Passion for Learning

Group M
Ashish Kumar 1111335
PVR Kartik 1111133
Kulkarni Aditya 1111189
Lokesh Chandariya 1111351
PFLs Business Model
PFL is not a manufacturer of toys. PFL also does not design its own catalog. It also outsources
the fulfillment function. What then is the value addition of PFL? Firstly, PFL exclusively deals
with educational toys. Secondly, the value addition lies in the process of selection of toys using
the advisory boards. Let us also understand the key elements of PFLs business.
Educational toys did not sell quickly unless the purchase process itself was fun. Can a
directly mailed catalog be made fun and how? (Challenge 1 for PFL)
Typical buyer of educational toys was a college-educated female between 25-44 years of
age. More than half had income of more than $40K and a quarter had it more than $60K (Is
there an opportunity for targeting here for PFL?)
70% of the toy sales took place in the last quarter (September to December). (Does it make
sense to go for 4 mailing per year? How to maintain customer contact with 1 or 2 mailings?)
Brand names/reliability of catalog influenced the buying in 40% cases. Adults were not as
influential (only 28%). (Can PFL leverage manufacturer brands? Does adult influence vary in
educational toy category? If yes, how much?)
Through 1994 to 1996, Direct mail industry is facing increase in paper, ink and postal
charges. (How can PFL fight this losing battle against rising costs?)
Response rate of catalogs is 1.38% for first mailing. (Does this hold true of educational toys,
especially if the targeting is neatly done?)
We will use these points as placeholders for now and determine their effects in later analysis.
Competition Analysis Matrix








We will use the above competition matrix to analyse PFLs sustainability. The matrix clearly
shows that the closest competitor for PFL is Imaginarium. The significant advantage
Imaginarium has over PFL is the established customer base of 75,000 people who have
purchased an educational toy at least once. Also, the stores give them scale which essentially
leads to some cost advantage with respect to PFL. Even though the case does not mention
clearly about direct mails in non-educational toys, there is also great probability that some of
the mass-merchandisers may be looking at it given the extensive customer knowledge that they
have because of volumes. There may be existing players who are mentioned in the case. It may
also be noted that the period is that of increasing computer and internet penetration in US.
Direct Mail may face serious competition from e-commerce businesses/ directly e-mailed
catalogues which have low costs to reach customer. Two points emerge:
PFL may face stiff competition from Imaginarium. Imaginarium has certain advantages.
New business may emerge (e-commerce Mass merchandisers may use this route).
Direct Mail
Distributor
Educational Toys Non-Educational Toys
Wal-Mart, Toys R Us,
Kmart, Target,
Specialty Stores


