Transformation of Marketing at the Ohio Art Company

Transformation of Marketing at the Ohio Art Company (A)

The Ohio Art Companyamong Americas oldest toymakerswas

headquartered in Bryan, Ohio, a small town in the northwest part of the state.

Although Ohio Art made over 50 toy varieties including dolls and water toys, its

flagship product was a drawing toy it had been selling for more than 52 years: the

Etch A Sketch (EAS). In that time, over 100 million units had been sold to

consumers in dozens of countries. Ohio Arts slogan, Making Creativity Fun,

demonstrated the companys commitment to arts and crafts products. Although most

of its sales came from its toy business, Ohio Art also produced and sold custom

metal lithography, which contributed one third of the companys revenues and a

disproportionate share of profits.1 In recent years, Ohio Arts toy business had

experienced a bumpy ride, alternating between profits and losses throughout the

1990s and up through 2011. Product placement of EAS in the hit animated movie

Toy Story was a shot in the arm for Ohio Art in 1995. In 1998, the company

introduced a new doll called Betty Spaghetty, which was an initial hit with

consumers, but its popularity and sales had waned over time. Aimed at girls ages

four and up, the small doll featured interchangeable limbs, spaghetti-like hair, and a

variety of accessories, such as a cell phone, a laptop computer, and in-line

skates.2

Toy Supply Chain and Seasonality

Toy retailing had become more concentrated, with Walmart, Toys R Us, and

Target accounting for the overwhelming majority of sales.3 The need for lower

costs (to compete effectively in the mass-merchant channel) forced Ohio Art to shift

all production of its toys to China in 2001. Making an EAS in China and delivering

it to the warehouse in Bryan, Ohio, cost the company 20% to 30% less than making

it on-site.4 The shift in production to Asia magnified the already high risks of

introducing new products. Long shipping times and the seasonality of most toy sales

meant that inventory management and tooling risks were significant. In 1998, a

major retailer abruptly canceled a $15.2 million toy order just before the holiday

season. [Ohio Art] was left with a large amount of excess inventory and also was

unable to cancel television advertising commitments that had been made in support

of the holiday line.5 Fortunately, in 1999, the company was again helped by the

release of Toy Story 2, which featured a 30-second spot showing the Etch A Sketch.

Management attributed the 20% increase in holiday EAS sales to that exposure.

The companys fiscal year ended January 31; November and December typically

accounted for 45% of retail sales. Each of the other 10 months averaged close to

5.5% (see Figure 16-1). This same pattern was typical for almost all toys,

including Ohio Arts.

The Etch A Sketch Experiment

Although the EAS line had been promoted initially with heavy television

advertising, by late 2006, advertising budgets for the EAS were below $1 million,

most of which went toward reimbursing retailers for cooperative advertising. Too

often, these funds did little more than fund temporary price reductions. No national

television advertising had been done for several years. In late 2006, however, the

companys advertising agency proposed a new campaign to enhance the toys

continued popularity. In part, this was due to a recent request by Target to include

the EAS in its own television spot.

Although management was divided on whether an advertising campaign would

be economical, it was decided to test the effectiveness of renewed television

advertising through a field experiment that lasted from November 27 to December

16, 2006, a three-week period during which approximately 35% of retail toy sales

normally occurred. Management intended to assess the results by comparing the test

and control market sales of its largest retail customer (25% sales). This retailer had

retail stores in all control markets and POS systems that allowed accurate

monitoring of sales. The expectation was that observed sales increases would

accrue to all retailers. Sales data from the previous year were not available

because the merchant had removed EAS from its shelves for much of the year due

to a pricing disagreement. The resolution of that disagreement had put EAS back on

the shelves, and some of the management team thought that a sales boost through

advertising would be a timely move to restore good relations between Ohio Arts

and the retailer.

