NIKE Pricing Strategy: Cost-Plus vs. Consumer Value Equation

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).

Source: http://www.just-style.com/analysis/new-pricing-strategy-pays-off-for-nike_id122400.aspx

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10 thoughts on “NIKE Pricing Strategy: Cost-Plus vs. Consumer Value Equation

  1. Jim Butterworth March 19, 2015 / 2:18 pm

    Ryan,
    You asked on key question in your closing that I think is key to your entire blog: Will they ever reach a price that is just outrageous?
    Nike has to walk a very fine line. There are already many people that won’t buy Nike at its current price point, feeling cheaper options from other companies have just as much if not more quality. If Nike does reach a price that a majority of consumers feel is “outrageous” they will have to start lowering prices. They have to be careful because a price drop out of the perceived “outrageous” could also form the perception that Nike is getting less expensive because its quality is decreasing.

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    • Ryan MacLeod March 23, 2015 / 1:53 pm

      Jim you bring up a great point that NIke’s product quality could be seen as diminishing if they feel they have to drop their price point. This would be extremely harmful to Nikes new business model/marketing plan as they are trying to be seen as a “premium product”. I’m curious to see what new or improved products Nike releases over the next few months. I’ll also be watching the ASP’s on their footwear and apparel products too.

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  2. Linsey Walker March 19, 2015 / 6:22 pm

    I think Nike’s strategy here is a win-win; not only is the company benefiting from increased profits due to their higher prices, but they also get a certain brand cachet from being a more expensive brand. Nike is able to do this because, as you mention at the end of your post, they have a “cool” factor. People want to buy their products and are willing to spend more to do so. As long as Nike is able to maintain this image, they will continue to benefit from their pricing strategy.

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    • Ryan MacLeod March 23, 2015 / 1:58 pm

      I think its also a win-win for Nike. Nike knows that they can charge a more “premium” price for their products. Consumers are willing to pay a higher price for a cool product. I feel that Nike does also have a higher quality and more technologically advanced product than their competitors. At the end of the day is solely up to the consumer to decide if the benefits outweigh the cost of the product. This higher ASP is definitely attributing to Nike being seen as a more premium product.

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  3. David Cravotta March 23, 2015 / 4:41 pm

    I’m an avid Nike buyer and I have noticed this price increase. The thing is though, I continue to purchase their products. Nike is one of those brands that gives off the so called “cool effect” to its buyers. Everyone wants the latest clothing and the hottest trends and Nike is one of those companies that their clothing creates trends. So by that they can increase their prices knowing that if they higher their price, it conveys a premium outlook on their products. Nike is doing a good job by this, but I’m not ruling out the fact that their prices may just get outrageous at some point. If that occurs then they have no choice but to lower their prices before their competition begins to take some of the customers away.

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  4. Andrew Dresner March 23, 2015 / 7:10 pm

    I’ve included an interesting article that was published on ESPN two years ago about Nike and it’s potential impact on recruits. Schools are starting to sell their uniform and gear providers to their recruits in an effort to sell them on a school. This works great for schools that have a ton of money or for schools that sport Nike founder Phil Knight as an alumnus.

    http://espn.go.com/college-sports/recruiting/football/story/_/id/9523357/college-football-recruiting-uniforms-selling-point-schools

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  5. Sam Ventresca March 24, 2015 / 12:20 am

    Great point about the “cool effect” nike has a brand image similar to apple. They have maintained a loyal fan base that will continue to buy their products even if the price rises. However Nike does have to be careful of how far they raise prices. The reason being is that their competetors are lowering their prices and this could lead loyal customers to change their mind about Nike if the prices become way too high.

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  6. Kevin McAtamney March 24, 2015 / 4:26 pm

    They idea of the “cool effect” has always surrounded Nike and it seems that the brand can only get stronger. My view on the whole price competitiveness of the product is a little different though. I have always found Nike shoes to be extremely expensive and I’ve always strayed away. My girlfriend bought me a pair and although priced fairly high, I have gotten great use out of the product. Do we really know how high Nike has the ability to raise their prices without losing market share? Another thing is that arguably their main competitior Adidas, with a strong GLOBAL brand and an integrative marketing campaign, have found themselves on the world stage teaming up with the sport of Soccer and if I’m not mistaken, pricing their products at a similar value to Nike. Nike has a strong US brand, where will they expand to next?

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  7. Brandon Gobbi April 20, 2015 / 10:30 pm

    I agree with all of these posts that this is a win-win for both the company and the consumer. Nike is smart asking their buyers what they are willing to spend on certain products. Nike is a company that everyone knows and one that everyone wants to wear. People will spend the money even if the prices are a little on the high side. I still think that Under Armor is way too expensive and personally I’d rather spend the money on nike products than a company like Under Armor, especially when it comes to shoes.

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  8. Alicia April 26, 2016 / 7:27 pm

    Nike is without a doubt a fantastic and very popular brand. I personally, buy pretty much everything Nike when it come to athletic apparel because they are my favorite brand. I have notice a light price increase, but it has not been anything that has made me rethink purchasing from this particular brand. I think brands such as Under Armour and Puma are also great brands, however I know I will always go for Nike because of their brand image. If Nike’s brand image was not as strong as it is, and continuing to grow, then people would probably not be as biased towards buying their products over other brands. The “cool factor”, mentioned at the end of this article, has definitely played a big role in consumer value. The reason people are willing to pay the price they do, other than quality, is because of the “cool” image that the company has adopted over the years.

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