Hornby's financial updates to the Stock Market

[MarkSG]

But what happens when the people who've been happily paying £200  start to cotton on that if they wait a while, they could buy 2 for £200 and stop paying full whack when they first come out?

They don't, though. Or, rather, they are aware that the price will probably drop, but they don't consider it's worth waiting.

 

It's exactly the same kind of mindset which sees people queuing up to see the latest Star Wars film on the first day of release, or queueing outside an Apple Store to be the first to own the new iThingy. The reality is that, for almost any product, there will be a subset of potential customers who are not particularly price sensitive. So it makes sense to extract maximum value from them.

 

And how many potential purchasers on the other hand turn away when they see the £200 price and aren't around to see it drop to £75?

Well, there's not a lot you can do if they die in the meantime    But, again, the reality is that most of them will still be around.

 

There are very few customers who are both price-sensitive and immediacy-sensitive - that is, who will only buy a product at a low price, and will only buy it shortly after it is released. While they undoubtedly do exist, their numbers are small enough that it's almost always more profitable to disregard them and aim at the majority of the target market.

[RJS1977]

They don't, though. Or, rather, they are aware that the price will probably drop, but they don't consider it's worth waiting.

 

It's exactly the same kind of mindset which sees people queuing up to see the latest Star Wars film on the first day of release, or queueing outside an Apple Store to be the first to own the new iThingy. The reality is that, for almost any product, there will be a subset of potential customers who are not particularly price sensitive. So it makes sense to extract maximum value from them.

 

Well, there's not a lot you can do if they die in the meantime    But, again, the reality is that most of them will still be around.

 

There are very few customers who are both price-sensitive and immediacy-sensitive - that is, who will only buy a product at a low price, and will only buy it shortly after it is released. While they undoubtedly do exist, their numbers are small enough that it's almost always more profitable to disregard them and aim at the majority of the target market.

 

I was thinking more of the people who are take a look at getting into the hobby, see the full-whack prices and take up a different hobby instead. That's not just one sale lost, it's the rest of a lifetime's!

[Chris Higgs]

But what happens when the people who've been happily paying £200  start to cotton on that if they wait a while, they could buy 2 for £200 and stop paying full whack when they first come out?

 

And how many potential purchasers on the other hand turn away when they see the £200 price and aren't around to see it drop to £75?

 

Problem with this is, if an item sells well it never drops in price, or even worse sells out and prices go up on ebay. I personally only buy stuff when the price drops, but it means there are some models I would like but don't have. which perhaps is not such a bad thing.

[Clearwater]

I thought MarkSg answered the what happens if people don't play along with the pricing strategy question in his earlier post: they go bust....

[jjb1970]

I think perhaps there is confusion between retaining customers and loyalty to customers. Companies will cultivate repeat business and make efforts to retain customers, but it is not based on sentiment or loyalty but rather hard commercial logic. That is not a criticism, as if the supplier makes efforts to maintain sales to existing customers and the customer likes the product then it is a mutually beneficial arrangement. However it is not, and I don't think it ever was, a relationship built around loyalty.

[MarkSG]

I was thinking more of the people who are take a look at getting into the hobby, see the full-whack prices and take up a different hobby instead. That's not just one sale lost, it's the rest of a lifetime's!

 

It would be very unusual for someone to consider getting into the hobby on the strength of one model, and then be put off by the fact that they can't afford it!

 

Most newcomers start off with cheaper stuff anyway - they're not generally the group that cares so much about the latest item on the wishlist being ticked off.

[JSpencer]

I think perhaps there is confusion between retaining customers and loyalty to customers. Companies will cultivate repeat business and make efforts to retain customers, but it is not based on sentiment or loyalty but rather hard commercial logic. That is not a criticism, as if the supplier makes efforts to maintain sales to existing customers and the customer likes the product then it is a mutually beneficial arrangement. However it is not, and I don't think it ever was, a relationship built around loyalty.

Indeed, People only ever buy products because they think they will benefit from them not because they are there.

Edited May 10, 2016 by JSpencer

[MarkSG]

There's another marketing principle here that's important, too. For any marketing strategy, you can come up with hypothetical examples of people for whom it won't work. But no manufacturer or retailer (at least, not one operating at the kind of mass market level that Hornby is) can address every potential customer's specific circumstances. You have to aim for the sweet spot, for the point that gets the most coverage. That will inevitably mean you miss out on sales to some people. But that's OK, because if you targetted those people with offers that would make them buy, then you'd miss out on sales to a far greater number of more typical people.