Television commercials for the EAS were aired during syndicated morning and

evening talk shows, daytime soaps, and evening news programs only in Cincinnati,

Ohio, during the three test weeks. There were internal concerns that Cincinnati

might not be a good test market because it was in the same state as the companys

headquarters. But research showed that not only was company location not a

concern for buyers, but an overwhelming majority of consumers didnt even know

that EAS was made and marketed by an Ohio company. Commercials were not

aired in any other place in the United States during the test period. The breakdown

of the total advertising spend in the three weeks is provided in Table 16-1. The cost

of working with an outside agency to develop the test EAS commercials was

$75,000. The media spend called for more than 100 spots, each with an average

rating of 2.7 to be broadcast over the three weeks.6 The $30,150 media spend in

Cincinnati would be equivalent to a $5 million national budget.

Four other citiesCharleston, South Carolina; Cleveland, Ohio; Indianapolis,

Indiana; and Pittsburgh, Pennsylvaniawere chosen as controls to evaluate

whether the EAS advertising led to increased sales (see Table 16-2 for city

demographics). In choosing test market cities, several factors should generally be

considered. First, the test city (or cities) must reflect market conditions in the

products market area, whether it was local, regional, national, or global. No city

could represent all market conditions perfectly, and success in one city did not

guarantee success elsewhere. Typical criteria for good test markets included

similarity to planned distribution outlets: representative population size,

demographics, income, purchasing habits, and freedom from atypical competitive

activity.7

Source: Ohio Art. Used with permission.

Table 16-2 Test and Control City Demographics

The greater Cincinnati area represented about 0.7% of the U.S. population. The

average population of the control cities was around 2 million, which represented

about 0.6% of the U.S. population. See Table 16-3 for sales data for EAS and

another new Ohio Art product, Doodle Doug, in Cincinnati and the four control

cities at selected stores of the major mass merchant.8 Doodle Doug was not

advertised, but sales were tracked in the cities as an additional control in

interpreting the results.

One Ohio Art executive worried that the test would be difficult to read and

suggested that a split-cable test9 could be implemented in April of the following

year for about $500,000. He believed the estimate of the projected sales lift from

such a split-cable test would be much more accurate.

The suggested retail price for EAS was $12.99. The Travel, Pocket, and Mini

Etch A Sketch were less expensive at $8.99, $4.99, and $2.99, respectively. Given

unit sales for each product, the weighted average of all EAS products sold in the

holiday time period was $10.00. It was this $10.00 price that was suggested for use

in calculating the percentage increase required for a national campaign. The

suggested retail price for Doodle Doug was $14.99. The companys average gross

margin for the EAS products was 58%, and the average retail margin was 36%.

The Betty Spaghetty Experiment

In mid-2007, the company implemented another field experiment for a revamped

Betty Spaghetty product line. The test had three objectives: (1) estimating consumer

demand for the revised Betty Spaghetty line, (2) testing whether advertising could

increase sales (and profits) obtained for the redesigned Betty Spaghetty, and (3)

convincing the merchandise manager at a mass-merchant chain that those sales of

Betty Spaghetty would justify the allocation of shelf space. For the Betty Spaghetty

experiment, television and radio commercials were aired in Arizona for four weeks

from June 17, 2007, to July 14, 2007. The company purchased 600 gross rating

points (GRPs) for the television advertisements for a total cost of $31,500. The ads

were aimed at girls between the ages of two and eleven and were aired on local

cable channels, such as Nickelodeon and the Cartoon Network. Management also

purchased 64 GRPs for radio commercials for a total cost of $8,022. The radio

commercials were aired during morning and evening commutes. Each of the

television and radio programs selected for the commercials reached about 1.8% of

the population in Phoenix. The cost of developing the commercial through an

outside agency was $150,000.

Management estimated that an equivalent ad budget for eight to ten weeks of

preholiday advertising, factoring in certain economies as well as the higher

seasonal cost of media, would be approximately $3 million. The average retail

selling price of Betty Spaghetty during the test was about $15.00. Retailer and Ohio

Art margins were about the same as for EAS, 36% and 58%, respectively. Given

that some time would be required to read the test, obtain shelf space, and ship

product to stores, management estimated that the four-week test market sales period

represented about 10% of the total remaining sales potential for the year.