LearningSmith,
Noodle Kidoole
Zany Brainy
Imaginarium
68 Stores, Customer
base of 75,000 in 16
States
PFL ???
Challenges and Opportunities for PFL
The previous sections clearly bring out key challenges and opportunities for PFL. We will
prioritize them here and use them for further analysis:
PFL needs to build sustainable competitive advantage vis--vis Imaginarium. This
translates into three sub-challenges : a) Customer Acquisition b) Cost advantage c)
Branding
PFL ordering process must be fun for the customer. A typical target customer is
educated woman. List acquisition strategy must be in line with this.
PFL must justify plan of 4 mailings per year, if it has one. Alternatively they can mail
only twice a year i.e. before then holiday season and before the beginning of the
academic year.
Validation of Financial Analysis
Exhibit 6 summarizes the financial analysis of the case authors. We will question the
assumptions and decisions implicit in the analysis to come to a conclusion about the best option
for PFL.
No. of mailing per year and Annual Mailing Volume: As mentioned previously, 4 mailings per
year (once a season) may be unjustified given that 70% of toy sales happen in one single
quarter.
Response rate : The list acquisition strategy should help PFL identify educated women (25-44)
with kids in age-brackets 6-12. Given that PFL is relying on WoM through its partnership with
advisory boards in option 1, the response rate may be far higher than is assumed. Also, as time
progresses, PFL can achieve higher response rate with optimization of mailing list.
Average Order Amount: Increase in average order amount is reasonable assumption given that
more relevant customers can be identified and the catalogue can be modified accordingly each
year. Increase in number of pages will also help boost up the average order. However, exhibit 6
shows that option 1 has higher rise compared to other two options. This may happen due to
Word of Mouth effect through advisory boards and letting teachers sell the toys for fund raising.
Revenue/Shop: Given the existing competition in physical store business and lack of cash in the
coffers of PFL, this assumption is doubtful. Especially in option 3, 10 stores sound astronomical.
Cost of Products: This is an institutional factor. If PFL acquires a manufacturing unit, cost will
come down (as in option 3). However, investing $1Million (especially when company is bleeding
money) may prove to be difficult.
Catalog Design and Production: Some of the costs like paper and ink are determined externally
and hence there is not much PFL can do unless it achieves a great scale. However, PFL must save
costs here as it can control them.
List Acquisition: Although list acquisition is not a major cost center, PFL must have a list
acquisition strategy which reduces list acquisition costs and achieves better targeting.
Capital Expenditure: There is more no. of proposed stores in Option 3 compared to Option 1 yet
investment considered is low. Also, the proposal of acquiring manufacturing facility in option 3
is not reflected in its investment projections.
Making the Right Decision
After scrutinizing financial analysis in exhibit 6, we will now weigh the three options financially
as well as based on market conditions. This should help PFL arrive at the right decision.
Option 1:
1. Even if PFL sticks to 2 mailings per year, they can achieve better conversion rate
because of the role played by national and local advisory boards. First, the boards will
spread positive word of mouth. Secondly, product selection is likely to be better with the
active role played by the boards. As a result, we will assume that revenue remains same.
2. Additional channel of allowing teachers and students to sell the toys for fund-raising is
likely to boost demand. This activity and engagement with boards is also helpful in
building a brand for PFL.
3. In option 1, PFL has option of outsourcing its learning centers to local advisory panels or
schools thereby adding service to its product without much additional cost.
4. Dropping non performing products and addition of new products have been
traditionally beneficial in the direct mail order industry.
5. Option 1 seems to be the most viable financially.

Option 2:
1. Competition level for option 2 is extremely high due to size and scale economies of
existing players.
2. Investments required in fixed costs (which are unrelated to PFLs core competency of
product selection) are very high.
3. PFL could consider acquiring resources related to fulfillment services as this would
allow them to provide better and differentiated service. But this should be of lower
priority as it involves capital investment and is not core value addition competency of
PFL.
Option 3:
1. Similarly for option 3, proposal of acquiring a manufacturing facility does not fit with
PFLs existing business model as their value addition lies in product selection and not
manufacturing. Even though reduction in cost of products may be achieved, the high
investment barrier is unlikely to provide any financial gain.
2. Decreasing the variety of products will decrease the response rates. The same cannot be
compensated by increased average order amount as there is a limit to how many
educational toys a parent will buy. Also, the season of sales (September to December) is
a holiday season and children are more likely to demand non-educational/hit products.
3. An exclusive Science and Crafts collection may not excite parents as it is likely to be less
fun.
4. Option of selecting only best performing lists is a very good proposal to optimize the
mailing list and mailing only relevant customers will increase the response rate as well
as avg. order amount.
5. Toll free numbers for ordering would add to the differentiated service image of PFL.
6. Magazine advertising can be considered especially in children magazines and parenting
magazines to increase demands.
Given the above analysis and exhibit 6, option 1 looks the best. But the options should not be
considered completely exclusively. Salient features from all options can be combined to arrive at
an optimal solution. Especially, point no. 4, 5, 6 from option 3 and point no. 3 from option 2
definitely will help PFL provide a differentiated service.
Building Additional Capabilities
Our analysis suggests that PFL must choose option 1 of differentiated service because it offers
engagement opportunities with the customers, strong branding opportunities and larger
customer base, more choice for customers and higher revenues for PFL. Additionally, PFL can
adopt some of the features from option 2 and option 3 to build a good strategy. While PFL can
do sufficiently well with the initiatives, it must also build certain capabilities and acquire certain
resources to execute its strategy well. This new product/capability development must include:
1. Incorporating the educational factor even in the coupons provided in the catalog. For
eg: The coupon itself can be a small entertaining puzzle which when solved can be used
to redeem discounts. This may bring about differentiation and fun. In other words
develop skills to promote awareness of the product concept and offering in all available
consumer touch points.
2. Skills to perform Shows/demonstrations and trials to acquire endorsement of parent
teacher associations in schools. Turn them into allies who can act as another
communication channel. Thus the dependency on direct mail lists can be reduced to
some extent which may later help if the costs of mailing rise too high.
3. PFL can search for new sources of acquisition of mails lists from new channels such as
credit card companies (have to check for legality, though) for specific targets such as
educated females, 25-44. This can be used to prepare target lists. PFL can also work with
existing sources, especially specialty toy stores, to identify and inform select consumer
information by incentivizing them. The gross margin per rented name is the highest for
these stores; some of it can be re-distributed for increase in precise customer targeting
which may result in higher response rates.
4. Opening of retail stores calls for new capabilities such as dedicated sales, distributor and
support force. It also has to search ways for consumers who havent received catalogues
to initiate trial of their products at their retail stores. Word of mouth and endorsement
of advisory boards and teachers should help in this regard. Even though adult influence
is low (28%) the advice of a school teacher or an educational officer may prompt more
adults to overcome their barriers and adopt educational toys for their children.
5. Retail stores also provide an opportunity for brand building and new skills are required
to maintain and enhance the brand status. Leveraging well-known manufacturer brands
will only help associate the PFL brand with reliability and high quality and increase the
trust in customers.
6. The company should develop capabilities to sense the new modes of communication in
the market which can offer viable low cost alternatives to traditional mails such as e-
mail. Knowledge of such alternatives, brand communication via other channels such as
endorsement by advisory boards, word of mouth by teachers and presence of retail
stores shall help in decreasing dependency on direct mailing lists thus avoiding the
impact of their rising costs.
Based on these recommendations, we have prepared another projected revenue model for PFS
(given in Exhibit 1).
Exhibit 1: Reconstruction of Table 1, Exhibit 6