 

In this context, it's important to remember that those of us here on RMweb are not the majority of Hornby's market. Even if you discount the non-railway side of things, like Corgi, Airfix and Scalextric, we still aren't the entirety of model railway purchasers, by a long chalk. The "train set" buyers are significantly under-represented here, as are the collectors. But those groups are significant contributors to Hornby's revenue. Collectors, in particular, tend to be those with money to spend. Look at the thread on Bachmann's £500 Blue Pullman for a discussion of that in a different scenario. While we may fervently wish that the manufacturers would put our needs first, the reality is that - especially for a company as large as Hornby - they simply can't, at least not all the time. 

[Coryton]

Indeed, People only ever buy products because they think they will benefit from them not because they are there.

 

I suppose that depends how you look at it. Some people collect things, and want one of everything in a set. If a new whatever-it-is comes out, then they want it because it's there. But then you could say they will benefit from it because it means they have a full set...

[Ozexpatriate]

In this context, it's important to remember that those of us here on RMweb are not the majority of Hornby's market.

Are you really sure of that assertion?

 

Even if you discount the non-railway side of things, like Corgi, Airfix and Scalextric, we still aren't the entirety of model railway purchasers, by a long chalk.

I will happily stipulate that by definition RMwebbers are not the entirety of model railway purchasers, but as a 'representative sample' I think we do represent the spectrum of purchasing behaviours of a very significant portion of Hornby's recent revenues - even if we are not a numerical plurality, let alone a majority.

 

The "train set" buyers are significantly under-represented here, as are the collectors. But those groups are significant contributors to Hornby's revenue. Collectors, in particular, tend to be those with money to spend. Look at the thread on Bachmann's £500 Blue Pullman for a discussion of that in a different scenario. While we may fervently wish that the manufacturers would put our needs first, the reality is that - especially for a company as large as Hornby - they simply can't, at least not all the time.

Let's be careful to discriminate fact and opinion.

 

I am wholly satisfied with the assertion that the denizens of RMweb do not represent all Hornby's customers but the data simply isn't public to draw accurate conclusions. We don't have data for trainset or RailRoad sales. Hornby does not publish this. At best we have what those retailers who post here on RMweb tell us about their customer base.

 

It is my suspicion that the traditional, 'trainset for Johnny' market is declining dramatically at present. Also I'm not sure why you would say that "Collectors" are not represented here.

 

We need more accurate data to draw conclusions either way.

Edited May 10, 2016 by Ozexpatriate

[MarkSG]

Are you really sure of that assertion?

Absolutely, yes. Hornby had revenues of £58 million in 2015. There are just under 29,000 members of RMweb. I am as certain as it's possible to be that we did not spend an average of £2,000 each with Hornby in that year. I'd hazard a guess, that, on average, we spent less than 10% of that.

[RJS1977]

 

 

It is my suspicion that the 'traditional, 'trainset for Johnny' market is declining dramatically at present. Also I'm not sure why you would say that "Collectors" are not represented here.

 

 

 

Which it will be if there is a very limited range of sets, at what appears (at first glance) to be quite a high price, and they're the same sets which have been on the go for years with no relevance to what youngsters see today.

 

Now, I've nothing against Smokey Joe/101 and indeed in many ways a simple tank loco and a few wagons to be shunted can have more play value than an HST which can only go round in circles, but they just don't have the same 'wow' factor.

[Ozexpatriate]

Absolutely, yes. Hornby had revenues of £58 million in 2015. There are just under 29,000 members of RMweb. I am as certain as it's possible to be that we did not spend an average of £2,000 each with Hornby in that year. I'd hazard a guess, that, on average, we spent less than 10% of that.

It would be fun to take that wager. I'm confident that over 29,000 registered members, you would win. 

 

Over many of the people who regularly post here, an annual outlay of £200 for Hornby items seems low and for many is limited by Hornby's inability to produce everything they announce in sufficient volumes to satisfy demand. (Great Gathering or Exeter anyone?)

 

(And of course the £58m includes non-railway items.)

 

But I'm sure you understand that my position is about the buying proclivities expressed here, not accumulated purchases by members.

Edited May 10, 2016 by Ozexpatriate

[The Stationmaster]

Absolutely, yes. Hornby had revenues of £58 million in 2015. There are just under 29,000 members of RMweb. I am as certain as it's possible to be that we did not spend an average of £2,000 each with Hornby in that year. I'd hazard a guess, that, on average, we spent less than 10% of that.

 

But that figure is hardly relevant.  For a start 21% of those revenues were accrued outside the UK (where the vast majority of RMweb's members are based I would think) and secondly of the revenue that was accrued in the UK we haven't got the faintest idea how much of it came from model railway sales although some people no doubt also spent on Airfix, Humbrol, Corgi and maybe even Scalextric.  in other words the amount of revenue which might have come from RMweb members was in any event much less than =£2,000 each.

 

Similarly to spend 10% of that mythical £2,000 wouldn't take very much - just a couple of locos or half a dozen coaches so I suspect the £200 figure will be well short of what some of spent although obviously £200 more than many have spent.  in other words the numbers become meaningless.

