By: Ryan MacLeod
One of the major components of the “4P’s” of marketing is price. Setting a price point is one of the biggest decisions a business has because, ultimately, customers react to this variable more than any other. Businesses must be aware of their target market, cost of goods, competitors’ pricing, as well as many other things when deciding on a price point. There are a variety of specific pricing tactics discussed in the text, such as price bundling, value pricing, discounting, and product-line pricing to name a few. A large majority of companies, more specifically manufacturers, will typically calculate their costs and then add a standard markup in order to achieve a specific ROI.
In July 2014 Nike, one of the world largest manufacturers of sneakers, began to raise its prices while the rest of the market was dropping them. Their competitors were offering heavy promotional discounts to try to stay afloat and keep consumers buying. Nike has taken a new approach to their pricing model, using a consumer value model based on analysis of how much a consumer would be willing to pay for each product. Their CFO Don Blair said Nike has “done quite a bit of work around its consumer value equation.” Adding, “the strength of our brand and the innovation that’s in our products means that there is a great consumer value proposition at higher price points.” Some would argue that his comments seem a little bit arrogant and risky, but the market doesn’t lie. Nike was able to single handedly drive growth in the U.S. sneaker market, helping the company to carve out a new “value added” competitive advantage against its competitors.
The article also stated that raising their sneaker prices increased the consumer’s perception of the product. Nike is trying to migrate to appealing as a “premium product”. This price tactic is an effective one as Nike was able to add $168m to total industry dollars by driving up their average selling prices. I think this is because if Nike is able to drive up their prices, their direct competitors feel that the may be able to too. To only further prove their pricing strategy change was effective I took an excerpt from Nike’s 2014 annual 10K. “NIKE brand footwear and apparel revenues increased 12% and 10% respectively…” it continues on to say “Footwear unit sales in fiscal 2014 increased approximately 7% and the average selling price per pair increased approximately 5%, driven nearly equally by price increases and a shift in mix to higher priced products.” Nike is directly associating their pricing change to better earnings. The company also so its earnings per share increase.
Nike had originally used a “cost-plus” model. This model is simple, you calculate what your cost of goods is and then markup the products selling price in order to achieve your desired profit. This works fine because you are guaranteeing yourself a certain percentage of profitability if consumers are willing to pay. With a company like Nike, its obvious the consumer is more than willing to pay for their sneakers. That’s why this consumer value equation is so effective for Nike. That pricing model is based on one simple idea: how much would a consumer be willing to pay for a product, ignoring any outside cost components? To me it sounds rather arbitrary, but obviously it’s effective and the analytics that go into a decision like that are extensive.
Another key factor in allowing Nike to test this new model is that they are viewed as an innovative and technologically focused company. They are known to provide high quality athletic products to athletes of all levels. I personally had no idea that Nike adjusted their pricing model and raised ASP’s. I have still bought their products and will continue to do so. I do believe their products are worth the spend. This is kind of a double-edged sword because it makes me think that if we are willing to spend a large amount of money for a pair of sneakers, will prices continue to grow? Will they ever reach a price that is just outrageous? One other factor in this consumer value added equation is simply, Nike has always been viewed as “Cool”. The “cool factor” seems to always raise prices and cause consumers to pay a little bit more for the next big thing (e.g. Apple).