How Melissa & Doug Fight Fakes, Dupes and Copycats

0:01Melissa Bernstein:This episode is brought to you by Nespresso. Introducing VirtuoUp, the latest in a long line of innovation from Nespresso. It's innovation you can touch, sense, and taste in every single cup. With a three-second start, easy open lever, and dedicated brew-over-ice button, it's even easier to enjoy your coffee your way. Sip for yourself. Shop VirtuoUp exclusively at Nespresso.com. running a business means solving problems i tell you how the smartest entrepreneurs do it hi i'm jason pfeiffer editor-in-chief of entrepreneur magazine and this is problem solvers

0:42Melissa Bernstein:of all the incredibly hard things about entrepreneurship this might be the hardest you come up with a great idea you pour everything you have into it all of your energy all of your love, all of your money. You get it to market. It works. People like it. And then because people like it, other people noticed that it is a successful idea and then they knock you off. They just steal everything that you have done. And they come out with a version that is, if not exactly the same, then really similar. And they start to steal your thunder. So what do you do? Today, I am talking with someone who knows the answer to that because she has dealt with it so often and yet still built a brand that I love, that my kids love.

1:26Melissa Bernstein:I am so excited today to talk to you, Melissa Bernstein, co-founder of Melissa and Doug Toys. Melissa is on tour right now, so to speak, for her new book, which is fantastic, called The Heart of Entrepreneurship, Crafting Your Authentic Recipe for Success. And we are talking today about this one particular part of the recipe, which is how to survive the knockoffs. Melissa, welcome to Problem Solvers. I'm so excited you're here.

1:48Jason Calacanis:I am so excited to talk about this topic because I don't talk about it at all. So it's going to be really fun.

1:55Melissa Bernstein:Oh, wow. I'm so glad to hit something that feels like new and fresh in the world of Melissa and Doug. I mean, you must have dealt with this so often because your toys, anybody who has kids who have had your toys knows, they are at their heart so simple. They are tactile. They are puzzles. They are, you know, lifting letters. and here, they're the kinds of things that kids need, but they're also, frankly, the kinds of things that are really easy to knock off. And so you must have dealt with this so often.

2:25Jason Calacanis:We did because our concepts really weren't patentable. And one of the hardest things was we were most often knocked off by our own large customers, which made it even a more complex issue because you can't necessarily go with some of the litigation route that you would want to, because they're also still one of your largest customers.

2:49Melissa Bernstein:And what do you mean by that? Like what kind of large customer, what are we talking about?

2:52Jason Calacanis:Everyone you can imagine. I mean, Target, Walmart, Amazon, Toys R Us, when they were in business, every single one of them ultimately ended up copying our best ideas and coming out with them under their own private label brands.

3:06Melissa Bernstein:Right. And then just selling that right alongside yours.

3:09Jason Calacanis:Yeah, because all these customers are looking to get higher margins. so basically if they can do it factory direct in their own brand they're going to cut out what we

3:20Melissa Bernstein:are which would be a middleman I guess you'd call it yeah yeah so how did you start how did you deal with this maybe even before you came up with what I know is now a formula for dealing with this if you can take me back to when you guys first encountered this what did you think and what did you try to do?

3:39Jason Calacanis:Oh my goodness. If you knew the first time this happened was with our very first product, our fuzzy puzzle. And that was back in early 1990s. And we heard from a customer that someone had copied our one product, which of course for us, it was our only product. It was life or death. I mean, we had, as you mentioned, we had poured every single ounce of our energy, our money, our time into this. And we heard that a retailer had it in New Jersey. We were in Connecticut and we immediately, we were in an all out panic attack, both Doug and I, we jumped into our beat up car and we drove all the way to New Jersey to this store to try to see what they were talking about.

4:27Jason Calacanis:And the interesting fact was when we finally saw what they were talking about, we both breathed a sigh of relief because although it was indeed a copy, it wasn't a well-done copy and it was done differently than ours. And that's when we said, whew, it's a copy, but they missed a lot of the nuance that made our product really special. Yeah.

4:53Melissa Bernstein:Although I bet a lot of people experience exactly that, whereas it's a copy, but it's also not a well-done copy. And yet a not well-done copy has its own kind of risks, doesn't it? Because number one, people can buy the crappy thing and then think that it's a Melissa and Doug product, and then it is harming your reputation, even though you had nothing to do with it, or it's a crappy thing, but also it is half the price of yours. And so people are like, ah, well, it doesn't really matter. I'll just get the crappier thing. And if it's a little crappy, at least I saved some money. So like either way, this is a threat.

