What Is Managed Should Be Measured In Sponsorship
BY ADAM GROSSMAN
Famed management consultant and professor Peter Drucker is arguably most well-known for the axiom, “What gets measured gets managed.” That is one reason why the results of a recent study of sports partnerships by the Association of National Advertisers (ANA) are so surprising. The ANA found that only “37% of respondents reported having a standardized process for measuring their return on sponsorship.”
These results are the complete opposite of what Drucker would advise for the way that sponsorships are being managed. Sponsorship sales have increased 22% in 2018 since a 2013 ANA study. The billions of dollars being spent on sponsorships requires that buyers and sellers have people whom manage each phase of the process including (but not limited to) sales, account management, and activation. So why are so few sponsorships being measured?
One answer is that most current metrics do not answer a basic question: Why is a specific sponsorship valuable to a specific company? In standard financial asset valuation, there are typically three approaches used to determine how much something is worth. They are:
- Comparable Valuation – What are other companies paying for the same asset?
- Relative Valuation – What is a common ratio that can be applied to the same type of asset?
- Inherent Valuation – What is the asset supposed to produce?
The problem is that most current metrics used in the sports industry commonly have been dependent on the first two approaches. In particular, relative valuation is used as the backbone of many analyses. Common relative valuation metrics are:
- Cost per thousand impressions (CPM)
- Cost per engagement (CPE)
- Cost per click (CPC)
- Cost per acquisition (CPA)
The challenge with these relative valuation metrics is that they are reliant on volume. The more impressions, engagements, etc. an asset produces then the more value that is generated for a partner. The problem with this idea is that having a higher volume does not always equal more value.
The most common example we use to explain this at Block Six Analytics (B6A) is the difference between a business-to-consumer (B2C) company vs. a business-to-business (B2B) company. B2C companies typically do want to reach larger audiences because their revenue is usually dependent on a large number of individuals making small purchasing decisions. B2B companies have the opposite challenge in that they have a small number of customers making large purchasing decision. For B2B companies, targeting the relatively few buyers making these enterprise-wide decisions is significantly more important than reaching a large audience.
This situation shows why different companies would receive different value from the same sponsorship asset. Yet, a relative (or a comparable) valuation approach would not capture this difference. The question becomes: why measure sponsorship if we cannot determine how valuable an asset is for each company.
An inherent valuation approach can answer this question. More specifically, a sponsorship asset should produce two things:
- Return on Investment (ROI) – does the asset maximize the probability of a company increasing its top-line revenue.
- Return on Objectives (ROO) - does the asset maximize the probability of a company increasing its brand engagement, sentiment, and / or awareness.
One natural question is: what does maximize the probability mean? The answer is: does the asset reaching the right people with the right message in the right channel. Right then is defined by: are these people likely to increase a company’s ROO and ROI. Each company will have different “right” people based on the products, services, goods, etc. it is trying to sell. That is why different assets can and should have different values to do different companies.
ROO is also an important element in this type of analysis. For customers to make a purchasing decision, they often have to know and have a positive relationship with a brand. Companies have the flexibility to determine how much to weigh ROI and ROO by using a more inherent valuation based approach.
One of the other common challenges to standardizing valuation is that most relative metrics are created from a media or digital perspective. How does a quantity-based approach apply to something like corporate hospitality or events that typically have much smaller audiences and are becoming a bigger component of sponsorship spend?
An inherent based valuation approach also answers this question. Because it is focused on ROI and ROO, an inherent valuation can more effective determine how much these types of assets are worth. More specifically, an asset should be more valuable if the customers that generate the most revenue are spending more time with the sponsorship partner in a unique environment that generates positive brand associations.
An inherent valuation can be more difficult to complete and can require expertise in financial analysis. In particular, both buyers and sellers (and agencies that work with both) have to pursue a deeper dive into a company’s data and information to learn what drives ROI and ROO. Yet, despite the difficulties, this is the approach that most likely will provide the answer to the question of how much a sponsorship asset is worth to a specific company. Knowing the answer to that question ensures that sponsorships are both effectively managed and measured.