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  • Subject Code : ECON2245
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Business Economics

Introduction to Nike Inc. Pricing Strategy

The essay discusses the general theory of pricing and different price strategies that exists and have been used and proven their calibre in the market with the chosen firm Nike Inc on how the strategies have been used. Further one more price strategy that the company avoids using has been discussed and case has been presented on how the strategy can be used by Nike to inflate their sales. The different price startegies with their separate importance and their particular uses have then concluded.

Nike Inc was established by Phil Knight and Bill Bowerman in 1964 and the company deals in designing, manufacturing, and distribution of the sports apparel and related goods and services. Today this American multinational giant has its foot in nearly 77 countries, isthe world's most popular and high net worth sports brand today (Nike 2020). Primarily Nike focuses on apparel, footwear, and related services of the sports industry. The marketing strategy of Nike changed from time to time and it follows multiple pricing strategies at a time for different goods and this strategy made Nike the pioneer of the sports industry. The total revenue of Nike in 2020 stands at 38 b USD. The total assets of the company stand at 31.5 b USD and are employing 75,000 direct and 600,000 indirect employees across the world (Nike 2020). The company has several competitors in the market but through its effective and dynamic pricing strategy, Nike has been able to stand at the top of the market and retained its potentiality to protect itself and sustain itself in the strong competitive environment today. As this industry holds very high competition which is near to perfect competitive market, pricing strategy is a key factor which madethis company the world’slargest selling sports and athletic apparel and Accessories Company.

Theory Of Pricing

Farm (2019) says that theory of price states that the price of any goods or services is based on the related demand and supply of that particular good. Goods are though divided into different toes depending upon the relationship of demand and supply andthus it says that the point at which the benefit is gained from those who demand meets the seller’s marginal cost is the most optimum price for that good or service. The optimal market or equilibrium is the point at which the buyer’s needs and sellers produced quantities can be fulfilled and consumed reasonably in which both the buyers and suppliers are satisfied.

In the above figure, the curve of supply increases as the price of the product increases, as the producer will get ore profit thus he produces more units and the demand curve is decreasing with an increase in price as according to the general tendency of less buying of the products as prices increase (theory for normal goods), the market equilibrium is set on the point p where adequate quantity is produced where buyers are ready to purchase all that is produced on a price which is satisfactory to them, on the other hand, suppliers are satisfied with the quantity produced on that price as all produced goods have demand. Above the point P, the excess production is not accepted by the buyers because the demand is less and the quantity produced is more and below the point P, the shortage in quantity with high demand, this demand and supply will vary until the point P is reached where all are satisfied.

Pricing Strategies and Their Implementation in Nike

Pricing strategies

Value-based pricing- Nike uses the value-based pricing strategy based on its customer value orientation and perceptions towards the different products and general appreciation toward the brand (Barrie 2018). Nike is concerned with delivering the highest quality products, it never compromises with the quality concern of the customers with the right prices based on customer’s value appreciation of the products, and on the other hand, other companies rely on the idea of selling at cheap rates to generate more sales. This strategy of value-based pricing ascertains that how much a customer is willing to pay for a particular product which is based on the value of that product with the valuation of the brand in the mind of the customer. It was a commendable step of Nike to ask people how much they are willing to pay for a product concerned. The company started to make profits and merchandise also increased.

Price leadership strategy- Nike business runs in an oligopolistic market and this price strategy is suitable for that market, Nike is on the leading brands of oligopolistic markets related to the sports equipment and apparel industry, and thus the company can easily and effectively practice the strategy of price leade4rsehip for its products (Toni et al 2017). Price leadership takes place when a leading firm has enough market shares to exert influence in that sector and that it can effectively set the price of goods or services for the overall market. Thus the company is known as the price leader. There are certain conditions under which price leadership can occur in a market which are the small number of companies in the market, entry of new companies is somewhat restricted, the demand should be inelastic and products are more or less homogenouslyorganizations generally have a similar long-run average total cost (LRATC) which is used to determine the minimum average total cost at which the company can produce a certain output on a long period. Barometric, dominant and collusive types of price leadership are seen exercised by the firms.

The strategy of premium pricing- based on the high quality of its certain premium products, Nike set their prices higher than similar ones of other brands and thus gives customers a high-value addition with those products at a higher price. The company knows that this price will not only reflect the quality of the product but will also add a substantial value addition for the consumer and the logo of Nike will be enough for the consumer to wear. Once Nike manufactures its premium products of high price, it became recognizable in the market. The limited-edition is one of the parts of sub-strategies of the parent premium pricing strategy, the recent example being the Air Jordan shoe of Nike. Nike takes the help of high-level techno and loyalty for the sales of these products.

The Price skimming strategy - The price skimming strategy is applied by Nike for the limited edition products of expensive nature. Whenever a new technological or designed product launches into the market, Nike set its high initial price, which has two benefits, firstly the high price set the value addition and brand value to the products and ultimately to the brand and secondly, the company comes to know the product of certain quality and new technology can be sold at what prices (Farm 2019). Also, the company earns high profits by limited sales of that product. With the help of this pricing strategy, Nike sells the product to those customers who are willing to pay a higher amount for the new thing. After some time when the product was launched, Nike lowers the pri9ce of that product as people who were willing to pay that amount have already bought the product. Nike has implimented a price skimming strategy by setting high prices initially and investing heavily in the R & D and promotion of that product. In normal conditions, it takes 3-6 months when the company adopts the price skimmingstrategy for a new product, in this period Nike promotes that particular product, which also gives an edge to the Nike for continuous technological improvements, new products launch, and substantial amounts of profits as over other competitors. 