Table 16-4 reports weekly sales in 23 Arizona stores (test) and in 24 stores of

the same mass merchant in California (control) for two versions of Betty Spaghetty.

The stores represented 50% of the retailers Arizona sales and 10% of California

sales, respectively. Arizona and California represented 2% and 12%, respectively,

of the retailers national sales, and that same retailer was expected to account for

25% of total Betty Spaghetty sales. Management intended to use the test to help

estimate Betty Spaghetty sales with and without advertising.

Transformation of Marketing at the Ohio Art Company (B)

In March 2012, the Ohio Art Company, best known as the manufacturer and

marketer of the classic toy, Etch A Sketch (EAS), had been distracted from its

efforts to shift its marketing emphasis from traditional mass-marketing channels to

more targeted digital marketing. Management believed such a shift would be

necessary for the company to thrive in the next decade. The distraction came from

the media attention surrounding recent comments made by a campaign manager of

Republican presidential candidate Mitt Romney. Having been thrust into the middle

of a political controversy, Ohio Art needed to decide how (and whether) to react to

the growing media attention.

Distraction or Opportunity?

When asked how a campaign might change tactics from primary to general

elections, Romneys adviser Eric Fehrnstrom replied, You hit a reset button for the

fall campaign. Everything changes. Its almost like an Etch a Sketch. You can kind

of shake it up and we start all over again.10 The result was a media firestorm.

Ohio Art received numerous calls from the media, and management knew it had to

decide on a plan.

Management was concerned that investing time and financial resources to

leverage the media attention might take resources away from the companys new

star product: nanoblock construction toys. Because it appealed to a wide range of

ages, it would be a great candidate for promotion through digital media. For both

nanoblock and the traditional EAS line, digital, social media, and online retailers

offered opportunities Ohio Art had yet to explore. Figure 16-3 suggests that there

was significant room for further growth in both Internet and mobile advertising, due

to the gap between the percentage of time consumers spent with Internet and mobile

devices and the percentage of dollars advertisers devoted to these media.

In addition to the Internet search and display ads, there were rapidly emerging

opportunities to promote through Amazon.com and social media. Social media was

particularly intriguing because management thought that outlet might offer new

revenue models for the EAS brand. Up until this point, the EAS brand had been

mainly leveraged through an increasing number of product variants (Figure 16-4),

and the productivity of introducing more EAS product extensions seemed limited.

Over 150 million EAS-related products had been sold by mid-2012.

Martin Killgallon, Ohio Arts VP of marketing, thought he could capitalize on the

iconic nature of the brand by exploring partnership opportunities with other

marketers. For example, the company had licensed iPhone and iPad covers that

gave those devices the appearance of the EAS. iPad and iPhone mobile

applications also mimicked the action of the EAS on the iPad and iPhone screens.

These EAS apps, offered through Apple, Amazon, Google, and Barnes & Noble,

had over 1.3 million downloads between mid-2010 and mid-2012. And interest in

the timeless toy did not seem to be slowing down. In May 2012, a California startup

company created an accessory called Etcher as part of a project with Ohio

Art: an iPad case styled after the EAS. It consisted of a bright-red plastic case with

two familiar-looking knobs that were used for drawing horizontal and vertical

lines. The system interfaced with an iOS app that replicated the toys drawing

experience. The iPad version allowed users to save and share their work with

others on social networks or simply shake the screen to erase their creation and

start over.

The company typically negotiated a royalty payment of 5% to 10% of gross

revenue for licensed products such as this. The image of the EAS product was also

often used in advertising as a prop, conveying fun and creativity in the context.

