Welcome to the first ever Solution Session where I intend to show you the intuition behind some of my blog posts. This first episode is regarding my three posts about the secret behind Nike’s limited releases. Check out my YouTube Channel: Young Economics and be sure to subscribe! Let me know what you think.
So, I know I’m now among the many bloggers, news anchors, and college students to talk about I’m Shmacked, but how could you not?
“It’s a movement.”
I’m Shmacked in itself is a business entity, founded by Arya Toufanian and Yofray Ray (college dropouts ironically enough), that tangibly showcases the all-American, fraternity/sorority-loving, Animal House portrayed college life right to your iPhone, iPad, or any other electronic viewing device. Established in 2011, the two marketing geniuses (yes, I think they’re qualified) began filming the one side of college that you always try to imagine, or remember for you older folks…and I guess you college students who got so drunk that you’re unable to recollect what happened the night before. Partying. Through short four minute YouTube videos (the I’m Shmacked channel now has over 62,000 subscribers), viewers can live vicariously through the care-free college kids taking shots, ripping massive bong hits, and shouting the famous phrase that embodies a generation, “I’m Shmacked!” indicating they are inebriated beyond belief. Check out the campuses they’ve graced in their 2013 Fall Semester Tour Recap below:
How did you make your college decision? Or for those of you still in high school, how are you deciding on which college to attend? Of course you want to think about how academically stimulating the environment is (at least make sure your parents think that its a part of your criteria), the enrollment, and maybe the geographical landscape of the campus, but how about the social scene? I’m Shmacked is making social life more relevant than its ever been before in the realm of college decisions. On their Twitter page you can see countless retweets of kids saying they’re choosing which college to attend based off of how insane their I’m Shmacked feature is. In one video, two college students from Ireland state that they specifically chose The Louisiana State University because of the I’m Shmacked video they saw for it. That, my friends, is being influential. You see, I’m Shmacked is extremely marketable and cool right now. If you’re a college administrator denouncing the I’m Shmacked crew from hosting a party on your campus, well, you’re clearly a buffoon.
Recently valued at $5 million after their first round of drumming up venture capital, I’m Shmacked legitimately provides something that University admissions officers cannot: the coolness factor. Venture Capitalists and investors see the potential in this brand; I don’t understand why administrators have to be so backwards. Your schools are popular because of I’m Shmacked! What more could you want?
Yes, I’m Shmacked has been receiving negative publicity in the news because of their controversial videos, but among the people who truly matter, the droves of college students buying tickets to their parties, I’m Shmacked is extremely relatable and primed to make a large profit. Think about the licensing deals that could spawn from their brand and even possible TV shows or movies. Who wouldn’t want to relive their glory days by watching Dave Franco and Jennifer Lawrence do ridiculously illegal and sexual things that are only acceptable for four special years of your life? One can only dream, hell, I’m Shmacked.
With my question still percolating within my mind, I decided to look through Nike’s 2012 Annual Report for more information. Two years ago, Nike brought in over $13 billion in revenue from their footwear sector of the company, a 15% increase from 2011’s fiscal year end. In fact, over the past three years Nike has seen a steady increase in their revenue from the footwear department. According to the report, Nike credits this increase to a low single digit percentage increase in average selling price per pair of shoes; a double digit percentage growth in unit sales; an increase in demand for performance products, such as the Nike Free and Lunar technologies, which can be found in a lot of their running shoes; and an increase in sales of the Nike Running, Basketball, and Sportswear lines of the company. Raise your hand if you own a pair of Nikes…I thought so.
In economics there is this principle called elasticity where changing an economic variable, such as price, quantity or income, affects other variables on a scale from inelastic to elastic. I want to focus on inelastic goods, regarding footwear, because Nike’s annual report indicates inelasticity of demand. With inelastic goods price and revenue move in the same direction, which means if the price of the good increases so will total revenue, and vice versa. In Nike’s report, they stated that they saw an increase in revenue for footwear because of a low single digit percentage increase in average selling price. This suggests that Nike knew their product and consumers (the sneakerheads) well enough to understand that their footwear is inelastic and that a slight spike in prices would not hurt revenue. As forecasted, Nike yielded increased sales, which is exactly why they later revealed a double-digit percentage growth in unit sales for the year.
