Frager Factor

Thursday, September 13, 2018

$5 Billion Reasons Why NIKE Stock Will Double In 12 Months (Hint: It's Not Kaepernick)

While participating in many of the social media debates about the Nike strategy, I realized that domainers are still stuck on CPC economics and really miss the point of a direct-to-digital model. For this post I will reprint a post from 2012 about Lifetime Customer Value.  Here's the story.

The pressure is on for Nike to really listen to consumers about what they want—and deliver it.

It's not about the controversy. It's about new strategy. Retail is dying. 

Sports Authority, for example closed all of its stores. Other stores like Macy's have become a bargain hunters basement. Big brands no longer can stake their futures on third parties. 

The face of America is changing. Minorities are soon to comprise the majority of the population. The majority of Nike’s 73,000 employees are minorities, with 38% African Americans. They are one of the key audiences this campaign speaks to and it will instill pride and motivate 140 million social media ambassadors to drive sales in their communities. Nike also recognizes that with 43% of the 75 million Millennials in the U.S. identifying as African American, Hispanic or Asian, if a brand doesn’t have a multicultural strategy, it doesn’t have a growth strategy.

So Nike's have built a platform and app to sell direct to urban cultural markets. Like Amazon Prime, it's a members-only subscription club. They already have 140 million subscribers and are on the way to 300 million. With it they will eliminate 70% of the product catalog, and most retail partnerships. 

That’s why I am intrigued by Nike's plan to focus on 12 Key Cities in its Consumer Direct Offense:  New York, London, Shanghai, Beijing, Los Angeles, Tokyo, Paris, Berlin, Mexico City, Barcelona, Seoul, and Milan.These are the places the company predicts will generate over 80% of Nike’s projected growth through 2020. Why? Because the company is tapping the biggest, baddest, but old-fashioned data of all: Consumer Demographics to leverage what's arguably become its most profitable asset: African-American cool. 

It’s a good business decision that will drive record sales. Because those sales are coming millennials. And the investors will follow.


The Bottom Line

It costs Nike an average of $28.50 to make a sneaker that will retail for $100. That sneaker will be sold to wholesalers at $50, meaning Nike will get back $21.50 (the profit on this comes to $4.50 after SG&A and taxes). This cut for Nike will of course increase in their direct-to-customer channels of retail.

SG&A includes all non-production expenses incurred by a company in any given period. This includes expenses such as rent, advertising, marketing, technology, accounting, litigation, travel, meals, management salaries, bonuses, and more. On occasion, it may also include depreciation expense, depending on what it’s related to.

Selling direct from the app increases the profit 3x on the same sale with Nike pocketing the distributor's share. If half of their current subscribers bought just one shoe, that's a $$ FIVE BILLION bump in profit.

But subscribers buy more. 3x more than shoppers at retail brick and mortar. So what I see is a company using a good marketing strategy that also empowers a generation of athletes and young people to stand up for what they believe in and the changes they want to see in the world:. And as the information below explains, the lifetime value of these customers, the big data advantage, is why you can look at any direct to consumer digital business and see they are the ones with the $2000 share values. I expect Nike to rapidly join them.

'Measuring Visitor conversion rates (Visit based conversion rates promote bad marketing behavior) is akin to declaring success after a one night stand."

One of the most important papers on web business valuations, a way to look at a business that is overlooked by traditional metrics and as result by analysts, in particularly Apple's case, is lifetime customer value.

The expert of this subject is Avinash Kaushik, "Director of Research & Analytics at Intuit, Web Analytics Practitioner, The Digital Marketing Evangelist for Google, author of two books and a VERY Nice guy."

In an April 2010 blog posts titled, "Excellent Analytics Tip #17: Calculate Customer Lifetime Value," Avinash claims that traditional metrics fail because they focus on short term success.

Says Avinash, "Even measuring Visitor conversion rates (Visit based conversion rates promote bad marketing behavior) is akin to declaring success after a one night stand."

Some of your customers are going to be spending more with you, for longer.

Let's say I am a car insurance company, or a subscription publisher, with a desire to sort out some of tomorrow's problems today.
I know that the initial cost of acquiring customers (or policies/subscriptions) will only go up as more of my competitors sail for the calm waters of "cost per acquisition" pricing.
So, if I need to sell 10,000 policies every year I have 2 options.
Buy cheap customers and hope that a few may buy again
Buy the right customers that stay with me for 2 or even 3 years
Without doing the value-based segmentation we'll never understand which channels bring in the best customers and that would be a terrible shame.
The ground truth is that I can re-new a policy or subscription for considerably less than buying a new one. How?
One strategy might be to spend an extravagant $1.00 of marketing costs to show my love an appreciation to our customers throughout the year via email or social media, increasing the chances they'll buy again.
That means I won't have to spend $20.00 buying a new one… a saving of $19.00 per renewal.
So if I can grow my repeat purchase rate from 20% to 40% that means I will generate 2,000 policies at $1.00, not $20.00.
That's a $19.00 savings on each of the 2,000 policies. BAM!!
Moving to a Life Time Value acquisition strategy will save my company $38,000. Not bad for a couple of days work.
Let's finish off the concepts of value based segmentation and lifetime value by going back to the original example we were working through.
If we can identify channels, campaigns, media or propositions that deliver "better than average" customers we can begin to see how much more profitable they are and decide how much more we should be spending on them.
Read on for an (sample) analysis I (or you!) should do:

About The Author: Owen Frager is an Internet marketing expert ready to help take your company to the next level.

Contact Owen: Twitter | Google+ | Facebook | LinkedIn | Email