Sometimes Ohio Art paid to be included (such as in the Target holiday

commercials), and sometimes the company granted permission in return for

expected favorable exposures (like the ESPN and BMW Mini commercials).

Management thought there was more the company could do to capitalize on the high

brand recognition and nostalgia associated with the EAS product, but it was unsure

exactly what to do and how it might be monetized.

A Shift in Strategy

Ohio Art made shifts in all aspects of its marketing mix in reaction to

developments in the toy industry and the growth of online retailing. Management

believed these shifts were investments that would make Ohio Art a stronger

competitor in the upcoming years.

Product

Instead of designing toys from the ground up and investing in its own tooling,

Ohio Art began looking to license toys for exclusive distribution that were

developed by other international toy companies or smaller entrepreneurial toy

companies that were trying to gain access to stronger distribution and marketing

capabilities. With this approach, focusing on new channels and monitoring

marketing investments, the company believed it could reduce the risk of introducing

new products. Early signs were that the strategy was working at least with its new

nanoblock product, which seemed to have a lot of potential. Other licensed

products included Ks Kids (infant and toddler toys) and Clics (construction) for

younger children and Air Picks (an air guitar toy that played famous guitar riffs)

for preteens and older kids.11

Channels

The traditional line of products (EAS and Doodlesketch) was stocked by the

three largest toy retailersWalmart, Target, and Toys R Usas well as a

number of other mass and discount retailers, including dollar stores and drug

stores. For the new line of licensed products, including nanoblock, the company

was shifting to specialty toy stores, plus Toys R Us and a few bookstores, such as

Barnes & Noble and Amazon.com. Management believed that attempting to

distribute the new products through mass merchandisers would reduce the

enthusiasm of the specialty channels (including Toys R Us) to stock and promote

these items. Also, broadening the distribution channels would make the company

less vulnerable to sudden changes in stocking, merchandising, and promotion

decisions by individual retail chains. By mid-2012, approximately 1,100 accounts

stocked at least some of the nanoblock line. Of those, most were specialty toy

retailers or accounts such as Urban Outfitters or Barnes & Noble, which also sold

hobbies and toys. Toys R Us and Amazon were expected to account for 65% of

nanoblock units sold in 2012.

Pricing, Discounts, and Margins

One of the reasons for moving to new channels was an attempt to escape the

relentless price pressure, unauthorized deductions, and promotional allowances

required by large retailers. Specialty toy retailers tended to price products to earn

50% margins. These independent toy retailers were serviced by manufacturer

representatives who typically earned commissions of 10% for sales to specialty

stores. Mass retailer margins were lower. For a heavily promoted item, they were

35% or so, and for Ohio Art products, they were closer to 45%. Manufacturer

representative commissions to this channel were lower: 4% to 5%. Ohio Art was

determined that the new product line would not be subject to the same price

pressure as the traditional line and intended to discontinue retailers that did not

respect the suggested retail price levels.

Marketing Communications

Historically, sales of the core EAS line had increased in response to such

publicity as the featured role in the movie Toy Story, but the gains had been shortlived

and might have been due to retailer reactionsmore displays, better shelf

space, fewer out-of-stocks, and the likeas much as consumer demand. Finding

efficient ways to promote the line of Ohio Art toys was an ongoing challenge.

Traditional marketing channels were not growing sales of EAS, and the nanoblock

line was an impetus to try new strategies.

Nanoblock History

Developed and manufactured by Kawada and first sold in Japan in October

2008, nanoblock allowed users to build detailed, intricate models because of their

tiny size (Figure 16-5). The blocks, which were about one eighth the size of other

popular building bricks, were made from high-quality ABS plastic and featured a

double-ridged backing that enabled the tiny pieces to fit together almost seamlessly.

They appealed to various age groups because of the variety of building sets offered.

Because of the blocks instant popularity in Japan, large Japanese retail chains

had dedicated much shelf display space to nanoblock. In addition to its regular

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lineup of products, Kawada also offered licensed products and special-edition

products. The company also regularly added new items to its catalog, sometimes

based on user-submitted ideas.

