Tuesday, September 4, 2012

Launching LeBron X Nike Plus at a $300 + Price Target: A Evolving Case in ... - Wiglaf Journal

By: Tim J Smith, PhD, Chief Editor
September 2012 Communication

This fall, Nike is rumored to be launching the above $300 LeBron X Nike Plus basketball shoes. What was expected to be a highly promising product launch has morphed into a management and political quagmire regarding its high price, potential violence, and target market abuse.  What should Nike do?

The Backstory

While a $300+ mass-market athletic shoe might sound outrageously expensive, the price tag is in keeping with overall market trends in terms of (1) the product category price increases, (2) industry wide costs increases, (3) the unique value proposition, (4) the prior price tags on hot new releases of athletic gear, and (5) the expected demand and aftermarket behavior.

The athletic shoe product category has been seeing substantial above-inflation-rate price increases recently, and higher prices from Nike would be expected in terms of keeping Nike in a price neutral position.  According to NPD data, basketball shoes were selling in July at 9.4% higher prices than a year prior.  A cross-competitor examination of Nike margins shows room for higher prices since Nike margins were lower than their direct competitors Adidas and Under Armour.  Nike has announced an overall 5-10% price increase across their athletic wear offerings.  Hence a high price on a hot new release is in itself unremarkable.

Input costs have risen substantially in the past year for Nike.  Key materials have risen materially recently including cotton which rose from a standard long running expectation of $0.70/lb in 2007 to a spike high near $2.30/lb in March of 2011 and is currently resting near $0.90/lb.  Labor costs in China, where one-third of Nike’s production exists, are anticipated to have risen by 12% in 2012.  Shipping costs have also been cited by Nike to have increased.  In light of industry-wide input cost increases, it is common and often recommended for industry leaders to seek higher prices, or at least to cite these factors when raising prices.

The LeBron X Nike Plus does offer a unique value proposition.  Along with licensing the LeBron name, this new basketball shoe will sport electronic motion sensors which measure how high players jump or how far they run.  Differentiation such as this and other features creates pricing power for Nike in the market which makes the price tag appear market attainable.

Prior price tags on hot new releases of athletic gear have been similarly high.  The original 1985 Air Jordan was launched at $138.38 in today’s dollars (after adjusting for inflation).  For healthy and maturing product categories, it is common and expected to see price-gaps between the lowest- and highest-priced goods within a market to expand.  Hence, an above $300 price tag for a promising new LeBron X release isn’t unrealistic.

Based on past experience with similarly positioned athletic shoes, the expected demand for the new LeBron X will be extremely high.  Aftermarket sales of similarly hot-new sneakers on eBay have fetched prices above $7000.  If anything, from a pure price management perspective and ignoring the brand positioning and public relations, this would indicate that the price of $300 is far too low.

The Brouhaha

While the above analysis indicates that the launch is well reasoned and its launch price is properly positioned, two issues have brought Nike into the center of an unwanted brouhaha: (1) the fear of violence related to the initial product sales; (2) the claims that Nike is taking advantage of the poor.

Past launches of hot-new Nike gear have been tarnished by violent customers.  During the Nike Air Jordon XI Concord launch of December 2011, Seattle police arrested one and pepper sprayed another 20 shoppers brawling outside of a mall.  During the Nike Air Foamposite launch of February 2012, 100 Orlando police in riot gear were sent to manage crowds causing Foot Locker to scuttle sales.  With the rise of Twitter flash mobs, things could get worse.

In response, Nike has set forth new rules for their distributors regarding the LeBron X launch that might reduce the likelihood of violence.  While I hope their efforts prove effective and I acknowledge that they are taking actions above and beyond the industry norm, I also accept that no approach to security is 100% effective in a free society.  Any outbreak of violence related to this launch will be a public relations nightmare for Nike.  Nike’s attention to these issues is to be lauded, yet I wouldn’t be surprised to hear they were insufficient and suspect they will be publically attacked if violence reoccurs.  (See J. Berger’s article on CSR.)

Recent comments from Marc Morial of the National Urban League called for Nike to pull its launch by indicating that the LeBron X is marketed to impoverished communities and implying customers would neglect school supplies in favor of the LeBron X.  He went on to describe the launch as “outrageously overpriced”, relying on “seductive marketing”, and delivering a “foolish status symbol”.  While refraining from attacking LeBron, Morial did request Mr. LeBron to join his cause.  While claims of taking advantage of the poor may be off-the-mark and politically-charged, what should Nike do?

The Flippant Suggestions

What is Nike to do with this quagmire?  As the above analysis demonstrates, the LeBron X does appear to be appropriately positioned and priced.  And, as identified above, Nike is potentially facing a public relations disaster.  How should Nike respond?  Pull a Tylenol? Lower its price?  Make more product?

