Rethinking Escalating Sponsorship Escalators

By Dan Kozlak

Sponsorship fee escalators come standard with pretty much any multi-year sponsorship agreement. (For those of you less privy to sponsorship contracts, an escalator is an increasing incremental fee charged to the sponsor for each year the sponsorship is active on top of the original base fee.)

However, lately, there appears to be a growing trend of properties baking in higher and higher year-over-year percentages. This could be a byproduct of attempting to recover losses inflicted by COVID-19 or could simply be more creatively aggressive pricing strategies.

Taking a step back, this begs the question of what justified escalators in the first place? Keeping up with inflation? A pricing psychology trick to lower the inaugural year price to get partners to commit? Believing the exposure and return a property would deliver would consistently and stably grow?

Escalator fees can be a recurring thorn in the side of marketers presenting annual budget requests with the ask getting bigger and bigger, even if the portfolio hasn’t expanded.

It’s difficult to lobby for an incremental budget without concrete incremental value. It can force brands to forego renewals or new opportunities to keep up with increasing payment schedules. With many sponsors rethinking their partnerships and being more prudent with spending, maybe this can be an opportunity to recreate a mutually beneficial way to justify annual fee increases or justify adjustments. The following are a few options partners can consider.

Increasing Sponsor Benefits

With this option, escalators can remain in the packages, but at the end of each season partners would have the opportunity to increase the number of assets they receive based on what’s been proven to be effective. If a property and sponsor are having success with email campaigns or experiential footprints, the property should increase the number they receive.

This allows for the partnership to be dynamic and continuously grow based on where its strengths are and heighten the property’s chance at a renewal. To avoid conflicts, certain assets can be designated as being eligible for addition so more valuable options are left off the table.

Maintaining Share of Exposure

Sponsorship recall and influence are indirectly correlated with the number of sponsors of a particular property. Sponsorship clutter makes it more difficult for any sponsor to stick in the minds of fans. A sponsorship loses value the more sponsors that are added to a property’s stable. Perhaps at a minimum, escalators can only be applied if a property’s number of sponsors doesn’t grow over a certain amount.

Exposure Kickers

This concept is not entirely new. Larger sponsors with buying clout have been reported to include performance-based incentives in their deals. If a partner reaches a certain amount of quantifiable game attendees, broadcast viewers, website traffic or social media engagements, etc. above the average season’s level, it can receive its escalator success fee. This way, sponsors can justify them by receiving exposure beyond what they originally paid for.

Performance Audits

Similar to the concept above, the year-over-year fee would be contingent on performance. Rather than the annual fee being dictated by a handful of exposure metrics, the value would be audited by a third-party firm with an agreed-upon methodology to value all rights in the agreement.

Teams have included performance-based bonuses for delivering incremental exposure by making the playoffs. Maybe that logic should also be applied to protect sponsors from partnerships that drastically under-deliver as well? The contingency fee could then fall into one of three outcomes based on how the delivered value compares to the scheduled fee:

• Package Under-Performs - If the audited value is below a certain threshold (e.g. 25 percent below the scheduled fee), then the fee owed could be either reduced to a mutually agreeable percentage below the scheduled fee or stipulated makegood packages could be offered.
• Package Delivers within Margin of Expected Performance – If the audited value falls in line with the scheduled fee (e.g. between 25 percent below and 25 percent above), then the scheduled fee is paid.
• Package Over-Performs - If the audited value is above a certain threshold (e.g. 25 percent above the scheduled fee), then the fee owed would be increased to a mutually agreeable percentage above the scheduled fee. An alternative would be to follow the more commonplace practice of instituting playoff bonuses.

Sponsors already endure the burden of justifying their premium cost. Increasing year-over-year fees only attracts more attention from CFOs’ chopping blocks. Even if properties have a clear-cut defensible case for why escalators are included in their agreements, providing tangible incremental benefits or makegood protections makes the case for increasing fees much easier.

The views and opinions expressed in Marketing Maestros are solely those of the contributor and do not necessarily reflect the official position of the ANA or imply endorsement from the ANA.

Dan Kozlak is the VP of strategy at IEG.