Furthermore, Nike also claimed that there was a revenue increase in footwear due to a spike in demand for their new running technologies and specific shoe lines within the company. What type of shoes do you see released in limited quantities? Well, its certainly not Nike’s football or soccer cleats, no, that would be impractical! Instead, we see limited pairs of shoes from the Nike Running, Nike Basketball, and Nike Sportswear lines, which also utilize Nike’s latest footwear technologies (Nike FREE and Nike Lunar). This is because these are the styles that are popular beyond the sports world. Kids and young adults are wearing these products for everyday use; no longer are the days where sneakers are solely used for athletic purposes, it’s a fashion statement to rock Nike’s Flyknit Trainers (my personal favorite) to school or on errands. Nike has taken note and exploited these trends in their releases, which is why they’ve seen augmented revenue margins. Making sense a little bit?
At the end of the day though, I think Nike, and other sportswear companies, utilize this limited release tool for reasons that go beyond economic or financial principles. Since Nike doesn’t produce at an efficient level where marginal cost equals marginal benefit, there must be some outlying factor that reaffirms this action. I believe it is marketing. Nike remains a part of our cultural fabric because of their ability to stay relevant, creating a buzz and reputation around their brand. With their athletes (e.g. Michael Jordan, Lebron James, and Serena Williams), commercials, and slogans people are consistently talking about Nike and their iconic status. Limited releases are Nike’s newest tool to combat the ever-wandering mouths of public consumption. The people who are able to buy the limited edition shoes feel special because of the rarity of their purchase and the little company they share. Those who are unable to purchase the shoes, on the other hand, either obsess over upcoming Nike releases or end up buying another sneaker with their allocated money that was originally designated for those special kicks. It’s a win-win situation for Nike, as they not only increase their revenue stream, but the buzz around the company is perpetuated by those obsessive followers of The Swoosh who just want to feel unique too!
You saw in the video (found in Part I) what kind of shoe collecting people are doing nowadays, now multiply that by the millions of teenagers and adults who are also trying to create their own sneaker collection…pure genius by the gentleman behind The Swoosh.
This completes the Nike chapter of Young Economics. Thank you for taking the time to read my material. Be sure to check out all three parts and let me know what you think!
It was June 9th, 2012 when one of the most highly anticipated shoes of the year was set to release on Nike’s website, the Nike Air Yeezy II collaboration with rapper [God?], Kanye West. The previous Air Yeezy that released in 2009 was only sold in brick-and-mortar stores, so the online release of the Air Yeezy II was a welcomed surprise by the sneakerhead community, which only drew more hype to the launch date. It was divine intervention (perhaps by the Rap God ‘Ye himself) if you happened to cop a pair of Air Yeezy IIs, as only five hundred were available in each of the two colorways of the shoe. Traffic was so heavy on this day that Nike’s website actually crashed. As a result of the limited quantities, the resell price soared up to as much as $96,000 on eBay (no, that’s not a typo) and still lingers around a four-figure price in specialty shoe stores today. This is an all too common occurrence within this phenomenon; sneaker collectors will pay obscene prices for the rarest (and sometimes the ugliest, but don’t tell them I said that) pairs of sneakers, which is beyond me because they are just shoes, they’ll be dirtied in one wear! Why wouldn’t companies, like Nike, supply more to increase their revenue?
From an economic standpoint, wouldn’t it make sense to produce a product up until the point where the marginal cost of the producer (Nike and other companies) equals the marginal benefit of the consumer? In the case of limited releases, a shortage is yielded since the quantity supplied by footwear companies is less than the quantity demanded by consumers, as you can see in my first graph below.
Let’s say Nike were to entertain my inquiry and increase their quantity of footwear supplied all the way to the equilibrium point where marginal cost equals marginal benefit (second graph). This would eliminate the shortage of sneakers and all of the sneaker collectors would be happy, right? In theory, though, the quantity of footwear demanded by the sneakerheads would decrease, therefore resulting in less revenue and less producer surplus for the Nike brand(according to my final graph, you can see the producer surplus decreases a significant amount from the limited release retail price to the new accommodating equilibrium price). The consumer surplus of the sneakerheads, however, increases as a result of this change in quantity of shoes available. Unfortunately though, business practices are not always based off of consumer preferences, which is why the true consumer surplus of limited edition sneakers remains at the little triangle at the tippy-top of my graph. Why does Nike do this? Well, besides the fact that it is more profitable for the company to supply in limited quantities, it is because we continue to pay these prices and demand The Swoosh at such high volume! I wonder what Nike’s annual report has to say about this.
