Note that this blog post reiterates a few points made in a white paper I published in June 2014.
Many brands spend millions of dollars on sponsorship rights fees each year, justifying these expenditures as marketing and business investments that deliver results to their company’s bottom line (in the long-run, at least). Because such large amounts of money are often spent on sponsorships, it makes sense that brands undertake a process of analysis and due diligence prior to entering formal agreements, in order to confirm that the proposed sponsorship will be a wise and worthwhile investment. Part of this process of analysis often includes sponsorship valuation – the practice of determining an appropriate investment level for a sponsorship opportunity of interest.
After working with many brands on sponsorship valuation over the past 5+ years, and studying the subject by gaining an understanding on different firms’ valuation methodologies, I’ve formed the opinion that brands need to rethink their approach to sponsorship valuation. At the end of the day, those responsible for the sponsorship analysis process at a company need to be asking themselves if they are spending too much time, and money, performing an exercise that simply doesn’t truly matter to their business.
The Difference Between Absolute and Relative Valuation
When a brand wants to know what a given sponsorship opportunity is “worth”, there is often confusion around the definition of value/worth being sought. When a “relative” valuation approach is used, getting a ‘good deal’ just means paying less for the acquired asset than others might typically pay. A conclusion from a relative valuation exercise might be that “if others were willing to pay $X for that (comparable) asset, I should be okay with paying $X+$5 for this asset I’m analyzing, based on how it checks out on key characteristics/attributes.” Alternatively, when an “absolute” valuation approach is used, the desired outcomes of an acquisition are forecasted and monetized. A simplified way to think of this concept is to understand that the focus is on ensuring a company doesn’t pay more for a sponsorship than it will receive in the form of future positive benefits/outcomes as a result of the sponsorship.
What type of valuation does your team conduct? Are you calculating on-site impressions and assigning monetary values to these impressions that someone has told you are “fair” or “market value”? Or are you assigning values to impressions based on an understanding of how those impressions really matter to your business? Are you valuing tickets within a sponsorship package based on what consumers and scalpers might pay for them? Or are you considering how B2B relationship building and employee engagement through event hosting impact your company’s profits?
Are you conducting a hybrid of absolute/relative valuation? If so, do you understand what the final valuation conclusion is really telling you and how that should impact your decision making?
Relative Valuation is Over-Used
Relative valuation is very commonly conducted by brands, for a variety of reasons:
- It requires less custom research and true strategic thinking about a business’ priorities and marketing objectives
- It can be conducted by a third-party expert without any real insight around a business’ true profit drivers or consumers’ purchase behaviour in the sponsor’s unique industry
- It is a method that has been borrowed from other fields – real estate (sales comparison approach), art (sales comparison approach), and finance (P/E ratio, among others), as examples
But I believe that many brands’ use of relative valuation is misguided, or over-emphasized within the sponsorship analysis process.
For one, when relative valuation is used in these other fields, it is often because the only tangible/quantifiable outcome that the buyer is looking for is a capital gain from a resale. When a family buys a home, they are not actually measuring ROI based their level of happiness throughout their time there, or based on the number of times they use the backyard, or based on how few times there is a crime in the neighbourhood. No, a home buyer can only hope that if the time comes to sell their home, that they can sell it for more than they bought it for. Similarly, an objective of capital gains is the primary rationale behind P/E ratio valuation of stocks.
In sponsorship, a brand cannot sell their sponsorship rights once acquired (see the language in your sponsorship agreements around rights being non-transferable), so resale is not a realistic outcome. Therefore, gaining an understanding of what a proposed sponsorship package might typically sell for (relative valuation), is less important. Instead, I would recommend that sponsorship marketers learn about the logic behind absolute valuation principles, as these methodologies focus on quantifying the value of desired outcomes throughout the life of the investment: real estate (income approach), art (income approach), and finance (dividend discount model, or discounted cash flow).
Relative Valuation as a Negotiation Tactic
It can indeed make sense for a brand to reference “fair market value” as a negotiation tactic – reminding a property that the sponsor knows what other companies might pay for the sponsorship package being discussed, and that they don’t believe they should have to pay more than this amount. A company should certainly negotiate as best as possible so that it pays less for a sponsorship than it might have been willing to pay, and relative valuation conclusions can help to identify where a property might be willing to settle.
That said, a company should never be okay with paying a fair market value for a sponsorship package of interest if it doesn’t also feel that the sponsorship will deliver enough positive future benefits to their business to justify the sponsorship costs (rights fees, activation, and other).
What does this all mean for your brand, and your team? I highly recommend finding some time to think about what you’re aiming to achieve through sponsorship (strategic sponsorship objectives), and how you can measure quantifiable outcomes (sponsorship KPIs) that indicate progress towards achieving said objectives. Then, instead of conducting relative valuation for the sake of it, when you’re looking at a new sponsorship opportunity, utilize an absolute valuation scoring system that considers how a potential sponsorship might impact your chosen sponsorship KPIs.
It will take some time to build this new absolute valuation approach. Determining what your team considers to be the right price to pay for various KPIs will take some trial and error, as will determining the best methods for forecasting KPI outcomes that will result from a prospective sponsorship. But all in all, if you strive for an absolute valuation approach, you will be shifting towards a more logical and rational approach to marketing – an approach that is more customized to your business, and to the drivers of your company’s success and profitability. A sponsorship strategy that “leans into a business’s real issues and delivers tangible results” is what Andy Shibata called “Sponsorship 4.0” at CSFX in 2014. It is where sponsorship is headed, and I strongly believe it will be worth it to steer your team’s practices and principles in this direction.