Assumptions:
1. No. of mailings is reduced to 2/year.
2. Revenue from direct mail order business remains same in spite of reduction of no. of mailings/
year because of proper targeting and advertisement.
3. Increase in cost of paper. Ink etc. is compensated by volume discounts on increased no. of
catalogs ordered for printing.
4. SG&A increases due to advertising expenses (incorporation of option 3 salient points in option 1).
1994 1995 1996 1997 1998 1999 2000
Revenue No. of Mailings/ Year 1 2 2 2 2 2 2
Annual Mailing Volume 123 600 600 800 800 900 1100
Response Rate 0.77% 1.51% 2.50% 3.32% 4.34% 5.81% 6.74%
Avg. Order Amount $57.50 $57.56 $63.08 $69.79 $75.12 $80.12 $81.35
Direct Mail Revenue $54 $521 $945 $1,853 $2,606 $4,192 $6,031
No. of retail shops 0 0 1 1 2 2 3
Revenue/ Shop 0 0 $59.00 $149.00 $305.00 $465.00 $603.00
Retail Revenue 0 0 $59.00 $149.00 $610.00 $930.00 $1,809.00
Total Revenue $54 $521 $1,004 $2,002 $3,216 $5,122 $7,840
Expenses Cost of products $25 $216 $522 $891 $1,483 $2,277 $3,228
Catalogue production $102 $261 $261 $348 $348 $392 $479
List Acquisition $12 $70 $104 $137 $170 $202 $245
Fulfilment $13 $123 $268 $426 $639 $954 $1,230
SG&A $35 $108 $423 $548 $841 $848 $928
Cash Flow Analysis
Operating Income -$133 -$257 -$574 -$348 -$265 $450 $1,731
Depreciation $3 $5 $20 $40 $80 $120 $180
Interest Expense $6 $23 $53 $77 $116 $152 $201
Income Before Tax -$141 -$285 -$648 -$465 -$462 $178 $1,350
Tax outlay $0 $0 $0 $0 $0 $0 $265
Tax adjusted Income -$141 -$285 -$648 -$465 -$462 $178 $1,085
Capital Expenditure 0 0 $200 $200 $400 $400 $600
Change In working capital $28 $28 $28 $28 $28 $28 $28
Annual Cash Flow -$169 -$313 -$676 -$493 -$490 $150 $1,057
Terminal Value $16,194
Present Value -$272.04 -$510.89 -$324.15 -$279.97 $74.42 $7,457.89
NPV $6,145.26