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In the previous article, we have already seen that sponsorship is one of the predominant ways in which a sports league can generate revenues. However, it is important to note that sponsorships can happen at various levels. For instance, sponsorship can be given to an individual, a team, or even an entire sports league. In […]
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Pros and Cons of Debt Ceilings in Sports Leagues
In the previous article, we have already been introduced to the concept of debt ceiling as well as the various types of debt ceilings. It is important to note that the debt ceiling strategy has some advantages as well as disadvantages. It is important to understand the details of both before implementing it. In this […]
Problem with Private Securities Offerings
The average person believes that they are legally allowed to make any investment that a rich person can. However, this is not true in America, and this is certainly not true in many parts of the developed world. The reality is that the average American population is only legally allowed to purchase securities which are […]
In the previous article, we have already seen what sponsorship tiers or sponsorship levels are. We have also seen the various benefits that such a sponsorship arrangement can provide to both the sponsor as well as the sponsored sports entity. Hence, we know why sponsorship levels are widely used as a financing arrangement across various sporting leagues.
However, it would be wrong to assume that there are no downsides to this approach.
Just like everything else, there are certain disadvantages to using sponsorship levels as well. In this article, we will have a closer look at some of the common issues related to sponsorship levels.
Branding is all about communication. Hence, the benefits derived by the sponsor are proportional to the clarity of the message of the sports league.
In case, many brands are co-sponsoring a league, the image-building and the message of the sponsors get diluted. This is because the consumer’s mind gets exposed to a lot of different messages simultaneously and hence the effectiveness of the message is reduced. It is for this reason that many brands do not prefer to enter into co-sponsorship agreements, particularly for small and medium-sized sporting leagues.
However, this involves making decisions about what additional items can be provided that are useful to the brand.
For instance, in some cases, higher sponsorship levels might be provided more free tickets to the event or maybe their logo will be broadcasted in more types of advertisements. It is possible that the additional facilities might not be very useful to the brand in question.
However, it is important to note that the packages seldom remain static. In real life, the packages are negotiated while signing the agreement. It is important to ensure that no sponsor is allowed to benefit at the expense of others. The sponsorship layers must be defined in such a way that any kind of arbitrage is not available to any of the sponsors.
For example, the cash flow schedule provided by each of the sponsors might be different. Also, if the cash flow commitment by one of the vendors is not met, then the entire event is impacted. This means that the sponsorship dollars spent by other sponsors could also be jeopardized due to non-performance by one particular sponsor. This is only an example.
In real life, the execution of an event with layers of sponsorships would pose a lot of challenges in the form of coordination between various stakeholders.
Every sponsor gets impacted (positively and negatively) by the actions of any of the other co-sponsors as well as the actions of the league as a whole. It is for this reason that the reputational risk i.e. the risk of negative impact on the reputation of a company relating to events beyond their control is much higher.
Each time, a sports entity agrees to take sponsorship, they get bound by certain terms of contracts. These terms restrict their ability to raise funds from other competing companies in the form of advertisements.
If the list of sponsors for a sports league increases, the corresponding list of prospective advertisers goes down correspondingly. Hence, it is possible that even though sponsorship provides immediate cash, it leads to lower economic benefits in the long run by restricting the demand for advertisements.
The bottom line is that there are several downsides to level-based sponsorships. These downsides need to be taken into account before making any decisions.
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