Customer Equity and Player Diversity in MLB

Yesterday, Major League Baseball’s annual report on the diversity of players was released to the media.  The headline finding was that the percentage of African-American players is just 8.5%.  This percentage is much smaller than the NFL or NBA, and is down from 19% in 1995 and 27% in 1975.*

I found the report to be interesting in several respects.  When we started this blog, we began with a focus on brand equity.  Brand equity is the value of a brand like Coke or Apple.  Brand equity is useful because it is linked to customer loyalty, consumer awareness, and it may decrease consumer price sensitivity.  The issue of the diversity of MLB players brings to mind another class of marketing asset: customer equity.  In brief, customer equity is the value of a firm’s customer relationships.  It makes sense to think of customer relationships as economically valuable assets because customers tend to buy repeatedly, and their behavior is often a function of a firm’s marketing decisions.

I mention the topic of customer equity, because customer acquisition, and therefore customer equity can often be impacted by a brand’s current customers.  For example, Cadillac long suffered from being associated with an older demographic.  I even did some research that looked at how MBA program student demographics affected future student enrollment.

While the MBA student research was executed using sophisticated econometric techniques, at the heart of the research is a concept from sociology called homophily.  This is a simple concept that suggests that people often prefer to be parts of groups that consist of demographically similar members.  Player demographics therefore is a marketing issue, since a lack of African-American players could result in fewer African-American fans.  While the issue of lower percentages of African American players adversely affecting fan interest is a negative example of the aforementioned principle more positive examples also exist.  For example, Ichiro increased interest in the Mariners in Japan, and the Chinese-American community quickly embraced Jeremy Lin.  MLB fears that a lack of African-American players will reduce African-American fans, and consequently the future supply of African-American players.  This type of negative feedback effect could greatly reduce MLB’s customer equity in the African-American segment.

However, if I had to hazard a guess as to why MLB is suffering declining interest in the African-American community, I would identify a different culprit.  My conjecture is that MLB’s reliance on a farm system approach rather than a system where major universities develop talent, is the true  problem.  High school athletes are well aware of the lucrative nature of participating in professional sports, and how players like Lebron, Michael, Cam Newton and RG3 transcend being just athletes, and become brands.  These future professionals also know that stardom can be acquired in college or even high school through AAU basketball, or high profile college football recruiting.  Simply put, major college football and basketball offer opportunities for athletes to become stars at an earlier age!

*Note that there has been some criticism of the report’s methodology.  The major concern seems to be that the percentage provided in years like 1975 included all players of African heritage, while the current number only includes US born African Americans.

Winners, Losers, and Question Marks from the Men’s NCAA Basketball Tournament

Later tonight, the NCAA championship game between Michigan and Louisville will tipoff in the Georgia Dome.  Even though a champion has yet to be crowned, we can begin to make some judgments regarding the marketing winners, losers, and questions marks of this year’s tournament.  Before we provide our thoughts, please note that tournament success will usually result in greater publicity, fan loyalty, and all the spoils that come with brand equity (think Apple or BMW).

The two teams in the championship game are both interesting stories.  Louisville is a marketing monster, and enjoys the greatest “revenue premium” relative to on-court performance, but Michigan is another story.  Michigan performs poorly on our brand equity metric because history shows that Michigan needs to win consistently to keep the arena packed.  Anecdotally, we had to explain this poor brand equity finding to a distinguished University of Michigan business school professor, who pointed at this year’s excitement as an indicator of fan loyalty.  Given that this was a UM professor, we had to explain using small words, that true fan loyalty means that the fans even show up in down years.

For the two teams in the championship, Louisville is a clear brand equity winner, as they will continue to lengthen their lead on the competition; but the jury is still out on Michigan.  The only potential losers in the Louisville family are the Louisville fans that could be asked to pay higher prices.  As a frustrated University of Illinois fan, Professor Lewis would view this as a very small sacrifice for basketball success.

Michigan faces the challenge of all football schools: the year consists of the football season, spring football, and the remainder is perhaps a tossup between basketball season and football recruiting.  For Michigan to create true basketball brand equity, the school needs to sustain success.  While Coach Beilein’s history suggests this is likely, Michigan could lose multiple underclassmen to the NBA draft.

