Reference no: EM131303962

How New Balance Runs Its Pricing Strategy

When marketers at New Balance race to develop a new product, they have a particular price in mind from the start. New Balance makes high-quality, highperformance athletic shoes. The brand is, as company ads proclaim, "endorsed by no one," yet the century-old company regularly racks up $1.5 billion in annual worldwide sales and currently trails only Nike and Reebok in the U.S. market. Major competitors keep labor costs down by manufacturing their shoes outside the United States, mainly in the Far East. In contrast, New Balance produces 25 percent of its shoes in five company-owned New England factories: one in Boston, one in Lawrence, Massachusetts, and three in Maine. How can New Balance remain competitive while balancing "made in America" and "the price is right"?

New Balance marketers strive to satisfy customers in a variety of segments by designing, making, and marketing shoes that fit properly, perform properly, and look good. They begin by studying customer needs in a specific category-for instance, running- and ask questions such as: For what type of runner will the shoe be designed? How many miles is that person likely to run every day or week? What is the runner's body makeup? Although costs and prices are not the key factors in marketing athletic shoes, they are very important. In the first stage of development, New Balance hires an outside firm to prepare a marketing brief.

This gives marketers detailed information about the target customer, outlines the special features that the shoe should have, and identifies the target price that will yield adequate profits. Members of New Balance's design, development, and marketing teams consider costs an integral part of the marketing strategy. They look at material costs, labor costs, and overhead costs, as well as any special treatments the shoe design may include, such as specially molded pieces, labels, or embroidery.

As product development progresses, the teams create a rough cost estimate that will be a major factor in the retail price. Material costs are a key factor in any athletic shoe product. Upscale high-performance shoes may contain more expensive materials and technology and thus sell for higher prices. Lower-end products may employ less technology and use different materials that perform at a different level. By varying both materials and technology, New Balance can offer a variety of products at different price points for various segments in each sports category, such as running shoes or basketball sneakers.

Still, most New Balance shoes are priced at $60 and above, reinforcing the brand's high-performance positioning. Competitors' prices are also an important part of New Balance's pricing strategy. When New Balance is developing an $80 cushioning shoe, for example, its marketers examine $80 cushioning shoes from competitors, comparing features as well as appearance and color. They often purchase competing shoes to see what else is on the market and how New Balance products match up to the competition. After designing a new shoe, New Balance will either make a prototype in New England or, if the shoe is to be manufactured abroad, have one of the overseas factories make a prototype.

This part of the process gives marketers a more realistic picture of material costs, labor costs, and the costs of any extras needed in actually making the product. Then New Balance makes final adjustments to materials, manufacturing, and design in line with the new product's expected price and costs. New Balance's decision to maintain production facilities in the United States is proving to be a smart competitive move for two reasons.

First, the company has modernized and reorganized its U.S. factories to cut the production cycle from eight days to just eight hours. This means that it can get by with much less inventory. More important, it can start production immediately when retailers order merchandise. Second, New Balance has the manufacturing flexibility to fill special orders for unusual sizes and widths quickly, which strengthens its relationships with retail partners. Other pressures also affect the way New Balance runs its pricing strategy.

Retailers continue to use bargain prices to attract shoppers, a trend that is pushing down the average price of athletic shoes at the cash register. In addition, New Balance must consider how fluctuations in the value of the U.S. dollar against the value of foreign currencies affect its costs and export pricing. Every day brings new challenges and opportunities for New Balance to refine its pricing strategy even more.

Questions for Discussion
1. What pricing objectives does New Balance seem to employ?

2. What type of pricing strategy is New Balance using?

3. What other pricing tools does New Balance employ?