I recently read a book called Shoe Dog, written by the original owner of Nike, Phil Knight (2016). The book describes the journey to success of the company and its very passionate team, starting in 1964. One passage stuck with me particularly. At the time, Nike was called Blue Ribbon Sports and it was selling innovative running shoes. Interestingly, Knight and his co-founder Bill Bowerman, a track-and-field coach, were driven by their passion for running. Bowerman even decided to write a book about jogging as part of a fitness program, even though it seemingly had nothing to do with the business, or so Knight describes (2016).
However, this book became extremely popular, because it enhanced the experience of runners by helping them to learn more and improve their performance. Nike was clearly selling benefits, not products, and benefits are easy to understand for the customer (Co-Schedule, n.d.). This is an early example of how Nike is slowly transforming its business model to become service-oriented, as opposed to product-oriented.
A more recent invention by Nike functions in similar ways: Nike+. This software program tracks the performance of runners through a sensor and tracking device that Nike provides. Users must register for Nike+ on the website, before they can see running history and connect with other runners. Nike+ offers training programs designed by experts, allows to set goals and acknowledges your achievements to keep you motivated. It also allows you to share your runs and play games. (Livestrong, n.d.) The Nike+ app now also rewards Nike+ members with in-store perks and exclusive features (Digiday, 2019).
With Nike+, Nike has created a customer platform, a free complementary add-on that offers extra value to the customer. This is essentially a form of bundling (or wrapping (Wixom & Ross, 2017), as it creates a joint offer of products for which the total consumer valuation by all consumers is maximized (without taking into account individual consumer preferences) Gutt [Session 3] 2019). The Nike+ app complements the Nike+ sensors, trackers, running shoes and apparel for sale, making the total bundle more valuable than the separate components. This has the potential to decrease deadweight loss, as Nike is able to charge a higher price for the bundle than for the separate Nike products Gutt [Session 3] 2019).
The components can possibly be bought separately, indicating a Mixed Bundling strategy (Gutt [Session 3], 2019). However, connecting with other Nike fans and tracking runs does not make much sense if a customer does not own Nike products. Therefore, one might argue that it is effectively a Mixed Components strategy, in which a customer can buy Nike products without using the Nike+ software, or buy the bundle including the Nike+ software (but the Nike+ software alone does not have any value, so it may be disregarded).
What Nike has done well, is that it created a bundle without increasing variable costs. These can make a bundling strategy rather unattractive to a producer (Gutt [Session 3] 2019). Nike has chosen an information good instead of a physical product to complement existing products – once created, software can be infinitely re-sold at almost zero marginal cost (Gutt [Session 4] 2019). Additionally, the value of the software for the customer increases with network externalities (Gutt [Session 4], 2019): more users on Nike+ means more people to have discussions with about running experiences and, as such, a higher utility derived from the app.
I decided to focus on Nike’s bundling efforts in this article, but it would be interesting to extend the analysis to other examples. Where have you noticed bundling efforts and how are they creating more values for businesses?
References
Co-Schedule, n.d. Nike Marketing Strategy: A Guide to Selling Benefits and Not Products. Assessed on 3 October 2019, through: <https://coschedule.com/blog/nike-marketing-strategy/>.
Digiday, 2019. In effort to grow direct sales, Nike integrated its app strategy into its stores. Assessed 3 October 2019, through: <https://digiday.com/retail/nike-integrated-app-strategy-stores/>.
Gutt, 2019. Session 3: Information Goods. Lecture at RSM, Erasmus University Rotterdam, 16 September 2019.
Gutt, 2019. Session 4: Versioning and Bundling. Lecture at RSM, Erasmus University Rotterdam, 19 September 2019.
Livestrong, n.d. How Does the Nike Plus Work? Assessed on 3 October 2019, through: <https://www.livestrong.com/article/533191-how-does-the-nike-plus-work/>.
Knight, P., 2016. Shoe Dog. Simon & Schuster. London.
Wixom, B.H., Ross, J.W. 2017. How to monetize your data. MIT Sloan Management Review, 58(3).
I like the idea that Nike transforms the business model into more service-oriented instead of product-oriented only. The evolution of business model could def create positive impact on Nike including profit and brand image. Based on the law of diminishing marginal utility, as the consumption increase, the marginal utility derived from each additional unit would decrease. From the customer perspective, the utility could be interpreted as happiness and satisfaction. Therefore, after reaching a certain point of time, the customer satisfaction of buying Nike’s product would decline, thus the customer loyalty might decline as well. Moreover, Nike’s brand image would get damage. This domino effect results in financial loss, brand attraction decline, customer relationship impairment, and market share deterioration. However, with the new business model. Nike is able to engender a virtual community for customer, where the communication between company and customer could be deeper and further. Additionally, people could have a lot of discussion on things like Nike, sports products, working out. Those communications enhance the WOM influence subconsciously.