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.
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.