SBJ/May 28 - June 3, 2001/Opinion

3-to-1 leverage a myth; smart sponsors buy equity instead

“Sponsors need to invest wisely, and leveraging less than 3-to-1 is just asking for failure," preached Billie Jean King to corporate sponsors in The Final Word in the April 30 SportsBusiness Journal. "Back in the early 1970s, Virginia Slims' sponsorship of women's tennis exceeded the 3-to-1 ratio," she went on, and "it worked for them." King's article suggested that corporate sponsors are rightfully allocating their sponsor dollars to properties that offer a high degree of interaction with fans, but they are not properly activating those sponsorships with support spending.

Although it is true that marketers must do more than passively sponsor a property, it is not as simple as following a 3-to-1 leveraged spend formula.

Simply put, there is no necessary correlation between a 3-to-1 activation spending ratio and successful sponsorship programs. Corporate sponsorship spending should be determined by the dynamics of the sponsored property and its relationship to the marketer's product category.

In other words, proper activation spending will vary by sponsorship opportunity and industry sector.

Most companies enter into sponsorship in the first place to increase brand loyalty. To achieve this goal, sponsors must be perceived by a property's fan base as having materially contributed to their enjoyment of the event. When this is achieved, a sponsor is said to have developed equity with those fans.

Developing sponsor equity takes both time and money. The proper sponsor spend on any property is the net present value of all cash and in-kind outlays, including rights fees, that it takes to develop your equity position.

Activation spending, therefore, impacts the length of time it takes to achieve equity, not the amount spent reaching that goal. For example, we estimate the proper investment for a telecom to achieve a measurable piece of fan equity through a sponsorship of the NFL at a net present value of around $350 million (perhaps this is why the league was unable to sell that category on a national level and gave those rights back to the teams). Assuming an internal rate of return on capital of 10 percent, that could be a spend of $57 million a year over 10 years (an activation spend of approximately 1:1) or a $93 million a year spend over five years (an activation spend of approximately 2:1).

Contrast that with our estimate of only $40 million for an isotonic beverage to develop the same NFL affiliation (not accounting for having to displace Gatorade's existing equity in that sport), and it is clear that a 3-to-1 activation spending ratio is too simplistic an approach.

A number of variables impact the process of influencing fan perceptions. Two of the most important variables are the importance of corporate sponsorship to the very existence of the event and the ability of the sponsor's product to directly or indirectly improve the performance of the event participants. These factors are the primary drivers of what we call the "equitization threshold."

The equitization threshold is the point at which fans begin to notice a corporate sponsor contributing to their enjoyment of an event. Gatorade has a low equitization threshold in sports because it is easy for fans to see how Gatorade contributes to their enjoyment by making athletes perform better. Conversely, telecom companies have a very high equitization threshold in sports because their product offering does not readily enhance the fan's enjoyment of most sports.

Thus, the reason Virginia Slims' sponsorship of women's tennis was so successful in the 1970s was because women's tennis fans believed that Virginia Slims' involvement in their sport was crucial for its survival. In its infancy, women's tennis had a very low equitization threshold.

Rights fees and equitization thresholds have an inverse relationship. The lower the equitization threshold, the more a property can charge in rights fees. The International Olympic Committee is very aware of this principle and almost always cites its survey showing that 87 percent of Olympic Game spectators agree "Sponsorship contributes greatly to a successful Olympic Games." The NFL is taking steps to make its rights more valuable by coming to terms with Players Inc. and aligning most league marketing rights in one place. This single step protects sponsors from competitor ambush marketing.

Contrast the positive NFL move with Major League Baseball's decision to further heighten its already high equitization threshold by having mlb.com sponsorship rights sold as a separate package. MLB is clearly moving in the wrong direction regarding sponsorship value.

Few companies have the sponsorship budgets to achieve equity in all the events they sponsor. The key is to locate sponsorship opportunities that offer the highest equitization value for the money (low equitization threshold combined with low rights fees). Those are the opportunities to activate heavily.

For nonsport product categories like telecom, home improvement and packaged goods, the WUSA offers a good equitization value because its fans know that sponsor involvement is key to the league's survival. In the mid-to-late 1990s, before rights fees escalated to their current levels, NASCAR team sponsorship offered sponsors a good equitization value. NASCAR fans understand the financial support sponsors make directly impacts a team's ability to compete.

For marketers serious about strategic sponsorship, the key is not to activate any old sponsorship with a 3-to-1 spending ratio, but to understand and apply the principles of equitization to identify the best value investments for their particular product.

James McPhilliamy is managing director of Group 3 Consulting in New York.

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