The Added Value Playbook

franchise’s part.

  Instead of working on ways to maximize the value that each customer can receive by purchasing the sports product, franchises negate this responsibility. The age-old sports marketer response reduces their concerns to “Well, everyone should just want to come out to our game.” Right there, that’s the key mistake. It fails to understand not only the customer, but what the true meaning of the three value investments are.

  Sports marketers, like any marketing director, are paid by their organizations to gather up people. They are paid to gain more than awareness, but to generate sales. They are paid to care about the product. Most sports marketers also tend to be gear heads toward the product. They would be buying the product if they were not paid to work on the product’s behalf. They are thus blinded by the hardcore passion that they feel toward the product and ignore developing the three core customer investments. In fact, sports marketers sometimes dilute those values because they don’t believe them worthy of “true fan” excitement.

  Why should a customer or potential customer care about the sports product? This is specifically a blind spot for most sports marketers. They are already sold on the product, by virtue of being a fan, so they do not understand why a convincing argument based on the three customer values has to be made. The arguments tend to be “Well, we’re holding the event,” or, “What else would they do on a Saturday night?” or “We’re in the championship game.” Again, it comes down to what most sports marketers think they would do on a Saturday night, but not what a casual or passive fan would have in front of them in terms of entertainment options.

  The goal for any sports marketer should be to view themselves as a passive interest person in search of entertainment. What would cause a passive person to cross the street, avoid all other forms of entertainment (a lot of entertainment options which are also free or readily accessible to the passive person), and purchase a ticket, enter a facility, be captivated for three hours during a busy work-night or weekend, as well as pay for ancillaries such as concessions, parking, merchandise once inside the building? Few sports marketers consider this way of thinking.

  What would want to make a passive customer decide to rush through the doors of the sports complex? Pretend for a moment that the customer knows nothing of the team’s record or about the game in general. What makes a person care about the sports product? Even in retail, the product cannot simply be sold to early adopters. It must be sold to those passive customers who consider the three customer value investments in order for them to make a similar purchase themselves in the product.

  If there isn’t a good, solid reason for why a passive customer would choose to attend a sports product, there is an inherit issue with the three value investments long-term. The solution cannot be simply to provide free tickets or do a bunch of heavily discounted pricing. Sports franchises are a business, although a lot of times, they are not treated as such.

  One of the core issues that provides for a sports business failure is that sports franchises are much like restaurants. They attract people who have money or enough credit for a loan, who want to own the ability to increase their popularity around town. Owning a restaurant or sports franchise is the easiest way to be liked, to be someone in a town full of nobodies. But restaurants fail because there are people with money who happen to have terrible taste in food. Sometimes, it is the owner’s unwillingness to cater to the audience which dooms a place. For example, offering a Cajun restaurant in an area where potential customers don’t eat spicy food.

  The same can be said of the sports industry. Far too many of those with the cash or the loan credit to fund a team have little in the way of sports business acumen. In fact, they don’t know how to attract passive customers into their buildings. That’s where the heavily discounted or free ticket mantra comes from. The majority tend to poison markets with these wrong-head, anti-business practices, then fold or move the team after unsuccessful ventures and free-wheeling marketing theories, blaming the “market” for their financial losses. And yet, these Dumb & Dumber franchise owners who make the awful decisions never question their own tactics, or try to truly understand why those great seats to their games are empty on a Saturday night. That is what they would do on a Saturday night, the gear head sports fan, who loves the game, who would show up anyway. Not the passive customer, who the gear head doesn’t know how to attract anyway.

  4 – Ticket Heresy

  An increase of attendees through the turnstiles is an overall positive. I’ll never be one to suggest otherwise. But there is also a calculable threshold for whether a franchise actually generates income based on more fans attending. The idea that a franchise will realize its money later on, upon secondary payment after a primary freebie, is a ludicrous assertion that any common sense business person would jeer. Yet this idea persists in the world of sports. The hypothesis forms within the circles and dens of the paper hanger. It also ignores the fact that, if the percentage of complimentary or heavily discounted attendees flock to the ballpark beyond those who are paying full price, there is an actual harm that can be done to the franchise’s per cap average for revenue.

  Let me explain my ticket heresy before they put the bonfire together for my effigy: Every franchise desires to have more attendees at their stadiums. No one questions that. However, having the right kind of attendees, those who actually pay full price for the product and realize a larger added value for the price that they paid, matters. A franchise can only support a certain percentage of attendees at its lowest, base profit margin before the measurement bottoms out entirely with increased attendance of people who aren’t showing a “spending result” to the franchise.

  This is why free or heavily discounted tickets do so much harm, part of those “shadow costs” which work to erode the bottom line for a franchise. By bringing the wrong people into the building, consistently, without considering there is an inherent unwillingness for that person to see enough added value to spend full price on that product should say something. If it doesn't, consider the additional shadow costs that remain only when viewed through the lens of the ledger. Yet another factor that the paper hanger does not consider, and in many ways, ignores, while they continue their delusions about fan growth for sporting events.