Two schools that didn’t make the NCAA Tournament also offer an education comparison.  Tubby Smith failed to make the tournament, and was replaced by Rick Patino’s son, Richard.  Given Minnesota’s high level of brand equity (2nd in the Big Ten), this was likely a decision to protect the brand by trying to bring in a dynamic young recruiter.  The most notable team to fail to make the tournament was last year’s winner, the Kentucky Wildcats.  The Emory Sports Marketing Science Initiative makes no pronouncements about Kentucky.  I think we can all agree that Kentucky and Coach Calipari have developed a new and unique business model.

March Madness is known for its Cinderellas.  This year’s top two Cinderella stories were the Wichita State Shockers and the Florida Gulf Coast Eagles.  Our assessment is that Wichita State was the BIG winner.  Not only did the Shockers reach the magical level of the Final Four, but also, at least as of now, Coach Marshall is sticking around.  For a mid-major to build equity, the school needs to sustain success beyond that achieved by an individual coach.  This last point brings us to FGCU.  By his hitting the exit for USC with amazing haste, it is likely that any fan excitement created by reaching the Sweet 16 has left the state of Florida with Andy Enfield.



Watching for Brand Giants in the Elite Eight

Each year, the second weekend in the Men’s NCAA Basketball Tournament gives us eight teams competing for spots in the Final Four.  One might assume that match-ups between the top college basketball brands will be correlated to the highest TV ratings; however our analysis of Nielsen TV ratings, team match-ups, and brand equity dismisses this conventional wisdom.

We analyze Elite Eight data from 2010 to 2013, and find that metrics at the match-up level such as the combined brand equity of the two teams or the difference in brand equity of the two teams have a negligible correlation with TV ratings (less than 0.1).  Thus, from a brand perspective, the match-up of two Goliaths or the David versus Goliath match-up does not seem to be correlated with viewership. Rather, it seems that on a given Elite Eight Saturday or Sunday, when there are four teams playing, there is a significant positive correlation between the highest brand equity team and TV ratings, and a significant negative correlation between the lowest brand equity team and viewership.

A possible explanation for these findings is that Elite Eight viewers look at the full set of teams playing on a given day, and are drawn-in by strong brands, but put-off by weak brands.  These findings also seem to possibly indicate that given viewership preferences, it is really difficult for a low brand equity college to improve its brand.


The Trouble with UCLA…

While often seen as one of the premier basketball programs in the country, UCLA is not even ranked first in brand equity in the Pac 12.  It is not a top 10 program with respect to brand equity.  Thus while there is a mainstream elite perception of UCLA, our study indicates that over the last ten years, UCLA has not created the revenue premium of schools like Arizona.  This has negative implications for recruiting and fan loyalty.

Chris Collins headed to Northwestern, not Minnesota

Reports this morning have Chris Collins accepting the head coach position at Northwestern over the same position at Minnesota.  Based on our Big Ten Brand Equity Rankings, this seems to be a mistake.  Minnesota is ranked second in the Big 10, while Northwestern is ranked 8th.  Greater brand equity means higher fan loyalty and more revenue in the athletic department.  This money can be used for better facilities and for recruiting.  Chris Collins seems to be eschewing brand equity in order to return to his hometown.


NCAA Basketball Coaching Compensation

For many college basketball coaches, the NCAA tournament provides an opportunity for increasing their pay.  For instance, it has been reported that Tubby Smith could have received a $2.75 million bonus if the Golden Gophers had won the NCAA Title, while Shaka Smart could have earned an additional $350K if VCU had won the tournament.

The variation in incentive contracts of coaches suggests that the value of making and progressing in the NCAA tournament is not well understood.  In the analysis below, we report the one year projected value of reaching the tournament or the final four for schools and coaches.

