How Nike Uses Customization to Build Long-Term Revenue

By Markets

The customization of retail products is a super trend that companies of every stripe are keen to exploit.

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In this Industry Focus: Consumer segment, Motley Fool analyst Vincent Shen and contributor Asit Sharma delve into Nike's (NYSE: NKE) online sneaker customization store and discuss how this fits in with the apparel giant's revenue strategies.

A full transcript follows the video.

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This podcast was recorded on Oct. 4, 2016.

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Vincent Shen: Ourfirst example, Asit, is Nike andwhat they're most famous for, and what most dominates in terms of their revenue and theirprofitability, which is their footwear and their NIKEiD customized shoes. Can you tell us a little bit about that?

Asit Sharma:Absolutely. Nike has their iD store, NIKEiD, and this is a place yougo online and customize your own footwear. This sells at a 30% to 50% premium overwhat you might buy in a store. It takes three to four weeks todeliver.There are a couple things that really benefit Nike here. Obviously, there's incrementalprofits in it for the company, whichI just mentioned. If you take the differencebetween buying a preferred sneaker onlineat a discount versus going to a store, which has no discount, but paying that premium,you can see that's a very nice margin pop for Nike.

Butthere's also customer education in this for Nike. Ifyou go online to the store and just go through the options --you can do this without having to buy a product. I did myself, the Nike Sock Dart sneaker. You'll learnas you construct your shoeexactly what a "heathered engineeredmesh upper" is.I had no idea what that waswhen I started this. You can see that Nike wantsto put you in the shoes of a sneaker designer and make you see their products from their perspective. That forms this bondbetween the manufacturer and the customer,which becomes hard to break. We'll talk about the implications of that in just a bit. Vince,have you ever had an opportunity to build a sneaker of your own?

Shen:Yeah,for the show, I wanted to see what it was like. I built a version of theLunarEpic Flyknit Low sneaker through NIKEiD. Just to givelisteners an idea of what optionalityyou actually get through this system, the UI on the site is very easy to use. In all, it took me maybe five or 10 minutes. If you want to bevery selective in terms of exactly the colorsand the combinations, playing around with that, it might take you a little longer. But, all in all, a very simple process. This includescustomizing how the upper looks, the laces, the midsole,even the color of the Nike Swoosh, you can add a flag or a logo to the tongue of a sneaker. And you can have -- I love this part -- text placedon the heel of a shoe,different for the left and the right side. It can be a number, your initials, whatever you want. I thought that wasa really nice touch. As Asit mentioned, it's about $200 all-in for the sneakerwith the various customization options. When it comes down to it,there are a lot of different combinations in terms of what the final product will look like.

Weweren't able to find as much information,but to give you an idea of how, with Nike, in terms oftheir manufacturing process to produce these NIKEiD offerings --but also, in previous episodes, we've talked aboutUnder Armourand the various innovation efforts they're trying to push on themanufacturing side -- but,how the company is able to deliver thesecustomized shoes to consumers in a timely manner. We know how impatient consumers can be when it comes to online shopping,expecting as close as they can get to thatinstant gratification. I think four weeks is on the longer side,but if the product is exactly the way you like it,people are willing to wait that extra time.

Sharma:Absolutely. And that waitactually builds anticipation, as long as it's not too long. There's a really apparent dynamicgoing on here in that Nikeis building loyalty for its brand. We look at that singlepurchase as this incrementalmargin pop. And it is that for Nike. But,if you look at it from their perspective, they want to build you as a lifetime customer.

Let's set ourselves apart --we have two personalities, we're investors, but we're also customers.I'm going to disassociate myself from the customer side of things, because I don't have the moola,personally, to plop down $200 every so often and design my own shoe. But, suppose you had the moola. Once you go through this process, it's awfully hard to go back. We see that with a lot of different instances of customization in our buying careers. Once you get used to customization, you don't want to go back and buy something off the shelf. For Nike to have you as a customer -- let's say 85% of your future purchases throughout your life, rather than having to entice you into the store every time you go back, besides its competitors likeNew Balance andAdidas, that's extremely valuableto them, to make you a lifetimecustomer.

Shen:That's anawesome point,the idea that instead of fighting for thosespending shopper dollars each trip to the store, win themover through the experience,build that loyaltythrough something like NIKEiD,and keep them coming back, and then you don't even have toworry in the future nearly as muchabout the competition, be itAdidas, New Balance, or Under Armour.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike and Under Armour (A Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.