I’m a sucker for thumbholes. Those little empty spaces on the cuffs of hoodies and base layers that showed up maybe a dozen years ago—those things make me swoon. And I’m not the only one. According to a recent Nike investor meeting, Nike’s customers are willing to pay a premium for clothing with seemingly benign features like thumbholes. During the past several years, Nike has performed analyses that looks at the value customers attribute to specific features on technical clothing in hopes of getting more “scientific” about its pricing.
“[We] had them tell us, what do you think this one’s worth versus this one? What details on the shorts make it worth more?” explained Jeanne Jackson, president of product and merchandising at Nike, to investors during the meeting. “We discovered in tops that if a top has a thumbhole in it, the consumer perceives it as a premium top. So we’re getting a little bit more scientific about what those features and benefits are that the consumer will perceive as worth more money.”
The scientific analysis is part of Nike’s shift from a “cost plus” pricing equation to a “consumer value” pricing equation. Instead of just marking up every product by, say, 35 percent, the company looked deeper at specific features to figure out where there’s wiggle room to increase profit margin.
“What will the market bear? What can the consumer stand in terms of price, and what do they see as added value?” explains Matt Powell, a market analyst for the NPD Group who was at the Nike investor meeting when Jackson dished on the company’s new scientific pricing methods. “If I add a bell or whistle? How much more will they pay?”
We reached out to Nike and a handful of large outdoor brands, all of which refused to comment about their pricing strategies or any internal consumer analysis.
“It’s a pretty sophisticated technique and probably something only the larger brands can afford to study,” Powell says. “Although the smaller companies will copy that ‘add-on feature’ onto their garment, and then copy the price as well.”
And yes, gear is getting more expensive. According to Nike’s financial reports, the average cost of footwear in North America increases by 3 percent to 5 percent each year, while the average selling price for Nike’s footwear increased by 9 percent in the first quarter of 2015. “We actually are not pricing literally with either inflation or input cost,” explained Nike CFO Don Blair during that same investor meeting. “One of the changes that we made over the last five years or so is really focusing on the consumer as we set price. And really, it’s about the value equation that we’re trying to create with the consumer. And so when we bring innovation and brand strength and premium presentation at retail to the consumer, then you can move the consumer to premium prices.”
Now here’s the part where it gets weird: We like it when Nike raises prices. We actually want to pay more for our running hoodies and trail shoes. Sort of.
Columbia Sportswear Company has spent a lot of time and energy in the past several years moving its customer base to “premium prices” as well, developing a series of innovations that have increased the quality of its technical brands while helping customers justify the higher price tags. And those prices will likely continue to rise. “We think there’s opportunity for us to increase our prices, especially in these differentiated products,” said Columbia CEO Tim Boyle during a recent investor meeting. “We think we have some disruptive technologies which we’ll be launching in spring 2016, which will allow us to lever the brand’s current strength and raise our margins.”
Now here’s the part where it gets weird: we like it when Nike raises prices. We actually want to pay more for our running hoodies and trail shoes. Sort of.
While Nike increased the average cost of its footwear by 9 percent this year, its worldwide unit sales rose by 11 percent. Columbia reached a record $2.1 billion in sales in 2014, up 25 percent from the previous year, a success that the company attributes largely to its premium lines, according to a recent article in Forbes.
There’s some fun psychology at play here, where the consumer attributes a higher price tag to a higher quality of product. Psychologist Robert Cialdini writes in his book Influence at Work about how people will use price as the determining factor when trying to judge the quality of a product. So if you’re looking for the best rain jacket on the market, and you’re comparing two jackets with similar technology, you’ll pick the more expensive jacket. It’s a common phenomenon that Powell sees play out over and over. “There’s a bias among consumers that higher-priced items are of higher quality, and right now, those premium products are absolutely driving the sports market. Consumers believe the more-expensive products are better.”
That’s not to say these more-expensive products aren’t worth the extra cash. When you consider the innovation that Columbia has put into its top-tier brands, it’s easier to swallow the $400 price tag for one of the company’s new OutDry rain jackets. Nike filed for 540 innovative patents in 2013 alone. The North Face introduced a new synthetic down technology in 2013 called Thermoball. The technology was supposed to hit the market in 2012, but TNF athletes Conrad Anker, Jimmy Chin, and Renan Ozturk tested the jackets while trying to climb Meru and came back with all kinds of “constructive criticism.” Thermoball wasn’t light enough and didn’t pack well enough. So TNF scrapped its original launch and spent a year redesigning the product. That kind of dedication to quality isn’t cheap.
“It’s tough to talk only about profit margins, because you don’t get the whole picture of what goes into that product or that feature,” says Pamela Ajello, senior communications manager at The North Face. “The cost of doing business, the cost of fair labor practices, the process of innovation, how a company gives back to the community—to only look at that profit margin for a specific product is too narrow of a picture.”
And while some companies might find a little extra profit in a relatively benign feature like thumbholes, that doesn’t mean they’re duping their consumers.
“They’re not gouging the consumer at all when they use the ‘consumer value’ model,” Powell says. “They’re increasing the price of a jacket from, say $120 to $130 because the market will bear it. The consumer is able to swallow a moderate amount of price increase. And if brands are going to keep innovating, they need to find margin wherever they can.”
In other words, paying a little more for a better synthetic down today allows a company to develop a better wicking material tomorrow. And in most cases, the top-of-the-line technology that you pay a premium for this year will trickle down into lower-priced garments next year. This year, Columbia’s new OutDry Extreme Diamond Shell has all kinds of proprietary bells and whistles and goes for $400. Next year, it might be a little cheaper. Either way, I’m totally willing to pay the price—if it has thumbholes.