*The final part of my research will be released tomorrow, thank you for taking the time to check this out.
Finance, and now economics as of late, has interested me because I am intrigued by the world of business and how it functions, but more importantly how business can empower people around the world. As I am just a freshman, I intend to utilize this blog as a learning tool not just for my readers but for myself as well. As I continue to broaden my horizon across these respective fields of business, the scope of this blog, along with the application of it, will widen as well.
I’ve pondered this idea of a financial/economic blog for some time now. The idea came to me this summer before I began my first year at George Washington University, but I was not sure if it was something that I wanted to pursue, for this isn’t the first blog I’ve created. When I was about ten years old I created a blog called Young Groove where I told stories about a boy named Unice (its like I wanted him to be bullied) who would ultimately learn some type of lesson by the stories’ end. Like most projects at a young age, this was short lived as I quickly moved on to the next bright idea that popped into my head. So, I put this new bright idea on the back burner because I wanted to be sure that a blog was something I truly wanted to create and form into an extension of my education.
Young Economics has to be more than just taking economic and financial theories and principles from the classroom to discussing them with you. While I thought about this idea I decided to research if there were any other blogs on the web that were pursuing a similar idea. Of course, there is the famous Freakonomics blog that intelligently and interestingly discusses current events, issues, and phenomena through an economic and financial lens, but I did not see a site that drew from a young (collegiate) mind for young minded readers who are interested in the respective fields. I intend for Young Economics to add elements to scholarly conversations. I do not plan on simply taking concepts and ideas from other financial sites and talking about them here, but rather researching and gathering information on certain topics that interest me and applying them to what I am studying in school.
I am just a college student; I do have interests and hobbies that are academically unrelated, like Nike shoes, architecture, hip-hop music, and so on. Hopefully, by writing about my own interests I may be able to capture an audience that shares similar interests but also finds my voice relatable and somewhat helpful along their own educational journey through the business world. I plan to write an entry at least once a week, but thank you in advance for taking the time to read my blog, and please do not hesitate to share your comments with me…a conversation is a two way street.
As I mentioned in my Introduction post, one of my interests revolves around global sportswear icon, Nike Inc. Ever since I can remember, I’ve been enamored with The Swoosh. The passion and ingenious behind each of their creations is something to marvel, for they continue to innovate and reimagine the way we think about apparel. Also, the entrepreneurial ability and spirit of co-founders Phil Knight and Bill Bowerman to start a company out of the trunks of their cars to only transform it into a multibillion-dollar entity is admirable and something every kid dreams about doing. Recently though, I’ve become more in tune with this interest and curiosity. Not to say that I am a ‘sneakerhead’ (someone who has an insatiable desire to collect sneakers), but I have begun collecting several pairs of Nike footwear…currently five kicks (sneakers) deep. If you aren’t familiar with Nike and this phenomenon of shoe collecting, I ask that you please check out this video of one of the most absurd sneaker closets you’ll ever see:
Limited release sneakers are what fuel this sneakerhead phenomenon. You see, on just about every Saturday morning people of all ages wake up just a couple of minutes before eight O’clock with their momma’s credit card in hand or money from their latest paycheck to hit that Twitter link Nike supplies saying, “The Air Jordan 11 Retro ‘Gamma’ is now available”, so that they may have a chance at “copping” (buying) the latest Nike shoes to hit the virtual shelves. The fact that these releases are limited alludes to the fact that many people end up empty handed after the shoe sells out in 10 minutes, only to try again, and probably fail, the following weekend. What I don’t understand though, is the purpose it serves to continually release limited edition sneakers when Nike could easily supply more and accommodate the demand of each shoe. Over the next couple of days I will be publishing my findings, stay tuned for part II to be released tomorrow.