Nike's pricing strategies

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Nike's pricing strategies

  1. 1. Siriorn Vichaiwatanapanich Microtheme#2: Nike footwear in the US Nike is one of the most successful companies in the sports wear market that uses the concept of value-based pricing strategy. For a long time, it has been committed to providing the best technology and high quality products to its customers. According to its mission statement, Nike aims “to bring inspiration and innovation to every athlete (If you have a body, you are an athlete) in the world”. The company proactively responds to changing trends and consumer preferences by adjusting the mix of its product offerings as well as developing new products, styles, and categories. With its successful marketing and pricing strategies, Nike has become the market leader in the US footwear market with 16.2% market share in 2013. The company mainly categorizes customers into 7 types based on sport activities which are 1) Running, 2) Basketball, 3) Soccer, 4) Men’s training, 5) Women’s training, 6) Nike sportswear, and 7) Action Sports. Then, Nike applies the concept of customization by offering different functional qualities and designs of footwear based on each category. By doing this, Nike develops a product line which allows customers sort themselves among various offering based on their preferences. The design and function differences are intended to customize products based on different user needs. For example, Nike’s running shoe has different cushioning material that allows the force of impact to users’ feet to be evenly distributed and help to reduce painful pressure points on users’ feet while running. This is the material that used specifically in running shoes only. Secondly, Nike also applies the concept of price discrimination by sorting footwear based on buyer groups which are men, women, and kids as shown in Exhibit 1. This strategy allows the company to implement fence building through 3 different groups of customers. The company generally prices sport shoes for kids in a lower price range than men’s and
  2. 2. Siriorn Vichaiwatanapanich women’s shoes. According to the Nike website, the price of Lebron 11 basketball shoes for men is at $200 while Lebron 11 shoes for boys is only $140, as shown in Exhibit 2. In addition, Nike segments the product based on user purpose, as shown in Exhibit 3. Nike’s website offers 4 main segments of running shoes which are of the “barefoot” ride (lightweight and flexible), neutral ride (superior cushion for a smooth ride), stability (increased support, excellent cushioning), trial (low-profile cushioning and traction), and racing (designed to compete at high speeds). This allows Nike to differentiate itself from its main competitor, Adidas. As a result, Nike can charge a premium price since better expected performance through customization is one of the most significant factors that is desired by customers and found in Nike products. Nike also utilizes the concept of channel segmentation and control availability, as the company prices similar products differently through different channels. The premium product items are only given to particular distributors, while the low price product items will be sold at discounted prices at superstores such as Walmart. For instance, the Nike-owned store on Newbury Street in Boston usually sells newly released product lines of Nike shoes at the full price. On the other hand, Nike footwear sold at an outlet or at Walmart offers at a lower price range with slightly inferior features. The demand for overall sport footwear in the market is likely to move in accordance with the economic condition since it is a non-durable good. Thus, I believe that the consumer’s price elasticity of sport footwear is elastic and greater than 1. The drop in 1% of a sport shoes price should have an impact on the sales revenue of increasing it by more than 1%. However, consumer’s willingness to pay for Nike sport footwear is high comparing to other brands in the industry. This is supported by Nike’s strong brand recognition that offers premium products to customers. The company builds its brand awareness through product
  3. 3. Siriorn Vichaiwatanapanich sponsorship by the professional and well known athletic teams, college sports teams, and celebrity endorsements. From the Mintel consumer report as of 2011 in Exhibit 4, both men and women are more likely to buy Nike than any other footwear brand when buying athletic shoes. 