5:27Jason Calacanis:It is. And one of the variables for if something is a copy when it's a non-patented product is, does it cause confusion in the marketplace? And when it was online, like on Amazon, and this happened, unfortunately, every day, like it started to happen scores of times each day. You know, I would even look online and sometimes I'd think that someone's copy was my product. That was a problem. And we did start to get calls of people wanting to return something that they thought was ours. And when we asked them for the serial number, it wasn't ours. It was a poorly made copy of ours that didn't perform like it was supposed to.

6:09Jason Calacanis:And then one of the other complexities that started to happen was people would put up phony reviews overnight. So they'd actually have 100 five-star reviews for a very subpar product. So people would be very angry because they would buy it thinking that it was going to perform at a certain level. And then they'd be ultra disappointed and they'd call us with something they thought was ours that wasn't ours. So this problem has gotten a little better over time. You know, we, I think, are one of the many companies that raised the level. We were so incensed at one point that we went to the very top of Amazon and we said, this cannot continue.

6:49Jason Calacanis:We will pull ourselves off this platform. It is not cool what's going on. And they started to put some restraints in place, but basically the onus was on us to find these copies and to pull them off. And it was a full-time job for a whole legal team, which we compensated. And then the companies that had them up, although they would ultimately get pulled down, all the sales they got in the three or four months it took to get them off, we didn't recoup. And Amazon made money on them and the factory made money on them that put out this copy. So it wasn't quite a fair equation, but ultimately one of the costs of doing business.

7:38Yeah.

7:39Melissa Bernstein:So how did you eventually systematize attacking this problem?

7:44Jason Calacanis:It's an amazing question. And it's probably, although I don't share it publicly like this, I mentor hundreds of entrepreneurs. We have an accelerator at Duke University. And it is one of the questions I hear the most because these entrepreneurs, they, you know, have their little fledgling baby in their hands and they're terrified about somebody taking their idea. And it's really three things that have helped me. And they're hard things. So the problem is not everybody can achieve these three core tenets that you need to follow. But the first and the most important is continual and incessant innovation.

8:22Jason Calacanis:So I love the phrase and I can't attribute it to anyone. There's no real attribution, but nobody can copy as fast as I can create. So I love this idea that if you're looking backward in the rear view mirror, right, you're back in the past. You're not focusing on getting further ahead. So what I started to realize is, okay, they're copying us rabidly, but they're not copying us for a few months, at least. I mean, I used to say it was a year and a half before they actually got wind that something, because it has to sell at a certain level before people really get wind of it. Now it's quicker. We've already had something copied for our new company, Lifelines, and it was about six months.

9:07Jason Calacanis:But it's at least, it's about six months. So guess what I can do in six months? I can come out with 25 new products that are as good or better than that product. And what I've realized over time is the knockoffs will skim off the cream. but they can't take the whole milk. So even if they're taking one or two of your good items, they're not going to take the whole thing. So I focus all that energy. Whenever I'm prone to looking backward, I take a deep breath and I say, no, no, no, no, no. Keep on creating, Melissa. Keep on pushing the bar forward and further up. And then you start to become the leader, the clear leader, and it becomes very clear that you're ahead of everyone else.

9:51Jason Calacanis:And I love that feeling, you know, where, sure, follow me, but you're not going to be ahead of me.

9:58Melissa Bernstein:So how would you take that advice and then apply it to someone who's at a really early stage and maybe just has one hero product or a small slate and has been advised, don't expand too fast. Don't create a million SKUs. You don't want to stretch yourself too thin. I mean, you know, at this point, Melissa and Doug has such name recognition and the ability to, I assume, churn out concepts at a pretty fast clip, but that's not something that someone who's just starting out can do, right?

10:27Jason Calacanis:Well, you do need to wait until the consumer speaks. So you don't do it too soon. I don't even do it too soon today with our new company. That's not profitable yet. So I'm right with all my mentees there with this line that was just copied. I waited. You put out your idea, And then you hold your breath and you wait to see what the consumer thinks. If the consumer gives you that nod of approval and suddenly you realize, oh boy, I have something really hot on my hands, that is when you begin to expand. And I'm not saying you start to go all over the map, but your expansion is more themes of the same thing immediately.

