So you want to produce the next toy hit? The first question to consider is whether to go for the hottest new entertainment license or to come up with something original. Remember, for every Pokémon license, there are barrels full of licensed merch languishing in discount, and for every Furby, there’s a short-lived original toy that you’ve never even heard of. Here’s a brief look at the pros and cons for each approach:

Marketing costs

Generally, you can expect to dish out more promoting an original toy than a licensed one. ‘With an original toy, you’re going into stores with a product that consumers have no familiarity with, so you have to generate that familiarity yourself,’ says Ben Varadi, VP of product development at Toronto-based Spin Master Toys.

Although marketing costs for licensed toys are usually less, toy licensees may be required to pay into a CMF (common marketing fund), a sum of money licensors collect from licensees to cover retail promotions and advertising. Toycos pay the CMF fee-which amounts to about 2% to 3% of the wholesale price of the toys-on top of any advertising they might be doing themselves. Some of the larger players, like Hasbro, manage to opt out. ‘In a lot of cases, I can get a licensor to agree that we can forgo the CMF contribution because we do a lot of our own marketing and we’ll be running TV advertising, which a lot of their licensees don’t do,’ says Hasbro senior VP of business affairs Joanna Reesby.

Development costs

Expect to pay a little more for an original toy. ‘With a licensed product, we don’t have to spend the time wondering if an action figure is too big, or how it should sound when it talks, or what color the packaging should be,’ says Spin Master’s Varadi. ‘All these questions that need to be answered when you’re creating original product are already done for you. You get the style guide and you’re off to the races.’

Still, whatever toycos save in developmental costs by opting for licensed can easily be gobbled up by licensing fees. In addition to the royalty (which sits somewhere between 10% and 20% of a toy’s wholesale price for theatrical properties) and the CMF (which amounts to another 2% to 3%), there’s the advance, a portion of the total promised sales given to the licensor up front. The size of the advance generally varies depending on the scale of the property.

Risk

Overall, the risk is far greater for an original toy because a toy company has to create awareness for its toy from scratch. No matter how toyetic your toy, there’s no studio spending US$30 million to create awareness for your property.

Because licensed merch has the support of a major studio or network, its an easier sell to retailers, who feel the recognition of the license will translate into an easier sell to kids. Of course, there’s still a lot of risk involved because if the toys don’t sell, you’re on the hook for the licensor’s guarantee.

Longevity

Barbie, Hot Wheels, Lego, Easy Bake Ovens. Original toys can live on indefinitely, because their sales don’t depend on the popularity of a TV show or movie. Once a toy reaches a certain level of sales recognition, it can graduate into a brand, allowing toycos to license out the property on everything from bed sheets to beef jerky. Licensing original brands such as Action Man, Playskool and Monopoly has become a lucrative business for Hasbro.

It’s another story with licensed toys. ‘You live and die by your license. The product is secondary,’ says Spin Master’s Varadi. ‘Once the license is no longer hot, nobody wants the product anymore.’