  I understand that paper hangers do have an math confusion when it comes to how they impact a franchise’s bottom line. They think what they do isn't harmful, and in some cases, helpful to the franchise’s income margins. Nothing could be further from the truth. Paper hangers issue a fuzzy math quota to any type of fiscal calculation. Consider it a “selective cherry-picking” of revenue statistics that hides those shadow costs from being examined by budget analysts. I’ve chosen to do it for them.

  In terms of sports finance, I can prove that once the numbers and the shadow costs have been laid out on the table, there is an inherent harm to heavily discounted or complimentary ticket distribution for franchises. Let’s take a simple scenario and work backward, in order to help the paper hanger fully understand their fiscal damage, though most will refuse to fully accept what the math works out because it is against their theories of building a fan base.

  Our scenario starts with a 40,000-seat ballpark and a franchise per cap average of $123.67. For those trying to understand the per cap, it is what the franchise estimates each fan will spend on ancillaries (parking, merchandise, tickets, concessions) upon entering the ballpark. Other per cap items include corporate sponsorship and broadcast, which the paper hanger relies on to suggest that in order to accept such large corporate sponsorship dollars, the free distribution of tickets is needed to claim a high number of average attendees. Thus, fraud is accepted to lie to the sponsors and broadcast partners about what they are getting, in order to push the per cap average higher.

  At 27,000 paying fans, that franchise per cap of $123.67 remains the same. That means that the club can expect, within five to ten percent, to generate $3,339,090 off of their per cap average estimations from total attendees. That??
?s a lot of hotdogs to eat, cars to park, and merchandise to sell. And that doesn’t mean that everyone will spend that average, just that the overall collective of that per cap will end up spending about that much in total. The per cap also takes into account the higher priced seating options, suites, and other types of price points in order to arrive at the $123.67 figure.

  But in a 40,000-seat stadium, drawing only 27,000 fans per contest does look a bit empty. That’s where the paper hangers come in. They arrive quick, with easy solutions to the franchise’s problem: Just discount the remaining 13,000 tickets at half-price through a gigantic threshold marketing campaign. Or just give a large stack of them away. Or have a Big Box store chain provide a “buy-out” night with the remaining tickets at a heavily discounted price, so the chain can provide them to their customers in the area. And with those efforts, the paper hanger is able to eliminate 5,000 tickets, meaning that the seats are blocked out, spoken for, through their distribution efforts.

  That doesn’t mean that 5,000 people will actually show even if handed a free or heavily discounted ticket as redemption rates for these distribution channels aren’t very high anyway. It could be that 500 to 1,000 people show up to claim their freebie. Now the attendance number is higher, because 34,000 fans looks better than 27,000 fans on the books. It’s a larger crowd, even though the stadium redemption rate shows that the building doesn’t have that many more fans in attendance.

  Here’s what that extra 5,000 people have done to the franchise’s per cap average: they lowered the per cap based on the idea of people that are inside the building during each game, even though most of the 5,000 potential recipients through those heavily discounted or complimentary ticket channels are not present. They also created stadium resource issues. Now, game operations has to prepare for 34,000 potential guests at the ballpark, not 27,000. Even though that number may not appear too much different, it can mean $200,000 in extra operations, staffing and security for groups of people who are never going to show.

  That means staff, marketing, customer service, janitorial and concessions all have to prepare for a mythic 5,000 folks. Food has to be prepared to meet those additional needs since 5,000 more tickets have been distributed, whether they are claimed or not, wasting time, energy and wholesale supplies. And all of this is based on the unfounded belief that more people will show up to the game. The paper hangers walk smugly around the Front Office, patting themselves on the back with their distribution plan. Several sports administrations can't disentangle themselves from the good vibes to understand that they have actually cost themselves money in resources, rather than made money.

  Let’s break down the numbers of redemption rates, since all paper hanger distributions are not the same. I would hate to suggest that complimentary tickets do not have a measurable redemption rate. They do, at eight to ten percent. With a complimentary ticket, there is no leverage for the person to make an appearance even when offered a free pass inside the stadium. Other issues may arise, or they simply decide not to go, and since there is no financial loss to the recipient who paid nothing to accept the item, there is also no obligation. It is, in essence, a worthless piece of paper to them, which discredits the product enough to make attending the function more of an effort than a necessity. It diminishes or devalues the idea that they would later pay full price for an item that they received without effort for free.

  Heavily discounted tickets have a larger return rate than their complimentary counterparts, but also come with various issues. Close to 75-87 percent of heavily discounted tickets are redeemed by their buyers because even a small portion of financial leverage was placed on the transaction. However, once in the ballpark with a cut-rate admission, these discount hunters now must interact in an economic ecosystem where none of the other ancillaries have been discounted. It seems illogical that a discount-hunting customer would take a heavily discounted ticket, then be expected to pay full price for ancillaries such as concessions or merchandise. It would offend the discount hunter’s genetic makeup because, by definition, the last thing that a discount hunter is willing to do, ever, is pay full price for anything.

