Materials you will need:
Prototyping (designing toys) takes, above all, patience. The next thing that will help tremendously is the skill of imagining 2D shapes in 3D configurations. If you have a natural tendency to solve the 'which cube do these six shapes make when folded' question on IQ tests, then you are a born protoyper.
Draw a Form out on Paper
Designing a three-dimensional form also takes practice! There comes a time when you have made so many patterns that some part of your brain just understands what shape, curve or tab needs to be where to make things line up. And there also times when you've drawn so many patterns they start to look alike. Your own personal 'style' will show up, no matter how many times you attempt to put it down.
Lay out on Fabric and trace pieces
cut one face-up and one face-down
Don't intentionally copy other people's styles - but looking at how they put things together (ah, their gusset is pointed at the back of the head to make it work!) is highly encouraged. A toy you are going to handsew is worth so much more (to them and to yourself) when it is your own original drawing and construction!
Design and cut out other pieces to make a 3D toy
shown here is the two sides of a body,
a center stomach gusset and a head gusset.
I've been making my own patterns for toys for over ten years now, I still recall a 'curiously similar in shape, size and construction' toy pattern being sold to a crafting magazine several months after I had sent out a dozen of that toy to the U.S and the U.K. However, since I had not documented the pattern in any official way, there was not much to be done. Use your OWN work and don't appropriate others, especially for commercial gain! It is strongly encouraged for you to document your patterns in public places, with dates and your full name. If you have access to a notary or other form of 'authentication' - do so.
SEW your pieces together with a good seam allowance. What is a good allowance depends on the fabric you are using and how tightly you stitch. Sturdy wool felt can be 1/8" to 1/4". Flannel, fleece and minky are good choices for children's toys, as is 100% cotton. Fabric that frays should have greater than 1/4" seam allowance, or a fraying treatment such as pinking, stay-stitching with zig-zag or a chemical fray resistant. Remember some areas will be hard to turn inside-out and/or may need clipping at corners and round edges.
Keep drawing and sewing until your prototype goes together smoothly - with as many of the kinks worked out as possible. Simplicity is the best policy - but sometimes complex techniques and many pieces will need to be used to put something together.
Some projects will need to be stuffed before you can see the true body shape. Use a double-pointed knitting needle, dry pen tip or pencil eraser to get stuffing into small places. Be careful! Pressing stuffing too hard into a small place can split your seams, if you are not careful!
Try again, and don't throw out your prototypes!
Keep trying new forms - even a tiny change to the nose, shape of the neck or foot can make or break a pattern. Learn from mistakes and save your prototype pieces in enevelopes. You never know when you might want that 'mouse that was supposed to be a dog', or 'squirrel-looking thing that needed a fix in the neck' etc... Also try different finishing techniques, embroidery, painting or even different fabric textures. What doesn't work in one cloth might look entirely different in another!
For your finished objects, try to use the better materials, but don't let that get in the way of your experimenting. Your largest audience probably won't be able to buy toys made of pure wool felt, or linen - and are more interested in having a cute toy on their desk or something the baby can chew on. For baby toys remember to put the detail in the shape of the creature, not in small parts and accessories. Simplicity is the best policy!
As for pricing - there are people who charge $$$ for their toys and some of them get it. The better your construction, originality and advertising is, the more you can charge. Take into account the cost of your materials and how much time you have put into the development and sewing of each toy. I tend to price my items according to size, construction satisfaction and popularity.