Two from the Vault and Time Off

On a quick personal note, I just got married over the past weekend, which was the most incredible day of my life! With everything going on, I do not have time to blog this week, so here are two of posts “from the vault” that I really liked and wanted to share with you all again. Thanks, and I’ll see you all next week.

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BASIC ECONOMICS IN SPORTS TODAY (originally published on 11/17/2008)

I was thinking more about the economy of sports, so I decided to write about some of the basic concepts and apply them to the current situation. I know I am oversimplifying some of this, but I think its an interesting exercise nonetheless.

Law of Demand: As price increases, demand decreases.

• Result: Ticket prices have increased significantly over the past decade. This increase had been consistent with and driven by the demand, as seen in the high degree of sellouts across the major sports. However, price increases over the last two years have been met with a drop in attendance, meaning that sports has passed the equilibrium point.

Law of Supply: As price increases, supply increases.

• Result: Over the past decade, the actual number of sports and sporting events have increased along with prices (the only ways to increase supply are expand stadiums or host more events). This increase included extreme sports (X Games), niche sports (PBR), and international exhibitions (Olympic sports & soccer). Now with the drop in demand and ticket prices, we are seeing signs of the supply dropping (e.g. my previous post mentioned the cancellation of the Tour of Georgia).

Price Elasticity of Demand: Demand is “inelastic” when the quantity demanded decreases slowly relative to a price increase. Demand is “elastic” when the quantity demanded decreases faster relative to a price increase.

• Result: We have seen price elasticity in sports shift from fairly inelastic to more elastic over the past two years. There are several things that impact this shift, including substitute products (more sports and entertainment alternatives mean people will choose other options when prices increase), % of income (as ticket prices equate to a larger % of income, people become more resistant to price increases), and necessity (tickets are not a need while other needs have also increased in price, thus there is higher resistance to ticket price increases).

Again, I’m just looking at some very basic concepts, without considering the multitude of other important factors. While there are a lot of “negative” news items related to the economy, it really is not surprising when you drill down to the basics. Sports has overshot its economic equilibrium. Adjustments will have to be made across all of the different sports, starting with a basic reduction in price, supply, or both, until we get back to a more stable equilibrium.

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THE REAL ROI (originally published on 9/11/2008)

So your company just paid $1 million to become a sponsor of Team X for the calendar year. At the end of the year, you tally up the value of all the exposure you got from being a sponsor. The guaranteed television advertising, the press releases and news coverage, the radio spots, the website impressions, the signage viewers, etc. At the end of all your adding, you find out that you got $3 million worth of exposure for your $1 million sponsorship. Wow, that’s a 3 to 1 return on your investment, otherwise known as ROI.

Well, actually it isn’t. What you just calculated is the media value of your sponsorship. All this is telling you is that you got a great value on your purchase. You essentially saved 67% off the regular price – not bad at all. This value is easily confused with and mislabeled as ROI. The question is, how can you determine what your ROI actually is?

Without going into all the details, your ROI is your actual bottom-line, dollar return divided by your costs. So lets say that you can accurately determine that, because of your $1 million sponsorship, your sales increased by $5 million, compared to the previous year when you were not a sponsor. Does that mean your ROI is actually 5 to 1? No, but we’re getting closer. Your sales increased by $5 million – a substantial increase. But your profit margin is only 50%. The results is that your ACTUAL return on your investment is $2.5 million – an ROI of 2.5 to 1.

So what does all of this mean? Here are the key takeaways:

1. Do not be fooled by measurement labeled as ROI that are not ROI. ROI comes down to bottom-line impact on profits (not sales, profits!)
2. Calculating ROI can be difficult. You need to put systems in place that will accurately measure what profits can be directly attributed to a sponsorship. This is a challenge, but its not impossible.
3. With corporate budgets tightening every day, companies need to really focus on metrics like ROI. If your team or agency can help get to those numbers and demonstrate a real return on a company’s investment, you will keep them as a partner and a client.