In late 2011, Ohio Art conducted an online survey to evaluate the demographics

of its core customers. The survey revealed that almost 90% of its purchasers were

between 25 and 54 years of age.12

With this valuable information about buyers, Ohio Art could now make informed

decisions about marketing dollars for nanoblock. Specifically, Amazon aimed to

use data, technology, and expertise to put the most appropriate products in front of

the most qualified and receptive potential buyers. Amazon had built proprietary

merchandising technology that allowed it to present a fully customized store to

every consumer who visited its website. Companies selling on Amazon benefitted

from Amazons commitment to drive sales by putting the right products in front of

the right customers.

A study of online shopping behavior reported that Amazon.com was the source

used most frequently for product reviews and ratings. Amazon was used by 58% of

respondents, compared with 45% for other retailers (such as Walmart and Best

Buy), 41% for search engines (such as Google and Bing), 32% for manufacturers

websites (such as Nike and Lego), 25% for review sites (such as Epinions and

CNet), 11% for Facebook, and 7% for Twitter.13

Amazon also offered a variety of targeted advertising options (see Table 16-5 for

a description of the typical merchant services offered by Amazon.com) with rates

that generally doubled for the toy category in the last quarter of 2011.

According to Larry Culp, an Ohio Art sales rep, the company had always had a

consistent presence on Amazon due to the EAS products. But the company had not

done much to promote new products on Amazon until the debut of nanoblock.

Amazon, like many technology-driven sites, used algorithms and collaborative

filtering to determine search results relevance. Collaborative filtering was a

process used to generate product recommendations by matching the purchase

histories of many different users. Without a minimum purchase volume, these

recommendation algorithms did not have enough history to generate relevant

recommendations for nanoblock.

One way the company was able to increase the potential for relevant

recommendations was through Amazons Gold Box promotion, where items were

offered at reduced prices for an hour or two on a given day. Ohio Art decided to

fund a promotion for its Eiffel Tower nanoblock set in the Lightning Deals

section of Gold Box on March 4, 2012 (see Table 16-6 for sales data on select

products). Companies paid Amazon to promote their products this way; fees were

determined by the number of units companies made available for the deal

multiplied by the discount (versus Amazons normal price). In this way, companies

were challenged to forecast properly; an overestimation would result in higher

promotional costs while an underestimation would result in foregone sales. These

Lightning Deals increased the number of user clicks on the nanoblock product,

thereby increasing the relevance of Ohio Art and nanoblock. That, in turn, increased

the number of appearances for Ohio Arts products even after the promotion ended.

Ohio Art sold all 300 Eiffel Tower sets it offered at $12.99 in the Lightning Deal.

The rest of March volume was sold at the regular $19.99 price.

Finally, Amazon charged suppliers a 10% cooperative advertising fee. This fee

was justified by Amazon providing search capabilities and using Google

AdWords/Microsoft AdCenter to get top results in searches for merchants

products. For example, the top advertised spot in a Google search for nanoblocks

was the Amazon.com link to Ohio Arts products. Ohio Art was trying to determine

if Amazon was a great new channel or if the challenges associated with it would be

just as tricky as those it faced in dealing with traditional retailers.

Opportunities

EAS sales were stagnant, but nanoblock sales were growing. The targetedaudience

data about nanoblocks customers coupled with a taste of Amazons

variable pricing motivated management to consider engaging in other new media.

Ohio Arts ad agency recommended advertising that was playful and sophisticated

for the adult audience. And the Amazon sales empowered management to recognize

that it could push for positive return on investment rather than financing a large

traditional ad campaign and then sitting around hoping for results. The new model

of testing several tactics, discontinuing the ones that did not work, and honing the

definitive successes was much more appealingfor all products, not just

nanoblock.

Ohio Art utilized its Facebook.com/EAS page primarily for polls and factoids.