35% of total consumers reveal that they have bought Nike footwear in the last 12 months. Different attributes of footwear are also some of the key factors that dictate consumer willingness to pay. This is supported by the consumer survey by Mintel of 1,527 internet users about the important product attributes when buying footwear, as shown in Exhibit 5. This market research shows that comfort and durability are the most significant attributes that most footwear purchasers consider, since nearly all of those surveys cite these as important factors when buying shoes. Besides these 2 factors, 70-80% of consumers also consider attributes such as easiness of getting on and off, style, multipurpose, and fashion. Different groups of consumers also weight the importance of attributes differently. As you can see from Exhibit 5, around 85% of women consider style and fashion as factors when they are buying footwear, comparing to men at 60%. However, men care more about weather resistance, wide availability of sizes, and brand name more than women. Nike understands the importance of attributes that are considered by consumers; therefore, it always focuses heavily on research and development to provide new technology that will improve user comfort and performance. Moreover, the company also provides aesthetic features and colors according to fashion trends. This allows the company to set a premium price as it provides superior attribute features, in combination with strong brand awareness in the US market. In terms of competition, Nike is the dominant player in the footwear market with 16.2% market share in the US. The main competitors are Adidas and New Balance. Adidas
  4. 4. Siriorn Vichaiwatanapanich has similar strategies to Nike, also focusing on new innovative products and setting products at a premium price. However, Nike differentiates itself through more innovative products, segmentation, and strong brand awareness through sport celebrity endorsements as described earlier. It also has a competitive advantage in terms of low costs of production. The company mainly outsources its manufacturing to other countries than the US. Nike builds an extensive network with many independent contract manufacturers around the world and works closely with them. According to Nike’s annual report as of 2013, the company has contract factories that produce footwear in Vietnam at 42%, China at 30%, and Indonesia at 26%. The company has also established a supplier’s tier system which allows Nike to manage relationship with its suppliers. By doing this, the company gains strong bargaining power with those suppliers through the tier system and can cancel alliances with any suppliers that fail to maintain their standards in term of quality and cost. Moreover, Nike supports innovation within its contract manufacturers by establishing and continuing the Nike research and development center unit within those factories, mainly first tier suppliers. Beside, Nike also has control over the supplier chain system since the company establishes contracts with raw material suppliers and enforces shoes manufacturers to purchase raw materials or components only from those companies listed by Nike. For instance, one of the biggest independent contractors in China and Vietnam is the main supplier of the Air-Sole cushioning components used in footwear products. Therefore, Nike can gain economies of scale and maintain a stable quality standard and shipment period within its supply chain. All of these reasons allow Nike to produce footwear at a very low cost without sacrificing superior quality. This outsourcing production strategy also allows the company to gain the benefit of a lower degree of operating leverage compared to its competitors such as Adidas and New
  5. 5. Siriorn Vichaiwatanapanich Balance. Nike does not own any production facilities, which gives them the benefit in term of low fixed costs and minimal investment risk. On the other hand, Adidas has its own production facility in Germany and outsources part of its production to Asian countries, which results in a higher degree of leverage compared to Nike. New Balance probably has the highest degree of leverage among the 3 companies, since it has its main manufacturing facilities in the US and United Kingdom which results in high operating fixed costs. Nike has successfully operated its business, become a dominant player in the US market, and effectively implement a declared price leadership strategy. In this situation, it sets premium footwear prices that competitors in the footwear industry follow. This strategy will stop being effective if the company fails to align its mission, operating strategy, and other marketing strategies. First of all, the company successfully aligns its mission with the rest of its business strategy. The company mission to bring inspiration and innovation to every athlete in the world explains Nike’s determination to provide the highest quality products to consumers. Next, in terms of marketing strategy, the company has built strong brand awareness in the market mainly through celebrity endorsements, as well as price discrimination and the mass customization strategy to different group of consumers. It responds quickly to trends and shifts in consumer preferences by adjusting the mix of existing product offerings as well as developing new products, styles, and categories. Therefore, Nike can provide and capture the value perceived by customers which consequently contributes to high revenues for the company. Moreover, Nike’s operation and supply chain strategies have helped the company maintain a consistent quality standard as well as achieve a low cost advantage over its competitors. The ability to set high prices and maintain low costs contributes to the profit maximization for the company.
