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Ten Factors That Will Change The Face Of Sports Sponsorship

July 2, 2018

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Will the Rich Get Richer Under A-B's New Incentive Pricing for Sponsorships?

April 5, 2018

 

Anheuser-Busch is shaking up the sports sponsorship industry with a new pricing model that includes lower base deal prices coupled with incentives for performance on and off the field. The new model, which will be applied as deals are renewed, will add new impetus to the importance of defining and demonstrating value, both with respect to traditional sponsorship assets and newer digital and social media rights. As one of the world’s leading sponsors, A-B has the experience and data needed to quantify and price the value drivers important to its business and the leverage to impose those factors in price negotiations across its sponsorship portfolio.

 

It will be interesting to see whether and how A-B’s new approach plays out across the sponsorship industry as a whole. For now, here’s our assessment:

 

True incentive pricing is long-overdue. In an industry where the contracts for coaches and professional players have had significant performance incentives for years, paying for rights holder performance makes sense. Incentives can provide evidence that brands are paying for superior value, encourage rights holders to create new sponsorship assets and improve performance and valuation analytics.

 

Understanding net cost will be important. For incentive pricing to be something other than a windfall for rights holders, “average” base deal prices have to go down. Incentive pricing does not mean piling additional incentives on top of existing deal prices. It means lowering base deal prices on a basis that allows higher overall revenue if incentive targets are met. But how will “average” base deal prices be determined? Given the lack of published rights prices across multiple properties and sponsors, how much visibility will sponsors really have with respect to any changes in base deal prices? Will changes in base deal prices be considered at the asset level or at the contract level? To a large degree, the winners and losers in any move to incentive pricing will depend on the universe (e.g., a single property or sponsor or multiple properties or sponsors) over which the changes in base and incentive prices are calculated.

 

Not every property will earn incentives and not every sponsor will get incentive pricing. As the pigs who controlled the government in George Orwell’s Animal Farm understood, some animals are more equal than others. Not all properties will be able to earn incentives. This is where the rubber will hit the road for properties that are unlikely to hit any incentives but who compete for sponsorship dollars with those that can. Whether the underperforming properties can avoid reducing their base prices even though they have no chance at incentives will depend on the market economics of supply and demand. Their bargaining power will be better with smaller sponsors who may not be able to afford, or negotiate incentive pricing with, the properties who can achieve the incentive payouts. Properties and other rights holders may accept incentive pricing with major sponsors like A-B, but they are not likely to provide the associated base price reductions to smaller sponsors with less bargaining power.

 

Incentives not only require measurement, they require definition. If brands are going to pay for performance, they need to define what types and levels of performance are important to their business. Some incentives may be quantified. Others may be more subjective. But all must be measurable and relevant to the brand licensing the rights. Properties may be able to create an overall rate card of incentives, but it will be important for them to be able to create alternate incentive packages that best meet the business needs and priorities of specific sponsors.

 

Incentives will renew interest in the importance of sponsorship data and analytics. Even if a deal does not include incentive pricing, conversation about incentives will re-emphasize the importance of measuring and ranking contract and asset values and portfolio performance. For the surprising number of sponsors and agencies that have not fully embraced analytics to date, accelerated catch up will be required. 

 

Agencies that step up their game on data and analytics will enjoy increased consulting revenue. Many brands will need help in defining, measuring and pricing deal incentives, creating new consulting opportunities for marketing agencies. But many marketing agencies will need to advance their own skills to take advantage of these opportunities, particularly when it comes to helping clients determine what incentives best align with the client’s business needs and how incentive performance should be included with other assessment factors in improving overall portfolio performance and mix. This is where multi-factor analytics tools like Sponsor Locker can be helpful.

 

Incentives will help the rich get richer. If it makes sense for brands to pay more for good performance, it also makes sense for them to pay less (or nothing at all) for poor performance. The best performing teams will be paid more by the leading brands that have the financial firepower and analytics data to demand the incentive payments.  The leading brands with the firepower will lead the way in demanding incentive pricing from the properties that can best achieve the incentive benchmarks. The weaker performing teams will try to avoid the base price reductions associated with incentive pricing and will have a greater share of sponsors who do not have the firepower to play in the incentive pricing arena where the best properties play. Some might argue this will just confirm what happens today with less formality and less data: The best teams will attract the richest sponsors.

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