Cultivating a fan base is key to revenue generation

In the long run, the value of a team or franchise is determined by how strong and durable its fan base is. A fan base is not exogenous to the operation of a franchise, but endogenous. In other words, while there may be some amount of fan interest generated independent of the operations of a team (possibly related in some measure to the level of competition in the league), a large portion of the fan base comes from a careful cultivation of fans.

The questions for the teams therefore, are: (a) how to cultivate a fan base and (b) how to convert the strength of the fan base into revenue? In order to answer these questions, teams have to first identify the different types of fans and what they are looking for in terms of entertainment. Some are hardcore fans whose loyalty is to their city; others may follow a team because of its performance or because their favourite players are on the team; some others may enjoy?watching sports with no loyalty attached to any particular team.

Also Read The previous story in this series

Cultivating a fan base is both a marketing and an economic issue. Applied microeconomic analysis is useful in assessing the intensity of demand of each group of fans and ascertaining their willingness to pay for the entertainment and for team merchandise. It provides the basis for developing a coherent marketing campaign.

In the context of a fan base, one interesting empirical question that merits attention relates to factors that drive the size of the fan base. A look at some American professional sports shows that there are teams with losing records spanning long periods of time with immense brand value and fan following.

For instance, Chicago Cubs, a Major League Baseball (MLB) team with a long history, but known more famously for its losing record, is one of the highly valued teams with a large fan base. Similarly, the Boston Red Sox continued to be a popular team even when it had a long drought spanning decades.

This shows that the fan base of a team does not depend entirely on winning, but also on history, the city in which it is located, the entertainment it offers fans and also the stars that play on the team. This indicates that fan base building strategies would differ from team to team. Interestingly, the valuation of Indian Premier League (IPL) franchises by two independent branding agencies shows that Kolkata Knight Riders has the highest valuation in spite of a mediocre performance in IPL 2008, and finishing at the bottom of the table in IPL 2009. Rajasthan Royals, winner of IPL 2008, was valued at second to last by one agency and second from the top by the other.

This indicates that teams from large markets (synonymous with large cities with a cricketing history) are more likely to have a fan base that is large and not so dependent on performance, whereas teams from smaller markets have to perform to tap into a national audience and fan base. A large fan base is followed by greater television revenue, sponsorships and merchandise sales.

While it is clear that revenues generated by a franchise are a function of the size of its fan base, it is also important to identify how revenue can be maximized. Fans are not a homogenous group. Their loyalty and their willingness to pay to watch and support their team vary. This presents a classic microeconomics problem, the problem of market segmentation and differential pricing to extract as much of the consumer surplus as possible.

For instance, economic research has shown that ticket pricing by MLB teams is in fact suboptimal. In other words, teams leave a significant sum of money on the table by not truly understanding the fans’ willingness to pay. This was shown using data from secondary market for tickets, where the true willingness to pay for a game is revealed by the fans.

Recently, the San Francisco Giants, an MLB team, has resorted to dynamic pricing, a technique used by airlines to determine fares based on demand using sophisticated algorithms. Ticket prices change on a daily basis based on the match-up, time of the game, weather conditions, and the team line-up. IPL teams could resort to such strategies as this is the best way to maximize revenues from ticket sales. However, currently teams face constraints in terms of ticket pricing as they follow Board of Control for Cricket in India guidelines on pricing.

Another trend in professional sports in the US and Europe is the team ownership of stadiums. Recently, several major sports teams have built new stadiums that have multiple uses. For instance, the New England Patriots, a leading National Football League team, owns the Gillette Stadium, which generates more revenue from uses not related to football. Given the short playing season—there are eight regular season games played in a year—owning a stadium is a financially viable option only if it can be put to other uses. The Gillette Stadium has a shopping mall, movie theatres, music hall, restaurants and a hotel.

The other area which requires the attention of profit maximizing franchises is cost. Costs have to be incurred to generate revenue, but it is important for teams to focus on efficient ways of generating the same level of revenues. The experience of some MLB teams can be illustrative here.

Cost minimization

As highlighted, above the strategies for a team will depend on what their fans want. The key, however, is to identify strategies and implement them in a cost-effective manner. Some of the developments in American professional sports in the relatively recent past shed light on how teams have used statistics creatively to make sporting and managerial decisions. The interesting angle to this is whether similar analysis can be conducted to Twenty20 cricket and how it would change the game.

One major cost driver for Twenty20 league teams is the salaries paid to players. Therefore, the focus of teams should be on determining the optimal players roster, while keeping in mind the cost. The determination of the optimal players roster is itself an interesting exercise which lends itself to empirical analysis.

Our hypothesis, based on the American professional sporting arena, is that teams from small markets will focus more on maintaining a winning record relative to having marquee players on their rosters than teams from larger markets. Given that cricket is a team game, having star players does not necessarily translate into victories.

Further, small market teams also have fewer sources of revenue and, therefore, are more cost-conscious. Therefore, the problem facing a small market team is how to build a winning team at the lowest cost possible.

The author is director at Nathan Economic Consulting India Pvt. Ltd.

This is the second of a three-part series on the business of cricket following the advent of the Twenty20 format and the Indian Premier League.

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