  6. 6. Siriorn Vichaiwatanapanich Nike has been successful in operating its business and capturing the biggest footwear market share in the US because it has a sustainable competitive advantage with its outstanding business strategy. As described earlier, the company has a low cost advantage through its production and supply chain strategy. Then the company positions itself as a premium brand, differentiates products with high technology through R&D, and implements a price leadership strategy which in turn results in strong financial performance. This is indicated by footwear revenue growth from 2011 to 2012 at 15% and from 2012 to 2013 at 11%. According to Exhibit 6, the key financial data of Nike compared to its main competitor, Adidas. Nike revenue as of 2013 was $26.29 billion, which is greater than Adidas revenue at $18.62 billion. Although Nike’s gross margin is lower than Adidas’, Nike has a higher operating margin at 14%, compared to Adidas’ at 8%. This can be explained by the fact that Nike outsources all of its production to its independent contract manufacturers while Adidas has its own factory that incorporates fixed costs. Therefore, the operating expense of Adidas is higher than Nike and results in Adidas’s lower operating margin of 8%. Finally, Nike has a higher net profit margin at 10.2%, which is a lot greater than the net profit margin of Adidas at 3.6%. This financial information demonstrates that Nike has a sustainable competitive advantage over its competitor. In conclusion, Nike’s management team understands the importance of brand awareness and applies valued-based pricing that allows the company to maximize its profitability in the long run. Nike has established a pricing strategy that consistently complies with its mission statement, operation strategy, and marketing strategy. For these reasons, I would recommend that the company maintains its current pricing strategy for its footwear products in the US market.
  7. 7. Siriorn Vichaiwatanapanich Exhibit1: Nike website homepage Exhibit2: Price differences of LeBron 11 basketball shoe between for kids and for men
  8. 8. Siriorn Vichaiwatanapanich Exhibit 3: running shoes segmentation Exhibit4: Brands of athletic/sports shoes bought, by gender, October 2010-November 2011 “Please indicate brands of shoes bought in the past 12 months.” All Male Female Base: adults 18+ who bought sneakers or athletic shoes 14,145 5,911 8,234 % % % Nike 35 37 33 New Balance 20 22 19 Adidas 15 18 12 Skechers 14 9 19 Reebok 11 12 11 Asics 6 5 7 Converse 6 7 6 Puma 5 5 5 K-Swiss 4 3 4 Vans 4 4 5
  9. 9. Siriorn Vichaiwatanapanich Airwalk 3 2 3 Avia 3 3 4 Fila 3 3 2 Keds 2 1 3 Saucony 2 2 3 Brooks 1 1 2 L.A. Gear 1 1 1 Rockport 1 2 1 Under Armour 1 1 1 Wilson 1 1 0 Other Brands 27 27 28 Exhibit 5: Important product attributes when buying footwear, by gender, February 2012 “Thinking about footwear qualities/attributes, please indicate how important each of the following are to you. Please select one per row.” Base: 1,527 internet user aged 18+ who have purchased footwear in the past 12 months All Male Female Base: internet user aged 18+ who have purchased footwear in the past 12 months 1,527 707 820 % % % Any important: Comfortable 97 96 98 Durable/sturdy/long-lasting 94 94 94 Easy to get on/off 80 80 80 Stylish 77 67 86 Multipurpose (ability to wear for many occasions, such as appropriate for work and special events/parties) 77 74 80 Fashionable 74 63 84 Classic, timeless shoes that won’t go out of style 67 58 75 Weather proof 59 67 53 Wide sizes 50 60 41 Brand or designer name 46 52 41 Functional/weight loss (such as FitFlops or ShapeUps) 34 33 35 Customization (creating your own elements) 26 29 24
  10. 10. Siriorn Vichaiwatanapanich Exhibit 6: Nike VS Adidas financial data comparison Nike Adidas AG Market Cap: 64.37B 24.37B Employees: 48,000 42,540 Qtrly Rev Growth (yoy): 0.08 -0.07 Revenue (ttm): 26.29B 18.62B Gross Margin (ttm): 0.44 0.49 EBITDA (ttm): 4.09B 1.78B Operating Margin (ttm): 0.14 0.08 Net Income (ttm): 2.68B 678.42M Net profit margin 10.2% 3.6% Direct competitor comparison from Yahoo finance as of 2013
  11. 11. Siriorn Vichaiwatanapanich References "NIKE, Inc. Introduces 2015 Global Growth Strategy." Press release distribution, EDGAR filing, XBRL, regulatory filings. N.p., n.d. Web. 10 Feb. 2014. <http://www.businesswire.com/news/home/20100505007051/en/NIKE-Introduces-2015- Global-Growth-Strategy#.UvmTsJWYbIU>. "Nike Inc. Cl B." NKE Annual Income Statement. N.p., n.d. Web. 10 Feb. 2014. <http://www.marketwatch.com/investing/stock "Nike: Marketing Strategies." Nike: Marketing Strategies. N.p., n.d. Web. 10 Feb. 2014. <http://www.slideshare.net/PareshAshara/nike-12906460>.

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