Push Towards Performance-Based Sponsorship Models Gaining Momentum
Nike will officially replace New Balance as Liverpool F.C.’s official kit supplier on August 1st (the Coronavirus outbreak and subsequent suspension of the 2019-2020 EPL season necessitated a delay of the original June 1st start date). The base value of ‘The Reds’ new multi-year pact ($39.5 million/year) is significantly less than the club currently rakes in ($52.6 million), but with an increase in royalties on the sale of licensed merchandise (rumored to be 20%) and cash bonuses tied to on-field performance it’s believed the sponsorship agreement could be worth upwards of $100 million annually. The Beaverton, OR based footwear and apparel brand is the latest company to adopt a performance-based partnership model in lieu of guaranteeing massive annual payments (see: Manchester United + Adidas). It's a trend gaining steam as part of a larger push towards transparency and accountability within the sponsorship arena.
Our Take: Adam Grossman (CEO, Block Six Analytics) said he considers Chevy's 2014 deal with Manchester United to be the official end of the previous sponsorship era. "The [automaker's] CMO was perceived to be fired only days after signing that deal because he could not explain how Chevy was going to gain value from being the team's primary kit sponsor - particularly at the price point they were paying. The company ended up exiting the European market entirely before the sponsorship was even activated.” That high-profile failure began to change the way sports sponsorship professionals think about team partnerships. It used to be assumed that because “Manchester United has a large, global platform, a [kit] deal must make sense for Chevy. Now, brands want to understand how value in the sponsorship is created and they want to hold teams accountable for how the sponsorship impacts their business."
Anheuser-Busch’s 2018 declaration that the company would be bringing a performance based model to sports sponsorships can be considered the beginning of the new ‘accountability’ era and brands have been following their lead ever since (see: the Nike/Liverpool deal referenced above, signed in January of 2020). The revamped approach is a significant development for brand partners because of the financial protection it offers in the event a team’s season goes south (and it does so without eliminating the financial upside). Granted, as Michael Neuman (EVP, Scout Sports & Entertainment) noted, "win percentage, television viewership and attendance figures are not the end all, be-all. The production of branded content and the ability of the team to understand the brand's objectives and create a wider approach to pushing out and socializing relevant content is just as if not more important."
Grossman says the sports hiatus and current economic recession have accelerated the trend towards metrics and data-driven sponsorships (all custom to the brand's KPI and ROI goals). With budgets tightening across the industry, the pressure on sponsorship professionals to explain “the value in what they’re paying for and how they’re going to determine if their efforts were a success” are greater than ever. Coronavirus has supercharged the shift towards performance based deals. Sponsorship agreements - particularly in a down economy - need to include accountability for the money spent. Neuman reminds that "the silver-lining from the 18 months that trailed the Financial and Housing Crisis in 2008/2009 was that it created a greater emphasis on measurement and accountability. Very few banks and financial institutions brought in front of Congress to explain why TARP money was going towards sponsorship of golf and tennis could demonstrate any resemblance of ROI - when all said it would drive their business and help them balance their ledgers. Our industry had a black eye and what came out of those difficult weeks was a heightened awareness and commitment to a better suite of measurement mousetraps."
The current pause in the sports schedule has given “companies that spend tens of millions - in some cases hundreds of millions of dollars/year on sponsorships - a chance to truly understand the value of these assets and rebalance their portfolios.” As a result, Grossman said that sports sponsors are actively working to both substitute assets and renegotiate terms within their current agreements. Of course, savvy sponsorship pros are also looking to ink new partnerships at depressed price points. With teams hurting for revenues (think: no/limited gate) teams may be willing to accept heavily incentivized/brand-friendly deals.
On-field performance is a sensible metric to include in sponsorship pacts (even if it's just one of many data points) because winning and losing is transparent (i.e. everyone can see where a team sits in the standings). Success on the field is also “typically tied to engagement and engagement can lead to opportunities for the brand to drive performance metrics.” Grossman used Anheuser Busch as an example saying the company “has historically seen an increase in beer sales when their team partners were winning” (hence why they began tying wins and losses into their sponsorship agreements to begin with).
While pro sports organizations have traditionally been weary of tying sponsorship revenues to on-field performance, Grossman says there is an increasing desire by teams “to show their partners that the broadcast content and in-stadium activations they’re paying for are in fact creating value." The thought is if they can demonstrate to brand partners that they're "helping to generate and maximize a company specific ROI, they can convince the company that sponsorships should be treated as an essential spend." Of course, one could make that argument anyway. COVID has proven just how important sponsorship dollars and consumer revenue are to the industry.
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