Sneaker Wars: An Analytical Look at Nike’s Pricing of the LeBron X Shoe – Part 1

There has been a lot of discussion around the release of the new LeBron X shoe which is set to hit stores later this Fall. The president of the Urban League, Marc Morial, recently made a statement saying “To release such an outrageously overpriced product while the nation is struggling to overcome an unemployment crisis is insensitive at best. It represents twisted priorities and confused values. Just don’t do it.”

I understand Mr. Morial’s concern, however there is enough blame to go around. By pricing LeBron’s new shoe at $315, Nike is following the standard corporate protocol of maximizing shareholder value at the expense of poor black people who make up a large proportion of their consumer base. No matter what types of boycotts or calls to actions against Nike that the National Urban League takes, it will only be a Band-Aid to cover up the root problem of hyper-consumerism and self hate in the black community. Even if Nike is being unethical and predatory, progress is in the hands of the black consumer as most of the world no longer cares if we sink or swim, especially if we make bad financial decisions as a race.

There are many factors at play and this scenario can be used as a parallel to many other sectors who profit from a less wealthy and less educated demographic. This article attempts to dissect the problem from many different angles so that the reader will have a clearer understanding of the forces economics, corporate & personal responsibility, and consumer psychology.

The Top Corporate Commandment

With the pricing of the LeBron X as a luxury good, many people probably have an image of Nike corporate executives deviously plotting around a large mahogany table about how they are going to screw the “little guy” even more. “You need bread money to feed your family?!? Not if you want these new LeBrons! Who needs food when you have status?” There may be a little nugget of truth to this, but this is probably false for the most part. In reality, corporations live by one principle only: to maximize shareholder value. This means that the manager’s ultimate directive is to make sure that the stock price is as high as possible. If this aligns with the public good, then great. If it does not, then refer back to principle number one.

Nike is not plotting against poor people who have limited self control, they just so happen to be a primary segment of their consumer base and nothing comes before profit. The manager’s job depends on a high stock price and his employment is more important to him than anything else.

Value Based Pricing

“315 dollars for a shoe!? I would NEVER pay that much. They only cost $15 dollars to make in the factory.” I understand this initial reaction made by many people on the different blog posts about this subject. However, companies should not price products based on the cost (cost-plus pricing), but by how much the consumer is willing to pay for the product (value based pricing). Some team of businesspeople determined that $315 was the optimal price that maximized the company’s profits. If Nike was able to charge $600 dollars for the shoe and still have the same demand, I’m sure that they would.

This pricing method is no different than any other luxury good. In the past, I dated a girl who loved Coach purses. She was willing to pay over $600 for a Coach purse that probably didn’t cost more than $100 to make. On the other hand, I wouldn’t have paid more than $50 because it was of low value to me.

The Myth of the Rational Consumer

There are hundreds of examples of goods that are overpriced relative to the average consumer. People pay hundreds of dollars for iPhones & iPads and stand in line for days. What makes the pricing and buzz of LeBron’s shoe different than any other luxury good? The difference is that LeBron’s shoe is marketed directly at those individuals who have difficulty in affording the product. There are two different limiting factors that keep a price of a good from rising to infinity: willingness to pay and the ability to pay.

I can afford to pay $20 for some Reese Cups, but I am not willing to pay that, especially since I have other candy options at my fingertips. On the other hand, I would love to have a 5,000 square foot condo in midtown Atlanta, but I can’t afford to pay that at this time even though I would value it highly. Now, if I wanted to, I’m sure I could sell my company, cheat my clients, borrow money from family, and take a corporate job. However, I would take a huge hit to my credit score, my family would hate me, and my clients would sue me. Luckily, real estate developers are not marketing their high priced properties to me as it could lead to potential destruction of my life. Although my secret weapon is my ability to think somewhat rationally and weigh my current choices to future consequences.

The limiting factor with LeBron’s new shoe is that their target market does not have the ability to pay for something that is of high status value to them. Kanye’s lyric from “All Falls Down” comes to mind, “then I spent 400 bucks on this; just to be like n**ga you ain’t up on this.” The problem is that this scenario has additional negative externalities like increased crime and the inability for some to pay rent. It is true that people need to show more self control, but slow down before you ride off on your high horse. If there is one thing that behavioral economics has taught us over the previous 30 years is that we all make irrational decisions, especially with money (read Daniel Kahnamen, Dan Ariely, Robert Cialdini, etc.). The difference is that poor people are disproportionately punished for them due to a lower margin of error.

In part 2, I will discuss the role of personal responsibility, the need for corporate ethics, and the paradox of the poor.