Posts ranged from Fun Fact: Worlds Largest #EtchASketch weighs 300lbs to

Does this expertly sketched Mona Lisa make you smile or pout? These efforts

earned it over 7,000 fans by mid-2012. For the nanoblock Facebook page, Ohio Art

produced a series of targeted poster ads (Figure 16-6), special offers, and

announcements about fun things that were going on. With nanoblock in particular,

the company attempted to create a forum for fans to communicate with each other,

asking questions and sharing creations. The videos were quite popular on the

nanoblock USA Facebook page, resulting in over 3,000 fans by mid-2012.

There were several ways that companies could use blogs to promote their

products. In 2010, Google Blogger introduced BlogSense accounts. Companies

would pay for advertising on blogs that Google determined were related to their

products. A percentage of the proceeds would go to the blogger. Of particular

interest to Ohio Art was the fact that Mommy Bloggers had recently become very

popular. Top Mommy Bloggers had thousands of daily visitors to their sites, many

of whom were avid, loyal readers who deeply valued the writers opinions.

Companies could create incentives for these bloggers to promote or review their

products on their blogs, which Ohio Art pursued in 2010 and 2011. The venture

resulted in over 350 websites creating permanent links to the Ohio Art sites

http://www.world-of-toys.com/ (the retail website) and www.OhioArt.com. By

mid-2012, the company was evaluating whether to attempt to convert certain

Mommy Bloggers into affiliates. Affiliates would link to Ohio Arts website and

receive commissions on sales that resulted from those click-throughs. Companysponsored

events, such as luncheons to demonstrate new products, functioned as

forums to inform and entertain 20 or so bloggers at a time. The success of these

small events was one argument for considering larger events (for example, inviting

350 bloggers to events sponsored by third parties or sponsoring booths at blogger

conventions).

Ohio Art had also developed an interest in Pinterest, a content-sharing website

where users could create, manage, and share theme-based pinboards. Users

could browse other users pinboards, follow other pinners, and repin images to

their own collections. Pinterest allowed users to share their pins on Twitter and

Facebook, and with more than 12 million users (more than 80% female), it was the

fastest social media site in history to break 10 million unique visitors.15 Users

typically pinned things such as recipes, dcor, childrens toys, and do-it-yourself

crafts. But by the middle of 2012, Pinterest had not yet been explored by Ohio Art.

Overall website traffic was of interest to the company because direct-toconsumer

sales represented the highest-margin sales and also because Ohio Art

controlled that consumer experience completely, from product copy to price. As of

mid-2012, search engines referred 22% of visits to the site. Thanks to the bloggers,

there were 365 sites linking to OhioArt.com and 110 sites linking to World-of-

Toys.com. Of the search-generated traffic, Ohio Art accounted for 25% of visits

and some version of Etch A Sketch almost 40%.16

Ohio Art had e-mail addresses for approximately 18,000 customers, which were

primarily collected from orders placed on the companys website. Many of those

orders were for bulk quantities, intended for events where the number of products a

customer needed exceeded what a local store might keep in stock. Ohio Art had

used these e-mails to send new product announcements and promotional codes to

encourage orders from its website.

Conclusion

Management at Ohio Art was convinced that finding marketing investments that

produced trackable, positive returns would be the key to its future success. It was

no longer acceptable to take the risks associated with expensive national television

ad campaigns and the associated inventory and receivables risk required to support

broad retail distribution. The new philosophy was that as returns could be

demonstrated, marketing investments could be rapidly scaled behind successful

campaigns.

So, when Mitt Romneys campaign manager said the candidates platform was

...almost like an Etch a Sketch, the Ohio Art team had a decision to make: either

have its staff and ad agency jump into social media to capitalize on the opportunity

or stay the course with other targeted efforts.

1. Which products and what kind of social media campaigns do you believe have the most potential for Ohio Art?

2. What actions would you propose in response to the media reactions to the comments by Romneys aide?