11:06Jason Calacanis:They're very smart ways to expand where you're growing a concept within the confines of that concept that are very, very wise. So more styles, a smaller one, a larger one, a bulk pack, right? The things that in consumer products are sort of your go-tos to take something that's one product and turn it into a small assortment. So that's what I do immediately, because if it's, especially if it's a consumable, And it also depends what type of product it is. But if it's a consumable, something people are using and then want more of, it's very easy to do more themes in it. So that's where I'll advise someone, depending on what their product is, like once they get that validation that they have something really incredible on their hands, they have to.

11:58Jason Calacanis:They must, must, must expand kind of as quickly as they can. Okay.

12:04Melissa Bernstein:So step one here is constant creation. What's step two? Step two in our book is accessible pricing.

12:14Jason Calacanis:So, you know, it all depends on what you want to be. But, you know, we wanted to have our product in the hands of as many people as possible and be a mass market player. So that means that you have to offer the best for the least. and you truly have to make a product that is exemplary in every sense, great quality, great design, great customer experience at a really, really fair, affordable price. And we are, I was always a champion of the consumer. I truly believe that great quality, well-designed products should be accessible to every hardworking person. And because of that, you know, I was very cognizant and conscious that we wanted our pricing to be really, really good.

13:05Jason Calacanis:You know, that someone look at our products and say, that's fair. Like, that is worth every cent I'm paying. And knockoffs come in. And by the way, we've seen this. There's a great Melissa and Doug story here. So, you know, throughout the 32 years that Doug and I were part of, Melissa and Doug, this was maybe our number one battle cry. Accessible pricing, do not overcharge, make really low, fair margins, but just enough and not so much that anybody sees that fat to come in and copy us. Because, you know, one of the main reasons that copycats come in is because you're overcharging and they can come in and charge, you know, 20, 30 % less and offer something very similar.

13:52Jason Calacanis:But with us, the truth is, and now it's been proven, that our low pricing was athwart to so many private brands, so many other manufacturers, because they looked at our quality. They saw we were offering a really incredible product, and they were like, oh, not enough room to come in, because if we come in, we're going to be at the same price and perhaps not even offer something as high quality as Melissa and Doug is offering.

14:47Jason Calacanis:You talking to me?

14:48Melissa Bernstein:Kayak. Got that right. Right. And then once you've built your brand recognition, once people know the name Melissa and Doug, then the only thing that a knockoff can really compete on is price. And if your price is low enough where the difference between your price and their price is marginal, then you'll win on brand story, won't you?

15:12Jason Calacanis:Exactly. But what a lot of advisors tell you is once you have that brand, that you have the permission to start to raise your price and charge more. And that's what ended up happening with Melissa and Doug, unfortunately. In new ownership, Melissa and Doug decided to charge for brand and raise prices 30 % more. And guess what happened? More knockoffs than you could ever imagine suddenly came in. and literally cut the legs right off of Melissa and Doug where it was. And today, Melissa and Doug has lost half its value because of that. And now they're retrenching as quickly as they can to lower prices and sort of go back to where we were four years ago when accessible pricing was our mantra.

16:04Melissa Bernstein:So it really proved out.

16:07Jason Calacanis:It's fascinating.

16:08Melissa Bernstein:Yeah. What has that been like for you and Doug to watch from the outside to see them drift upward on price and then get undercut and it hurt the company?

16:21Jason Calacanis:Horrifying, honestly, because we knew it and we said it was going to happen. And I think it's an easy way to improve your profitability. And it's always the go-to because it's the easiest thing to do. And short term, you think it's amazing. Wow, look, people are willing to pay more for these same products. But basically, that profit is everyone else's opportunity to come in. And we saw it with our customers. They came in with their own owned brands. We saw it with a lot of other competitors who had stayed out of our space because there wasn't room come in. And now that they're in there, you know, then it's very hard to get them to leave.

17:06Jason Calacanis:because they're seeing that it's a good category. Yeah.

17:11Melissa Bernstein:And I imagine also it's harder than to create the pass along brand love effect in a category like yours where, for example, every somewhat experienced parent tells the new parent, oh, you got to get the Melissa and Doug stuff. The kid is going to love it, right? But now if you've allowed the category to become more crowded, then there isn't that same affection to the brand. They're not passing it along as much. And then Melissa and Doug sinks into the category instead of leads it.