For example, for the aforementioned Tubby Smith, we estimate that reaching the final four would result in $797,700 in brand equity (annual) while Minnesota’s cost in terms of bonus payments to coach Smith would have been $600,000.  In contrast, if VCU had progressed to the final four, the benefit to VCU is estimated to be about $1.1 million while the payout to Coach Smart is just $56,000.


We suspect that this analysis will provoke questions.  Several such questions are provided below:

1.  How was the analysis performed?

Elsewhere on this site we report an analysis focused on school’s and conference’s brand equity.  These estimates are computed using a revenue premium model.  Basically, this model examines single year revenues as a function of performance in a given year.  The excess revenues (the residual of the model) represent a form of brand equity.  Specifically, the revenue premium (or deficit) provides a measure of how the team’s brand influences fans to pay more (or less) for the school’s basketball product than is merited simply by the team’s on court success.

To understand how this brand equity is created, we then examined the relationship between brand equity and each school’s past NCAA success (Tournament participation and Final Fours) and conference membership (major or mid major).  The results from this statistical model then reveal how brand equity is created by reaching the tournament or the final four.  We also use a nonlinear specification for these terms to account for whether cumulative achievements yield diminishing returns.  Finally, we include terms that estimate separate effects for high and mid major conference members.

2.  Since Brand Equity is an enduring asset wouldn’t it make more sense to look at the Net Present Value (NPV) of the created brand equity?

This is a complicated issue.  On one hand, it is likely that an improved brand image will have at least medium term effects.  It is, however, hard to assess the dynamic impact, because coaches can often “harvest” a significant amount of the increased equity through higher salary levels.

3.  Why don’t colleges use greater incentives and perhaps less salary when negotiating a coach’s compensation package?

It could be argued that our analysis suggests that compensation should be more heavily skewed towards bonus payments.  The logic for this argument is that if brand equity creation can be measured then coaches should be paid for their actual results.  However, we must remember that the coaching hires occur in a competitive market.  It is likely that coaches are somewhat risk averse and may prefer fixed salaries over incentive-heavy contracts.

4.  Why doesn’t Louisville create brand equity from making the tournament?

In the case of schools’ like Louisville, the existing brand equity and fan expectations are so great that the impact of making the tournament is negligible.  It is more likely that making the tournament merely maintains the Louisville brand.  Failing to reach the tourney would likely hurt the brand, but Rick Pitino would need to take the Cardinals to the final four to improve the Louisville brand.

Revenue Premium Based Brand Equity

Brand equity is a common concept in marketing.  The basic idea is that well known and well thought of brands provide value to organizations.  Examples of high brand equity brands include companies such as Coca-Cola, McDonald’s and Apple.  These brands have value because consumers may have significant loyalty to the brand, or may be willing to pay a price premium.  There are a wide variety of methods for calculating brand equity.  Most methods involve surveys of consumers, and focus on data such as awareness levels, loyalty rates or consumer associations.

For our “College Basketball” brand equity analysis we use a “Revenue Premium” method.  The intuition of this approach is that brand equity is reflected in a school’s men’s basketball revenue relative to the team’s quality.  To accomplish our analysis, we use a statistical model that predicts team revenues as a function of the team’s performance, as measured by winning rates and post season success.  The key insight is that when a team achieves revenues that greatly exceed what would be expected based on team performance, it is an indication of significant brand equity.

There are, of course, other possible measures of brand equity.  Consumer surveys could assess fan awareness, or we could look at a school’s ability to recruit five-star student athletes.  The advantage of a revenue premium approach is that the brand equity measure is directly determined by market performance.  This is not to say that a revenue premium approach is not without faults.  Schools may face short- or medium-term constraints that prevent them from fully exploiting the value of their brands.  For example, while the Duke Blue Devils score very well in our analysis, Duke University could likely increase overall revenue by replacing Cameron Indoor Stadium with a larger facility.

For now we have conducted two analyses related to revenue based brand equity premiums.  The first is a ranking of teams for the 6 major conferences.  Secondly, we have also ranked all the conferences in Division 1 basketball.

Our hope is that fans find these analyses of interest.  We will be happy to respond to questions about the method and to engage in debate.  We also expect to frequently update the site with additional analyses, insights and updates.