Jon Kander, Valuation Analyst at IEG, and I decided to have a little back and forth discussion of the idea of integrating guarantees and team performance into sponsorships and sports business in general. Jon’s comments are in black and mine are in blue. Hope you enjoy our conversation!
Jon: I really enjoyed your latest blog post on guarantees in sports, especially the part where you made the distinction between “guarantees as a sales/marketing tactic” and “guarantees as a result of passion/emotion.” Emotional guarantees by players and fans have been around since people began playing and watching sports. However, sales-based guarantees appear to be a recent trend. While both can have a drastic impact on a team and its fan base, I was hoping we could delve further into the sales-based category. Is this purely a result of the economic downturn, an ever-increasing amount of available entertainment options, or something entirely different?
Also, the examples you brought up in your blog post were ticket sales-based. What are your thoughts on variable compensation as it relates to sponsorship fees? Are their instances where you would recommend incorporating a pay-for-performance model?
Russell: Thanks Jonathan. I don’t think the idea of using guarantees can be entirely attributed to the economic downturn, although there’s probably some relationship. From the ticket sales perspective, the guarantee is designed to overcome two objectives: the risk of team failure, since fans are less willing to financially support a losing team, and the financial reassurance, to try and make customers feel more comfortable with the value of their purchase. Even without the economic downturn, if a fan becomes too frustrated with the team’s on-field performance, they will still walk away, and if the team doesn’t live up to the “guarantee,” they risk potentially reinforcing the fan’s choice.
Connecting guarantees to sponsorships can have similar issues. Hopefully, the team sells the sponsor on the long-term relationship with the brand, and that brand needs to have value even if the team isn’t winning. There’s no question that winning always helps, but the more you tie a significant revenue source, such as season tickets or sponsorships, to the on-field performance, the more you risk potentially devaluing your brand. This is not to say there’s no place for pay-for-performance, but I believe it needs to be selectively and strategically applied. For example, I like the idea of escalator clauses with additional sponsor benefits when the team is performing well. Another option would be to offer additional “complimentary” benefits if a team under-performs – in this situation, you aren’t decreasing your revenue potential, but still try to compensate the sponsor with additional value to ensure they get the results they’re hoping for.
Finally, as a last resort, I think you can consider using a pay-for-performance style deal for a new customer or even a renewal if they absolutely insist and you believe there is no other option that can close the deal. However, when you open this door to one sponsor, others will find out and want the same type of opportunity, and I don’t think that’s a road you want to head down. Jonathan – what pay-for-performance structure do you feel can help mitigate the team risk but still drive sponsor value? Also, from the sponsor perspective, what are the biggest reasons why they would benefit from that approach? Are there reasons why that model could actually hurt the sponsor?
Jon: Great question. I would endorse a variable compensation model tied to delivery of benefits and a property ensuring its sponsors are achieving their ROO and ROI benchmarks. This can include establishing minimum performance milestones around attendance and an out clause if a property is not meeting expectations. Negotiating this type of sponsorship model would be a completely justifiable and prudent move on the part of the sponsor. Ideally, this would ensure that properties would work with its sponsors to better meet their objectives as well as force sponsors to think through what they are hoping to accomplish with a sponsorship investment on the front end of a negotiation/partnership.
On the other hand, I do not believe sponsorship fees should be tied to on-field performance. First, on-field success is no guarantee of fan loyalty – look at the Cleveland Browns vs. the Tampa Bay Rays. The former has one of the most loyal fan bases in country (coming from a biased Ohio boy) and the latter had to give away 20,000 tickets late in the season for a team in a pennant race. Second, I worry that this model enters the territory of sponsors unduly influencing a property’s decision-making. This has happened in college athletics by alumni promising large donations if the school fires its athletic director or coach. I wouldn’t want team execs firing or hiring a coach based on the potential loss of sponsorship revenue.
A sponsor could also be hurt by this type of model. If a sponsor requires a refund because it is unhappy with the on-field product, the organization could come across as disloyal and/or a fair-weather fan. That reputation would make it very difficult for the company to market itself to a team’s die-hard fans who have stuck by their favorite team through thick & thin. Their fan loyalty is unlikely to extend to the sponsor in this instance.
Despite my concerns detailed above, sponsorship fees linked to on-field performance appear to be more commonplace than in years past. Within the past month the French National soccer team paid a significant refund to many of its sponsors after its dismal World Cup performance. A few days later, England’s soccer governing body said that it believe it needs to link payouts more directly to performance if it hopes to secure new major partners for the national team. I also was in attendance at a conference where Bank of America’s former corporate sponsorship manager, Ray Bednar, argued that winning teams should get paid more in sponsorship than losing franchises. Do you think this is the next sponsorship trend? What impact do you see guaranteed on-field performance having on the both the sponsorship industry as well as the sports business landscape as a whole?
Russell: You brought up some great examples. I completely agree that winning does not guarantee fan loyalty, which for a sponsor is probably the biggest factor to identify in a property they should connect with. And in the right (or wrong) situation, I can see your analogy between athletic donors and performance-related sponsors becoming reality – you cannot put your organization in a position where business relationships can have undue influences on your on-field decision making.
There does seems to be a small trend developing, but I don’t see it becoming common practice because of the various risks we’ve discussed. Let’s take the French national team example. There was nothing specifically designed into their sponsor deals that I’m aware of. However, the team didn’t just under-perform – in many eyes, they embarrassed themselves and their country with how they handled the conflict between the players and their coach, leading to their quick World Cup exit. I imagine that the national team was at risk of losing several sponsors because of this. So as a proactive measure, they decided to refund several sponsors. To me, this was a relationship-saving decision more than a direct tie to performance. The goodwill generated by the refund can hopefully ensure their continued support of the national team in future years – you can almost think of it as a renewal discount more than a refund if things work out well.
In principle, I agree with Bednar’s statement that winning teams should get paid more. But even without direct pay-for-performance style contracts, isn’t this already happening? Winning teams almost always have the ability to generate more revenue than losing teams (additional short-term deals during a good season, better chance for long-term renewals, escalator clauses, maximizing all inventory, etc). And if they make the most of the good times, that can help carry them if team performance swings the other way. If organizations take the next step and directly integrate on-field performance guarantees into their sponsorships, I feel like all they’ll be doing is leaving revenue on the table during the downtimes. So I guess my position is that guarantees are still a bit to “gimicky” to be a significant aspect of sponsorships and sports business in general. Sponsorship, season tickets, premium sales and most significant revenue streams are ultimately based on long-term relationships, affinity and brand value. Guarantees shift the focus from the long-term relationship to the short-term transaction, and I think that’s bad for business.