To my knowledge, there is no clear case study to compare Nike’s situation and identify the appropriate response or course of action.  A sophomoric response might suggest following the 1982 Tylenol scare response when a cyanide murderer tampered with the product and the Chairman James Burke reacted by pulling the product nationwide.  In Tylenol’s case as in Nike’s case, there was a no inherent fault with the product.  But that is as far as the similarity goes.  Consider the following contrasts:

  • In the Tylenol scare case, a murderer actually killed others through the product.  In this Nike case, no person has been harmed yet.
  • In the Tylenol scare case, the murderer causing harm was an independent third party to the transaction (not the manufacturer, distributor, nor the customer).  In this Nike case, the suspected person to cause harm to a customer is the customer itself â€" and it is not the product that is suspected to enable harm but the decisions of customers surrounding the acquisition of the product.
  • In the Tylenol scare case, the product was re-launched following a product redesign to address the safety issue.  In the Nike case, neither a delay nor a product redesign will fully address the fears and accusations.

Hence, the Tylenol scare and response does not provide a clear prescription for Nike today.

Other flippant remarks suggest selling the LeBron X at a lower price.  This is unwise.  The presence of secondary markets implies that Nike is underpriced, not over-priced.  Applying the logic of The Price Advantage by Marn et al., the shoe would in the “unharvested value” position and the recommended action would be to raise the price significantly.  Furthermore, lowering the price of the shoe will only increase the incentive for touters (UK) or scalpers (US) to hoard the shoe and earn higher profits on eBay.  If anything, a lower price would only increase the likelihood of violence surrounding the launch.

Producing more LeBron X in anticipation of high demand is also unwise.  While standard economics texts would suggest that supply should always meet demand, buzz marketing has demonstrated the value of supplier created scarcity.  Watch makers like Patek Philippe, bag makers like Louis Vuitton, and plush toy makers like Ty Beanie Babies have each found that luxury items, be they expensive luxuries or simply affordable luxuries, benefit from scarcity in the creation of the perception of luxury.

Morris et al. 2000 research identified these products as “high-involvement/relationship-prone products”.  They go on to state that ten common attributes of high-involvement/relationship-prone products include “nostalgic value, personification, uniqueness, facilitation, engagement, aesthetic appeal, quality/excellence, association, social visibility and image congruence, and price risk.”

Producing more units of the Nike LeBron X will, by definition, reduce product uniqueness, thus reduce the customer involvement in the product and relationship attribution with the brand.

The Difficult Decisions to Make

This leaves Nike executives in an uncomfortable position.

  • Nike shouldn’t lower the LeBron price significantly from its current target due to the expected demand and need to reduce adverse aftermarket behavior.
  • Nike could raise its price target but doing so would create its own set of brand positioning and market alignment challenges.
  • Nike shouldn’t pull the product given that the purpose of a firm is to make and deliver products customers want profitably, and clearly this is a product that some customers want and Nike is likely to profit from its sale.
  • Nor should Nike increase the initial production run since part of the value of the initial LeBron X is its scarcity.

If material changes to price, product, distribution and supply are not recommended, we are left with message positioning.  One position Nike should not take is that of a free market economist callously stating that customer’s decisions are their own responsibility, much less should they take the position of comedian Ron White: “you can’t fix stupid.”

So what should Nike do?  Here are some possibilities:

  • To the fear of mob violence at product launch, Nike appears to be on the right track.  Further action might be possible in the form of positive reinforcement of good behavior by engaging community peace leaders and mob psychologists to encourage positive crowd interaction (preferred) and potentially through coercive control techniques with added security guards and police presence (undesired but more common).
  • To the claims of taking advantage of the poor, I see no need for a highly public response to this accusation from Nike.  It is unlikely that the accusation will enjoy broad support.  Hence, do-nothing may be the best reaction for Nike leaving the argument for non-Nike experts, commentators, academics, pundits, and community leaders to resolve.  If forced to respond, a line like “The LeBron X is the best shoe on the market for those that can afford them” succinctly addresses the issue.  Stop thereafter and move on to other talking points.  Repeat the same statement if asked the same question in a different manner.  (This applies to you LeBron just as much as it applies to Nike.)

I admit, these suggestions are little more than tweaks on the current actions underway.  Yet what did you expect?  Nike has been the center of public relations attacks many times over the past 20 years.  As such, I suspect that Nike has developed a corporate staff, routines, and culture to address public relations attacks.  The real hope isn’t that we will get to watch a new chapter in public relations attacks and disaster management, but that the case unfolds with a surge in sales and customer happiness, and fizzles in the PR dimensions.

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