What Sponsors Need to Know at the Negotiating Table

How do you know if you have succeeded in a negotiation?

Whatever way you look at it, it is impossible to answer this question without understanding value and what you are willing to pay. Imagine Facebook sitting at the negotiating table with WhatsApp with nothing but gut instinct saying they want to pay $19.4bn. What if WhatsApp wanted $20bn, $25bn, or $30bn? Clearly, Facebook will have done their research (strictly speaking, an investment bank will have done their research for them in the form of thousands of pages of analysis). But can we honestly say that the sponsorship industry takes the same approach?

Before entering any negotiation, sponsors should know their:

• target price and terms (what you’re hoping for)
• walkaway price and terms (what you will reject)

Often sponsors go into negotiations with one or the other. Often these conditions are based on a gut feeling; not an understanding of sponsorship effectiveness and expected value.

So how do we know when to walk and what to target? It’s critical to do early research based on firm inputs and assumptions, especially to ensure you don’t overpay for the asset in question. By knowing your own range, better sponsorship decisions will be made.

However, the impact of understanding value doesn’t stop there. Even if a sponsorship represents good value – that is to say the deal price on offer is below the walkaway price – there might be better alternatives. A sponsor should generally not accept a worse resolution than it’s best alternative. So, if you want to be sure you’ve succeeded in a negotiation, you need to understand the value of the rights on the table and what else your money can buy.

The current “here’s the package; here’s the price; and then we arm-wrestle a bit based on gut instinct” approach to sponsorship negotiation has to change. That does not mean every deal must be preceded by thousands of pages of analysis, but it does mean brands must spend more time thinking about value, and what they will pay before walking away.

adidas & Manchester United: Will It Be Worth It?

Since Manchester United confirmed the record-breaking £750m adidas kit deal in July, are we really any clearer on whether the 10 year deal is good value for the German sportswear giant?

On the face of it, the wave of commentary post-announcement has given sports fans across the world a comprehensive account of the costs and benefits. If we believe the benefits outweigh the costs – as adidas and many fans do – then the deal would represent value for money. The key considerations look something like this:

• Costs: £750m rights fee over 10 years, products supplied and outfit of all the club’s teams
• Benefits: increased brand awareness, enhanced favourability vs. Nike, direct revenue from shirts and dual branded merchandise

However, something is missing.

Do we know the £ value adidas expect from increased awareness? Do we know the £ value adidas expect from increased shirts sales? Do we know the £ value adidas expect to return to shareholders? Nike decided against extending the contract (2013 value £38m), claiming the terms “did not represent good value for Nike’s shareholders“, so if we really want to understand adidas’ record-breaking deal we need to understand how it’ll make them money. Put another way, we need to understand the pathways through which adidas will generate value and what they are worth.

Pathway #1: Brand awareness

adidas chief executive Herbert Hainer is right when he says “[the deal] will help us to further strengthen our position in key markets around the world“. Manchester United is one of the most popular teams in the world with a claimed global community of 659m followers, and is increasingly prominent in the Far East and US.

So what is this worth?

Outside in, we cannot demonstrate Synergy’s tailored approach to measurement. What we can do, is apply some logic against a hypothetical scenario. So, if we imagine that 2% of United followers are unaware of the adidas brand, adidas is reaching over 13m more people because of the sponsorship. If we assume 20% of those are open to buying United / adidas branded merchandise and that 20% of those actually do, then adidas have 520,000 new customers (13.2m x 20% x 20%). If we assume each of them generates £50 profit for adidas per year, the total 10-year value created is £260m.

Pathway #2: Brand Favourability

Among those already aware of the adidas brand, the deal increases relative conversion rates down the sales funnel. Put another way, some of the 659m United followers will move away from Nike towards their new team sponsor, especially if Manchester United can turn followers into addressable individuals for their sponsors. Doing so would add further weight to the not unrealistic assumption that, given the size of the Manchester United fan base, the deal will give adidas a significant competitive over Nike.

So what is this worth?

As before, with a few inputs and assumptions we can estimate Pathway £ value. From the outside in it’s tough to determine – so we’ll leave this as a thought exercise for now – but some simple logic can go a long way.

Pathway #3: Direct revenue

As part of the agreement, adidas will supply product to Manchester United and outfit all of the club’s teams. In addition, adidas will have the exclusive right to distribute dual-branded merchandising products worldwide.

So what is this worth?

If we take Mr Hainer’s estimates as accurate, we expect “total sales to reach £1.5bn during the duration of our partnership”. Remember, however, that revenue is not the same as value. The value each of the c.1.5m annual shirt sales from 2009/10 – 2013/14, for example, has a profit margin. The higher that margin the more valuable the “direct revenue” pathway to adidas.

Only when we consider the £ value created by all pathways can we truly know whether adidas’ £750m expense will create value for shareholders. Sports fans don’t need a rigorous cost-benefit analysis to debate deal value – most will understand the dent in adidas’ wallet comes with huge potential upside. But for brands and rightsholders worldwide, understanding of £ value created across Pathways to Value should be a pre-requisite to any sponsorship deal.

Only with time and effective measurement will we know whether adidas have created value for their shareholders.