How Nike Uses Customization to Build Long-Term Revenue

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

In this Industry Focus: Consumer segment, Motley Fool analyst Vincent Shen and contributor Asit Sharma delve into Nike's (NKE -0.28%) online sneaker customization store and discuss how this fits in with the apparel giant's revenue strategies.

A full transcript follows the video.

This podcast was recorded on Oct. 4, 2016. 

Vincent Shen: Our first example, Asit, is Nike and what they're most famous for, and what most dominates in terms of their revenue and their profitability, 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 you go online and customize your own footwear. This sells at a 30% to 50% premium over what you might buy in a store. It takes three to four weeks to deliver. There are a couple things that really benefit Nike here. Obviously, there's incremental profits in it for the company, which I just mentioned. If you take the difference between buying a preferred sneaker online at 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. 

But there's also customer education in this for Nike. If you 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 learn as you construct your shoe exactly what a "heathered engineered mesh upper" is. I had no idea what that was when I started this. You can see that Nike wants to put you in the shoes of a sneaker designer and make you see their products from their perspective. That forms this bond between 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 the LunarEpic Flyknit Low sneaker through NIKEiD. Just to give listeners an idea of what optionality you 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 be very selective in terms of exactly the colors and the combinations, playing around with that, it might take you a little longer. But, all in all, a very simple process. This includes customizing 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 placed on 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 was a really nice touch. As Asit mentioned, it's about $200 all-in for the sneaker with 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. 

We weren't able to find as much information, but to give you an idea of how, with Nike, in terms of their manufacturing process to produce these NIKEiD offerings -- but also, in previous episodes, we've talked about Under Armour and the various innovation efforts they're trying to push on the manufacturing side -- but, how the company is able to deliver these customized 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 that instant 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 wait actually builds anticipation, as long as it's not too long. There's a really apparent dynamic going on here in that Nike is building loyalty for its brand. We look at that single purchase as this incremental margin 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 like New Balance and Adidas, that's extremely valuable to them, to make you a lifetime customer.

Shen: That's an awesome point, the idea that instead of fighting for those spending shopper dollars each trip to the store, win them over through the experience, build that loyalty through something like NIKEiD, and keep them coming back, and then you don't even have to worry in the future nearly as much about the competition, be it Adidas, New Balance, or Under Armour.