Expanding the Pie - A Nike Story

When I was in college, I discovered NikeID. Now rebranded to be Nike By You, it's a customization service that allows you to select from a menu of colors and materials to build your own shoe. The original goal of NikeID was to drive Direct-to-Consumer businesses. As a digital-native product, NikeID promised to drive engagement on the Nike app, allowing Nike to skip the wholesale discount that cut into its profit margins.

The problem? The shoes were about 50% more expensive than the generic colorways, and took up to 6 weeks to arrive. These things reflected the challenge of making small-batch or customizable sneakers - working against the principles of an economy at scale.

If you look at Nike By You today, it's a different story. Customized shoes are only $10-20 more, and arrive within two weeks. In the last 5-6 years, Nike must have made some serious manufacturing investments to both decrease costs and time to manufacture. This operational improvement goes beyond customer-designed shoes. It opens the possibility of small, exclusive releases of sneakers.

This possibility became the SKNRS app. But before I connect SNKRS to Nike By You, we need to explore sneaker culture and the ridiculous strength of Nike's brand.

Nike was one of the first brands to kick off the collectible sneaker. A lot of this came from Michael Jordan. As the NBA's most famous athlete, Jordan left a rich history of iconic moments. And in each of those iconic moments, he was wearing Nike. Because each year came with a new silhouette, there was a natural supply limit. Add in wear-and-tear, and original Jordan's are still hard to find. This combination of rarity and history makes them extremely valuable as collectibles.

Nike has capitalized on this history with its "Retro" drops, where it re-releases a limited quantity of an old shoe. Originally, these re-releases attracted crowds to line up at physical stores, hoping for an opportunity to snag a piece of sports Americana. In 2015, Nike launched the SNKRS app, a new way of fulfilling these requests. The premise is simple. You enter the drawing at a certain time, and a lottery is run on the backend to decide who can purchase the sneakers. If you win, your card is charged, and the sneakers are sent to your house. If you don't win, you lose nothing - it's free to enter and only takes a couple of minutes.

This design comes with some pretty powerful psychology. To start, it circumvents the natural loss aversion people feel when they part with their money by turning it into a lottery. This lesson, like so many others, comes by way of Thinking Fast and Slow (chapter 31). When faced with a choice between a sure loss of some amount and a chance of a greater loss, people are much more likely to choose the chance of a greater loss, even when they're mathematically equivalent. So when Nike turns the shoe buying process into a lottery, you end up feeling less bad about parting with your cash.

Then there's the Decoy Effect. The canonical example of the decoy effect is movie theater popcorn - there's an absurd price jump from a small popcorn to a medium popcorn, which makes the large popcorn look like a great deal. The price of the medium popcorn is a "decoy" - nobody is going to buy it, but it pushes people to buy a large popcorn because it's a "better deal." In the case of sneakers, that decoy is resale prices. Some shoes resell for significantly higher than their retail prices, even up to the thousands. Throw in a little selection bias (people remember the few shoes with extremely high resale prices, not the many with low ones) and even an inflated retail price seems like a bargain.

But it's not all about removing inhibitions. Nike's done a great job of drawing people into the app. The impact of Nike's brand cannot be overstated here. To keep new SNKRS drops relevant, Nike essentially harnesses the same thing that made Jordan's career

so powerful: shared experience. In a world driven by social media, they created easily sharable graphics to celebrate success. And as people shared their winning draws, they also started to share their losses. The ever-growing social media sneaker community came up with a new shared language, like "Taking L's." The SNKRS app took Nike's brand power and turned it into an entire culture, one that makes sneakers a focal point of peoples' lives.

This, in turn, started to change customer behavior. The world of sneaker collecting has exploded in size. If you randomly pick a set of 10 friends, odds are high one of them is regularly entering those SNKRS drops.

For sneakerheads, variety is the spice of life. Where your average person may have a single pair of casual, non-athletic sneakers, Nike's making it cool to have a lot more. They've artificially inflated their market by creating demand almost out of thin air. People who had one pair of stylish sneakers now have 10. Some even purchase multiple colors of the same shoe.

Let's synthesize where we are now. Nike, a company with immense brand power, has created a platform that harnesses and perpetuates that forward momentum. In putting sneaker drops in everybody's pocket, they've turned a whole generation of people into sneakerheads. There's still one step to capitalize on this - how does Nike, a company making millions of shoes each year, make money on these drops?

And now we come full circle. The same technology that allowed Nike to slash the time and cost of custom shoes allows them to create small batches of new colorways, all while turning a profit. In truth, this is probably dwarfed by the everyday operations of Nike's business. But this profitability makes it more compelling for Nike to invest in its brand, its technology, and its digital engagement. And it's the digital engagement, getting customers to create accounts and use the apps, that pays dividends for a modern company.

On a superficial level, customers using apps are being sold the shoe at retail price. When Nike goes through a distributor, it sells at wholesale prices, which can be up to 30% less. Customers who order online are better for Nike's margins. Beyond that, it's easy to market to them. The SNKRS and Nike apps are enormous producers of data. As customers interact with these apps, Nike can turn this data into more targeted and effective marketing. It opens up a greater user base to perform experiments on to test improvements to their platform. All of this opens up avenues for Nike to make incremental improvements on their sales and operations.

To bring it together, I want to highlight how impressive this is from an organizational processes perspective. Nike, a publicly-traded retail titan, disrupted its own industry. It did what Blockbuster couldn't: look past the obvious operational improvements to develop a multifaceted strategy that changed the way people shop for shoes. This strategy incorporates improvements from so many different siloes: design, manufacturing/supply chain, digital product, and marketing all immediately come to mind. Whether Nike master-planned all of this (less likely) or simply invested in high-value improvements and saw an opportunity to integrate, they demonstrated an incredible ability to join work from across the company.