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.

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.

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:

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...