Other than these prime strategies, Nike also follows some other strategies according to the situations of 4 Ps of marketing which are penetration pricing, psychological pricing, segment pricing. A question arises as to what is the use of using multiple pricing strategies by a company with a limited type of products (Gregory 2018). Here the success of Nike's multiple pricing strategies can be seen as the company is the biggest brand in its segment and multiple pricing are done as the company consider each of its products as different from each other on some basis, also the market of each product is differentiated by the company on a particular degree. These different pricing strategies give Nike a chance to adjust according to the trend of product, market, people, and fashion; and their changing needs.

The Alternative Strategy of Psychological Pricing Which Nike Can Use

Psychological pricing is a pricing and marketing strategy which says that certain prices bear a psychological effect on the consumer, in this, the retail prices are kept just below the round number for example $ 19.98 or Pound 2.95. The evidence says that consumer tends to precept just below prices as much lower than their actual value and tend to round up to their next lowest unit (Kumar and Pandey 2017). This theory says that a pricing system like this causes greater demand than the actual demand and supply rule of the market for a product. This type of pricing is one cause of the price point. Nike does not seem keen for this pricing strategy as it may seem to mock the customer's rationality and Nike fears that this possible analysis by the consumer against Nike can result in image deterioration for the brand. But careful psychological pricing strategy can be very useful for Nike. Psychological pricing which is also known as charm pricing makes the brain happy and the consumer estimates that price much lower than it is. Pricing a 30.9 dollars product to 30.4 will not get a substantial response but pricing a 30 Dollars product at 29.98 will get a remarkable response from customers (Majeed 2019).

Nike has the power to turn the market price of the product of its segment, it can use psychological pricing for its high-end products after they end on the limited edition era and starts to sell in normal market conditions. Though it is not necessary to lower the price which seems a rationale mockery of the consumer but if Nike can lower its price of a shoe of 200 $ (for example) to 195.5 dollars than it can get rid of the fear of negative consumer perception and can also give the consumer a substantial discount and can get a heavy response from consumers as a round figure of 100s ($ 200) is deleted and a lower amount of 195 which show the initial number of 1 can do wonders for Nike sell (Goefman et al 2018). Research on such an issue has not been done on a scalable level.

Conclusion on Nike Inc. Pricing Strategy

The different pricing strategies that Nike used have resulted in remarkable success for it which means that Nike has used them only after a substantial amount of research and different primary and secondary level information collected. The normal pricing of normal goods which are based on market forces of demand and supply do have little scope for marketing and pricing them on a price that the company wants which it can create only through generatingeffective demand by several measures. But Nike did the product pricing by altering the different products from normal goods to luxury ones and Giffen goods which have broken the normal price theory of market demand and generated revenues of high amount for Nike, though Nike has never showcased any of its products as an inferior good. Nike has presented a remarkable unique example of high sales with high prices with its dynamic and multiple pricing strategies.

References for Nike Inc. Pricing Strategy

Gregory, L 2018. Nike inc’s marketing mix- an analysis. [Online] Available at http://panmore.com/nike-inc-marketing-mix-4ps-product-place-promotion-price-analysis. Accessed on: 08 Oct, 2020.

Lumen n.d.. Reading: Pricing objectives. [Online] Available at https://courses.lumenlearning.com/clinton-marketing/chapter/reading-pricing-objectives/. Accessed on: 8 oct, 2020

Barrie, L. 2014, Analysis: New pricing strategy pay off Nike. [Online] Available at https://www.just-style.com/analysis/new-pricing-strategy-pays-off-for-nike_id122400.aspx. [Accessed on: 8 october, 2020]

Toni, D., Milan, G., Saciloto, E., and Larentis, F. 2017. Pricing strategies and levels and their impact on corporate profitability. Revista De Administraca,o 52 (2017), pp. 120-133.

Farm, A. 2019. Pricing in practice in consumer markets. Journal of Post Keynesian Economics  43(1). Pp. 61-75.

Goefman, K., Bramson, A., Schoors, K and Ryckebusch, J. 2018. The impact of functional and social value on the price of goods. [Online] Available at https://doi.org/10.1371/journal.pone.0207075

Kumar, S. and Pandey, M. 2017. The impact of psychological pricing strategy on consumers' buying behaviour: A qualitative study. International Journal of Business and Systems Research, 11(1/2). pp.101.

Majeed, B. 2019. Psychological pricing strategy and its influences on consumer’s buying behavior in kurdistan region. International Conference of Accounting, Business, Economics and Politics "ICABEP2019" Tishk International University, Erbil, Iraq. [Online] Available at DOI: 10.23918/ICABEP2019p13.

Nike Inc. 2020. NIKE, inc. reports fiscal 2020 fourth quarter and full year results. [Online] Available at https://news.nike.com/news/nike-inc-reports-fiscal-2020-fourth-quarter-and-full-year-results. [Accessed on: 8 october, 2020]

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