A lot of people wonder how Lego, selling a now un-patented product, can command both massive market share and sell at twice the price of the nearest competitor: Megablocks.
Rhett Allain, in his WIRED article addressing why lego sets are so expensive, unsatisfyingly concludes “Honestly, I don’t know much about plastic manufacturing – but the LEGO blocks appear to be created from harder plastic. Maybe this would lead them to maintain their size over a long period of time.”
While lego offers a superior product, that doesn't wholly account for why they sell so well.
Chana Joffe-Walt offers a much better explanation in her NPR Planet Money article:
Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.
The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.
Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.
Lego isn't just selling a product, they are selling a story. Still, I doubt that alone fully explains the difference.
I think Warren Buffett offers the best explanation. Talking about the brand power of See's Candies, he comments:
What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn’t take any capital.
… It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts—somebody’s birthday or more likely it is a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three-week period. Men buy on Valentine’s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won’t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine’s Day is the biggest day.
Can you imagine going home on Valentine’s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let’s say there is candy available at $6 a pound. Do you really want to walk in on Valentine’s Day and hand—she has all these positive images of See’s Candy over the years—and say, “Honey, this year I took the low bid.” And hand her a box of candy. It just isn’t going to work. So in a sense, there is untapped pricing power—it is not price dependent.
The reason Lego is awesome and Megablocks is not has as much to do with what's in the consumers' mind as the product on the shelf. It's the experience you have with Lego that makes it so amazing.
Remember the first time you played with Lego? You want to pass that experience off to someone else. No one wants to show up to a kids birthday party and announce to everyone they took the ‘low bid' on a relatively cheap children's toy.
Lego is a safe bet and we want to reduce uncertainty.