Sports Sponsorships: Not a slam-dunk anymore
Spending on sports sponsorships has been rising dramatically in the past decade. Still, most advertisers are surprisingly unsophisticated when it comes to their approach to sponsorship strategy, spending decisions and activation. At the same time, significant changes in the media landscape, rights holders’ revenue models, and fan behaviour can cause the return on sponsorship investments to drop. In this article, we describe how brand owners that make an effort to improve their approach to sponsorships can benefit from new opportunities to engage with consumers and enhance their return on sponsorship investments.
Back in the day when Messi and Ronaldo made their debuts and when the Cleveland Cavaliers drafted LeBron James, the sponsorship game was still a simple one. Advertisers paid rights holders to associate themselves with sports properties that guaranteed high reach (i.e. through boarding, break bumpers etc.). Combined with memorable advertising, this created a very effective marketing platform. An example of this kind of memorable advertising is the 2014 World Cup campaign by Beats ‘The game before the game’. This campaign made the Beats brand go mainstream by positioning it as a fashion icon.
However, most of the time, sponsorships made up a relatively small part of the total advertising and marketing spend of advertisers. For the rights-holders as well, sponsorships were a small part of their earnings compared to broadcasting rights. As a consequence, sponsorship capabilities were largely underdeveloped, deals were struck largely informally, behind closed doors, and managed to escape the scrutiny applied to other parts of the marketing spend.
However, in recent years, prices for sponsorship properties have been rising and will continue to do so considerably. Premier League shirt sponsoring increased in value for the tenth year in a row, the NBA’s sponsorship earnings rose to 1.12 billion US dollars (2017-2018) and the NFL rose to 1.32 billion US dollars (2017-2018).
Source: Statista, Strategy & analysis. EUR and GBP converted to USD at fixed current rates. *EURO 2015 sponsorship revenues excluded from 2014/15 figures
The high demand for, and scarce supply of, premium sports properties with global reach has put the rights-holders in a quite advantageous position towards advertisers. However, as prices go up and sponsorships start to make up a larger proportion of advertiser spending, questions about the return on these investments start to become more urgent.
With pay-TV conquering the sports domain, the balance between broadcasters, rights holders and advertisers has distorted. Where eyeballs used to drive these three and incentives where aligned, broadcasters and rights holders are now driven by monetisation which conflicts with the interest of advertisers who are driven by reach. As pay-TV expands its portfolio to more sports every year, viewers move away from broadcast television and find new avenues to consume sports, leaving advertisers with decreasing brand exposure.
Another driving force of decreasing sponsorship value is new viewership behaviour taking hold. As smartphones and tablets have become an integral part of our lifestyle, they are in direct competition with the television screen. Second screening and ‘snacking’ means that the exposure sponsors expected in the linear world is not guaranteed anymore, even among viewers of the sport.
All these developments mean that the value of today’s sports rights packages is in decline. This combined with the increasing costs of sponsorships leads to quite a unique challenge for advertisers.
2015 Indexed TV Sports viewership data
The lesson in this is that sticking to traditional sponsorship rules of engagement means that advertisers are leaving money on the table. With three simple but bold moves, advertisers can get back in the game and build a valuable sports sponsorship portfolio for the future:
- Action 1 – Rationalise sponsorship budget
- Action 2 - Define performance metrics and negotiation strategy
- Action 3 - Go where the action is
Action 1 – Rationalise sponsorship budget
It is key for advertisers to rationalise their sponsorship portfolio. Advertisers need to assess if they are active in the right domains (sports, music events, series etc.) and if their properties continue to have strong overlap with their target audience and have the right brand association. This requires advertisers to be critical towards their portfolio and to stay on top of emerging sponsorship opportunities, such as e-sports.
Action 2 - Define performance metrics and negotiation strategy
Most advertisers do not really know what the right price for a sponsorship deal should be, nor do they have a negotiation strategy. A performance metric can help align the internal organisation and rationalize spending decisions. It can also help in negotiations with rights holders. Given the complex dynamics and lack of transparency (e.g. strong price fluctuations, no visibility into competitive moves) around sponsorship deals, a negotiation strategy is key to get to a favourable deal and to sustain positive ROI. A negotiation strategy includes a price estimate (valuation of sponsorship property), preferred rights package (e.g. include more digital rights) and an alternative strategy. The alternative strategy sets your ‘walk away point’, i.e. the cost at which you are better off implementing the alternative strategy.
To mitigate risk of overpaying, some advertisers are jointly setting targets with the rights holders, creating incentive-based contracts. This move, which is regarded as quite revolutionary within the industry, is quite common in other parts of the A&M spend of advertisers. AB Inbev is rolling out an incentive-based model and already has four partners on board under this new format: the New Orleans Saints, the Los Angeles Dodgers, the Minnesota Timberwolves and NASCAR. An incentive-based contract is a way to align the incentives of advertisers with rights-holders and broadcasters, and is a way to maintain a positive ROI.
Action 3 - Go where the action is
Most advertisers do not really know what the right price for a sponsorship deal should be, nor do they have a negotiation strategy. A performance metric can help align the internal organisation and rationalize spending decisions. It can also help in negotiations with rights holders. Given the complex dynamics and lack of transparency (e.g. strong price fluctuations, no visibility into competitive moves) around sponsorship deals, a negotiation strategy is key to get to a favourable deal and to sustain positive ROI. A negotiation strategy includes a price estimate (valuation of sponsorship property), preferred rights package (e.g. include more digital rights) and an alternative strategy. The alternative strategy sets your ‘walk away point’, i.e. the cost at which you are better off implementing the alternative strategy.
To mitigate risk of overpaying, some advertisers are jointly setting targets with the rights holders, creating incentive-based contracts. This move, which is regarded as quite revolutionary within the industry, is quite common in other parts of the A&M spend of advertisers. AB Inbev is rolling out an incentive-based model and already has four partners on board under this new format: the New Orleans Saints, the Los Angeles Dodgers, the Minnesota Timberwolves and NASCAR. An incentive-based contract is a way to align the incentives of advertisers with rights-holders and broadcasters, and is a way to maintain a positive ROI.
In conclusion, advertisers need to take a bolder approach and redefine their sponsorship strategy
As Lionel, Cristiano and LeBron are in the autumn of their careers, their teams need to prepare for a new future. Similarly, advertisers need to evolve and take a bolder approach. Advertisers who know their objectives, know when to close and walk away, and know how to go where the action is can take a bolder stance in their sponsorship strategy. This will allow advertisers to build a portfolio and sustain an optimal return on sponsorship investments.
The main principle of this ‘zero-based’ approach is that sponsorship spending needs to be justified on a yearly basis. With this approach, advertisers can continue to ensure that sponsorships contribute to the overall objectives, that they get a fair price, and that they are able to activate in the optimum way. Although this approach has an optimisation focus, this allows for more flexibility to up the investment and take advantage of emerging opportunities.
It also helps to limit sentimental / emotional decision-making, which is all too common in this domain. This approach, however, requires a change management effort, which includes a change in mindset from what advertisers are willing to pay, to what they need to pay. This also requires an open mind and a field of vision that goes beyond scarce flagship properties. This ‘zero-based’ sponsorship approach will allow advertisers to remain in the driver’s seat and not become spectators of their own sponsorship game.
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