 

What does however have greater impact is the extent to which RMweb members might buy Hornby product if they happened to make the right thing in the right quantities because my overall impression is that many are not particularly price sensitive (within reason of course) provided they are offered the right product at the right level of quality etc, witness the rate at which many 1st runs vanish from the shelves.

[Legend]

I thought MarkSg answered the what happens if people don't play along with the pricing strategy question in his earlier post: they go bust....

Or they modify their pricing strategy. There is such a thing as consumer resistance. It's not organised, of course, but there comes a point where consumers don't perceive it's value for money and go away and do something else instead. I don't subscribe to the statements that we can do nothing about it. Of course it maybe that the company decides it really wants that price as they can make larger margins doing something else. In which case let them withdraw from the market and let other companies in that can meet the consumers expectations and at same time make reasonable margins.

[MarkSG]

But that figure is hardly relevant.  For a start 21% of those revenues were accrued outside the UK (where the vast majority of RMweb's members are based I would think) and secondly of the revenue that was accrued in the UK we haven't got the faintest idea how much of it came from model railway sales although some people no doubt also spent on Airfix, Humbrol, Corgi and maybe even Scalextric.  in other words the amount of revenue which might have come from RMweb members was in any event much less than =£2,000 each.

It's relevant to the extent that it demonstrates how improbable it is that we comprise the majority of Hornby's target market.

 

Similarly to spend 10% of that mythical £2,000 wouldn't take very much - just a couple of locos or half a dozen coaches so I suspect the £200 figure will be well short of what some of spent although obviously £200 more than many have spent.  in other words the numbers become meaningless.

It may be meaningless to you. I can assure you that it isn't to Hornby.

 

Which is part of the point I'm making here. Hornby's strategy for returning to profit will be driven by the sort of calculations which are often counter-intuitive, at least to the average consumer. When you are talking about millions of pounds of revenue and millions of potential customers, then averages (and variance, and standard deviation, and a whole host of other statistical concepts) are far more important than individuals.

 

It's also worth noting that this is often a conflict within large organisations as well, particularly between the sales department - especially if the reps are on revenue-based commission - and the financial department. It can often be more profitable to sell fewer items, if in doing so you make a bigger overall margin.

 

[Coryton]

It's relevant to the extent that it demonstrates how improbable it is that we comprise the majority of Hornby's target market.

 

It may be meaningless to you. I can assure you that it isn't to Hornby.

 

Which is part of the point I'm making here. Hornby's strategy for returning to profit will be driven by the sort of calculations which are often counter-intuitive, at least to the average consumer. When you are talking about millions of pounds of revenue and millions of potential customers, then averages (and variance, and standard deviation, and a whole host of other statistical concepts) are far more important than individuals.

 

It's also worth noting that this is often a conflict within large organisations as well, particularly between the sales department - especially if the reps are on revenue-based commission - and the financial department. It can often be more profitable to sell fewer items, if in doing so you make a bigger overall margin.

 

 

I've certainly heard of organisations getting into a mess because the salesmen were paid commission on sale price not profit, so it was in their interests to cut margins to next to nothing to get a sale...

[MarkSG]

I've certainly heard of organisations getting into a mess because the salesmen were paid commission on sale price not profit, so it was in their interests to cut margins to next to nothing to get a sale...

 

Yes, that's a common mistake, and can be financially disastrous if not managed properly.

 

Nothing to do with model railways, but back in the late 90s I worked for a large Internet company. One of our biggest problems was sales staff selling systems that were really difficult to provide, technically, and thus cost more to fulfil than they earned. One particular deal was with a then big name "dotcom" startup that was going to revolutionise online retail. Unfortunately, they didn't really know what they were doing, and went bust - owing us a lot of money for systems we had put in place to provide services to them. That contributed to our parent company going down the pan as well. Meanwhile, the salesman who'd closed the deal walked away with a six figure bonus.

[Dunsignalling]

Or they modify their pricing strategy. There is such a thing as consumer resistance. It's not organised, of course, but there comes a point where consumers don't perceive it's value for money and go away and do something else instead. I don't subscribe to the statements that we can do nothing about it. Of course it maybe that the company decides it really wants that price as they can make larger margins doing something else. In which case let them withdraw from the market and let other companies in that can meet the consumers expectations and at same time make reasonable margins.

But your idea of a reasonable margin is different than theirs.

 

The best way of ensuring prices don't rise unjustifiably is healthy competition. Removing one major player from the marketplace would reduce that, not enhance it.

 

The overall supply of product would reduce because it would take many years for existing competitors and all new entrants combined to replicate anything like Hornby's breadth of coverage.