  Now that the paper hanger has flooded the market with 5,000 more tickets to boost the attendance number, other financial impacts surface. The franchise’s per cap now drops from $123.67 to $109.23 because the loss from the highest ROI generators, admission tickets, cannot be made up in core ancillaries. That means that the franchise’s financial expectations now go from $3,339,090 to $3,495,360 for the entire gameday. While the second figure appears higher than the first, it is actually a shadow cost mirage: The team net gained only $156,270 from those additional 5,000 tickets – if that income was realized at all – and there is no guarantee on that average change.

  At the franchise’s rate of $123.67 for the per cap average, the income would have been $618,350 for those 5,000 additional fans. That amount would have also helped offset the game operation non-fixed costs required to maintain the fan experience for those attendees. Instead, those costs likely gouged well into the $156,270 and may have actually devoured into the budget even more than that. It also dropped the franchise’s per cap average in order to bring in those 5,000 additional people, with the team losing $468,080 in potential revenue as well as taking on encumbrances related to their new fan entries.

  The simple rule of sports finance, though, is that the standard rules of business somehow don’t apply, especially when a paper hanger is involved since they are allergic to mathematics and simple business accounting. In normal business operations, increasing the amount of customers means moving product in order to lower wholesale costs to the business while driving up revenue. In sports business, the amount of customers can mean that revenue has the ability to go up but so do the costs. This is because each customer carries a cost to the team after the initial purchase during their time in the stadium.

  That is why outside business people investing in sports franchises don’t understand the financial model of the industry and end up divesting within a couple of years. For every dollar spent by a fan, the team must spend about $0.65 in order to facilitate that fan’s continual presence in the ballpark through its operational staff (including salary of athletes, etc). The real money for any owner is in the franchise value upon resale. This is because as the franchise grows in value, it brings in new potential investors who pay more in a franchise sale than the current ownership did.

  That is why every dollar is so crucial to a franchise. It is also why distributing large blocks of tickets through complimentary or heavily discounted practices is wrong-headed. The paper hanger marketers do not understand this. They think that bodies in the house will translate into revenue.

  Another aspect of heavily discounted tickets is the role that threshold marketing has played since the advent of the online discount deals. Those sports marketers who advocate these practices are contributing to the revenue erosion of their franchise. Threshold marketing is another form of a discount wholesaler, where the third party agent has a 300,000-person localized e-mail and social media network list of people interested in any type of deal in the area. Right there, that is an issue: 300,000 potential customers who are intiating their experience with the sports product at a heavily discounted rate and have now branded your product at the price point set by the third party agent.

  While I understand that the mathematics of ROI tend to be a tricky thing for some sports marketers to wrap their collective brains around, it is critical to understand what can cost a franchise long-term in terms of gaining the elusive fan. ROI is a core principle for how each franchise should be operating. Whether that be year-to-year or in a twenty-year business cycle.

  Unfortunately, ROI is not viewed as the end-all for the majority of sports marketers in the field. They don’t judge ROI as a barometer for success, instead looking at actual bodies in the building regardless of what was paid or tickets distributed. That, to be honest, is frightening. Worse still, some sports marketers shrug off
ROI entirely as an unattainable financial statistic in the industry. Nothing could be further from the truth.

  The main focus has shifted away from actual dollars earned to drawing out fans by any means necessary. This paradigm, promoted by non-sellers, has changed how franchises generate money and how they understand whether they are doing the right things in terms of the industry or bottom line as a whole. Non-sellers do not take into account a full understanding of the fiscal balance sheet for franchises. And how could they be expected to? The majority of non-sellers believe in loosely-based criteria for how a franchise actually generates income, relying on the old world sports marketing tactic of “walk-up” crowds in order to facilitate the needs of the entire franchise financially.

  Here’s the core argument for why threshold marketing (i.e. heavily discounted tickets, etc) has a negative ROI for a franchise: Basically, the franchise has to give up 75 percent of its profit margin on a non-fixed cost item’s price point, such as a ticket, or a fixed cost item’s price point, such as hot dog or other per cap ancillary, in order to gain a 25 percent net return on a short sale. And, the 25 percent net returned gain from the heavily discounted ticket or per cap ancillary likely does not even cover the marginal expenses, let alone those pesky shadow costs, for that wholesale item.

  One of the core issues surrounding the sports marketer’s willingness to lose revenue and actually deplete financial resources in order to participate in threshold marketing schemes is simple laziness. It illustrates a team’s marketing department and their lack of achieving Big Data returns. That the sports marketer finds comfort in contracting out a customer base to a threshold marketing company (such as Groupon), instead of building up that client base internally, speaks volumes about the problem globally with the industry.

  This poisons the future by the compounding problem of the threshold marketer’s unwillingness to provide Big Data information on any one of their customers who purchased the