Nike uses several different pricing strategies to determine the appropriate amount to charge their customers for the various products in their portfolio. By utilizing multiple pricing strategies, the company is able to maximize their profits. Price is the amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using that product or service. If the perception of the product’s price is greater than the value, then a customer will not purchase it and satisfy any perceived need that they have elsewhere. This reality is why it is so critically important for businesses to proactively set their prices based on the buying behaviors of the customers in their market. Nike controlled about 62% of the American footwear market last year and therefore has what is known as “price leadership”. In other words, they have the luxury to lead and set the standard price for goods and services in their industry, requiring their competition to have to react in certain ways to remain competitive. Deciding on a product’s price is complex and influenced by multiple factors, and not just the sum of the cost of production and adding a set formula for profit margin. Nike has capitalized on the fact that many consumers have an elitist mind frame and think expensive products are worth the higher price. Pricing must seem like a simple, straightforward process to consumers, since often times we are able to easily compare and contrast the prices of comparable products offered by different brands and intuitively determine which product to purchase.
Nike is best known for using a customer value-based pricing strategy, which is when the business itself sets their prices primarily on the perceived or expected value to the customer rather than based on the cost of producing the product or the historical prices. In other words, the price point is considered before the marketing program is put into place by management. Nike specifically uses value-adding pricing, which attaches value-added features and services to differentiate a company’s offers and helps to rationalize their higher price points. This strategy works for a company after first assessing customer needs and value perceptions. They can then set the target price based on the market analysis of the value of the product. These two pricing strategies drive decisions for costs and product design, with a restriction known as a price ceiling since there is a maximum amount that even the wealthiest consumers will pay for a product. However, a “good value” may not always equate to a low price even for the average consumer. This type of pricing strategy has worked well for Nike; however, it is difficult to quantitatively measure the value that a customer places on its products because consumer opinions are subjective. Nike responds to changing trends and consumer preferences effectively by adjusting their products’ styles, technologies, categories, and even prototypes. Its reputation for selling high quality products that are perceived to deliver exceptional outcomes to consumers has allowed it to set high prices for their products. For example, Nike’s impeccable reputation has allowed it to sell Air Jordan’s for $212. The company’s significant sales of this expensive sneaker were not only influenced by Nike’s reputation formed by word-of-mouth in their target market, but by their sponsoring of Michael Jordan and naming their product after the elite athlete. Because Nike has more unique, highly valuable features or services that they routinely include in the products, they are able to take advantage of this pricing strategy.
Nike also uses segmented pricing. This occurs when a company sets more than one price for a product without experiencing significant differences in the costs of producing or distributing the product. A segmented pricing structure may be used by a business to take advantage of pricing disparities observed between different geographical regions. For example, the price for an average pair of Nike sneakers in Nigeria is $25, while in the U.S. the average price is about $75. This price disparity can occur when there are differences in the standard of living and incomes in different locations. In this way, segmented pricing allows for Nike to be successful and profitable in many different geographical regions.
Finally, Nike also uses the product pricing strategy known as “price skimming”. This strategy describes the practice of a company initially charging the highest price that customers will pay until the demand of that first wave of customers has been satisfied, and then lowering the price to then attract the more price-sensitive segment. This strategy gets its name from skimming successive layers of customer segments over the life cycle of the specific product, as prices are reduced over time. Nike does this by first selling their footwear and apparel at full price in premier retail stores and online venues that they control, then allowing a sale or discounted price then eventually moving the less in-demand goods to clearance outlets. This allows the consumers that are able and want to purchase the newest Nike products at full price to do so, and then let those of lower socioeconomic status to purchase Nike goods at a more reasonable price. Nike can use this strategy because they have built a reputation as a lifestyle brand and for having sought after quality products that support a higher price. Additionally, they have the pent up demand of buyers that want the newest and most innovative products and are willing to pay whatever price Nike wants to charge. Although competitors can undercut the Nike premium price, they cannot replicate the innovation in their products exactly or the perceived premium value that diehard Nike customers place on the value of the product.