 

The pressure on prices that reductions in supply exert is upward rather than downward. Some new entrants undercut established players; that's normal; it's one (but not the only) way of gaining a presence. However, in the modern world, few companies are content to remain at the entry level of their chosen field, it's just not a safe place to be. So, either the effect on prices doesn't last or the company doesn't (think Lima).

 

The market will decide. If consumer price-resistance at the bottom of the market is sufficient, manufacturers might decide to abandon it, concentrating their efforts on more exclusive goods aimed at that portion of their clientele which remains both able and willing to buy. All model trains are a luxury, there's no reason why they can't, won't or shouldn't become more of one. 

 

Cheap cars are produced because they are sold in sufficient numbers so provide a good return for their makers. Sales of the most popular model locomotives are tiny by comparison with even some pretty obscure cars. It is quite possible that the overall market for UK outline model railway goods is just too small to make it commercially worthwhile catering for the budget end of it other than as a springboard to better things. 

 

John

Edited May 11, 2016 by Dunsignalling

[Dunsignalling]

Service and keeping price increases to the minimum do it for me. But it's all about perception.

 

I'll give you an example. I bought my parents an iPad to keep in touch with them. They hardly used it , but after a year the blue screen of death appeared. Just out of guarantee. So off down to Apple Store to see how much cost to repair. Imagine my surprise when the tech guy said, it's the blue screen of death, it'll take me a while to figure out what's wrong, it's just out of guarantee, how about I offer you a replacement instead. I was gob smacked! As a result my next phone was an iPhone and seriously considering iPad pro to replace my existing iPad . Yes they are expensive but it encouraged customer loyalty and overall I felt it value for money. Parting with money was turned into a pleasurable activity! The whole thing was very slick. You can tell the difference buying direct from Apple rather than through Dixons, where you are more likely to know more about the device than the assistant.

 

Contrast that with companies that put up prices 20% pa , even for superannuated mouldings. Just get the feeling of being exploited. Def not value for money as a result now haven't bought anything from them for a year.

 

Apple, on the other hand just set massively inflated prices from the start; a small yearly percentage added to them looks very reasonable but is quite a lot in cash terms.

 

They can afford to offer that sort of replacement now and again simply because their margins and volumes are so big (multiples of anything you can find in the model railway industry). An iPad almost certainly costs well under £100 to produce.  

 

Weird comparisons. Weird perceptions.

Edited May 11, 2016 by Dunsignalling

[rob D2]

Apple and dyson are like the best examples of controlled products and high prices

[RJS1977]

Apple, on the other hand just set massively inflated prices from the start; a small yearly percentage added to them looks very reasonable but is quite a lot in cash terms.

 

They can afford to offer that sort of replacement now and again simply because their margins and volumes are so big (multiples of anything you can find in the model railway industry). An iPad almost certainly costs well under £100 to produce.  

 

Weird comparisons. Weird perceptions.

 

I called into the Reading Apple store yesterday morning. Distinctly unimpressed. Yes, lots of iPhones and pads around to have a play with, and quite a few assistants around, but no indication of specification and prices (for the stock, I mean, not the assistants!). Went round to Staples and bought a laptop instead.

[Legend]

I called into the Reading Apple store yesterday morning. Distinctly unimpressed. Yes, lots of iPhones and pads around to have a play with, and quite a few assistants around, but no indication of specification and prices (for the stock, I mean, not the assistants!). Went round to Staples and bought a laptop instead.

Surprised you weren't approached. I always am when I walk in. The prices and specifications are actually on the iPads or iPhones but there's usually someone there to talk you through it.

[ruggedpeak]

Surprised you weren't approached. I always am when I walk in. The prices and specifications are actually on the iPads or iPhones but there's usually someone there to talk you through it.

I have no idea how Apple operate, but in car sales the dealers have been told not to jump on customers as soon as they walk in the showroom as it puts people off, and many are advised to wait until the customer makes an indication of seeking assistance. Although it might be they are like certain premium brand car dealerships who judge you as you walk in and decide if you are worth bothering with, if not then you will be studiously ignored and refused so much as a brochure!

[The Stationmaster]

I have no idea how Apple operate, but in car sales the dealers have been told not to jump on customers as soon as they walk in the showroom as it puts people off, and many are advised to wait until the customer makes an indication of seeking assistance. Although it might be they are like certain premium brand car dealerships who judge you as you walk in and decide if you are worth bothering with, if not then you will be studiously ignored and refused so much as a brochure!

 

They certainly don't jump on you in the Apple stores and there is no hard sell when they do start to answer questions etc (I understand they are not on a direct commission in any case).  They can also be remarkably tolerant when you ask dumbo questions (like when I asked where you could attach a mouse to an iPad - no mouse, no sale, no tears on their part).

Edited May 15, 2016 by The Stationmaster