constitute over half the industry revenues. If PHL
became a low-cost provider of toys for children of all ages, it would become
undifferentiated from these heavyweights and will be placed in a very weak competitive
position. Further, mass merchandisers have special arrangements with large
manufacturers which would be difficult to penetrate.
2) Discount schemes: To encourage ordering, catalogers generally use a variety of
incentives, including volume discounts, lower shipping and handling on large orders, free
gifts, dollar-off coupons, overnight shipping, unconditional guarantees. Studies indicate
that a typical catalog customer generates $200 in NPV. However, PHLs value proposition
is its unique and high quality products for which it can command a premium instead of
resorting to discounts and freebies.
3) Order fulfilment center: Investment in equipment is expected to cost around $500,000.
The current and projected revenue and volumes of the company do not justify such an
investment.
4) Acquisition of a manufacturing company: This strategy would provide PFL enhanced
control over design and product concepts. The cost of acquisition is expected to be less
than $1 million. However, this could affect the companys ability to source unique toy
designs from different manufacturers, thus reducing variety in its products.
5) Folding up the company: This could be considered as the last resort if the company is
unable to overcome its temporary financial woes.

Plan for Implementation

The necessary action steps are enlisted and prioritized basis ease of implementation and required
investment:
1) PFL should focus its attention on educational toys that are unique, and those that do not
lose their popularity in the short run, in alignment with its value proposition. [Phase 1]

2) The company should try to build its existing customer base through distribution of its
catalogs. The redesign of its catalogs should be in line with its best-selling toys, which
have been rated high by parents and children. The cost incurred on catalog printing can
be restricted by limiting the use of glossy sheets of paper. [Phase 2]
3) PFL should consider having tie ups with elementary schools to promote its products and
build its brand equity. It should further try to build a strong connect with children and
parents alike, by making the purchase experience fun, through hands-on-toy displays and
in-house learning/action centers. [Phase 3]
4) PFL should invest in a chain of retail outlets, which would help to improve consumer
awareness about its brand, by reaching out to a greater audience, and increasing the
overall sales of the company. [Phase 4]

Conclusion
PFL needs to build a reputation for high-quality educational toys. Based on the aforementioned
recommendations, the company needs to go ahead with redesigning its catalog to highlight its
value proposition, and increasing its customer base through initiatives like fostering relationships
with schools, making the purchase experience fun through interactive displays etc. to compete
with mass merchandisers and specialty toy stores, PFL should consider expanding to its own
chain of retail stores, that would help it firmly establish its presence in the market.