The Economics of Fan Engagement: why fan engagement is important

Fan engagement has evolved in recent years to a new innovative approach, which perceives sports fans in relation to a wholesale growth strategy used by elite organizations for profit maximization. These developments call for a more economic and deliberate approach in order to capitalize on the commoditization of sports fans. This article will review the basics of fan engagement economics and will refer to some suggestions associated with the fandom business paradigm fan welfare maximization.

An important aspect of fan engagement is to get as many ‘bums in the seats’ as possible. Common opinion states that an empty stadium represents poor fan engagement. An empty seat is a missed commercial opportunity. Therefore, sports organizations and marketers always look for ways to fill their stadiums as close to maximum capacity as possible to maximize revenue generation. In The Peculiar Economics of Team Sports, Kesenne proposed several methods for calculating stadium attendance numbers (Kesenne, 2014). The first function we will discuss is seasonal stadium attendance:

This function shows the basic building blocks of stadium attendance (Ai). It states that seasonal attendance levels (Ai) are dependent on the potential fanbase, or drawing potential of the team (mi), the seasonal winning percentage (wi) and the average ticket price (pi). An example: a club like FC Barcelona facilitates an international market and has a high expected seasonal winning percentage, and concurrently has a higher seasonal stadium attendance than it’s city competitor Espanyol. Simply put, teams with low winning percentages have more difficulty attracting fans, and therefore have a more urgent need for maximizing fan engagement. Ticket price plays an important role: a large club with big drawing potential and a high winning percentage can raise its prizes simply because there is more demand. This explains why ticket prizes at large clubs are more expensive than at smaller clubs. If small clubs would raise their prizes, it would negatively impact attendance levels.

A second function proposed by Kesenne is the match day attendance function (2014), which is different than the seasonal stadium attendance function. Whether an occasional fan visits a sports game depends on the following factors:

In an average match in an average league, i stands for any club and j stands for the opponent team. The amount of fans at the stadium now also depends on the fan base of the opponent (mj), the distance between the clubs (distij), the winning percentage of the opponent (wj) and the price of the tickets the home club charges (p). Research shows that variables distij and w interact: fans are not as likely to travel to a club with a low winning percentage than to attend matches with high level opponents (Wang, Goossens, & Vandebroek, 2016). This explains why it’s harder to sell out low-profile matches than high-profile matches, and why these matches require considerably more marketing activities. Other variables which affect stadium attendance are the day of play (weekday or weekend), weather conditions and free-to-air broadcasting or broadcasting via subscription channels (Garcia & Rodriguez, 2002).

The previous concepts did not take into consideration other elements which influence stadium attendance levels, such as stadium capacity constraints. In reality, this is an important factor. Though, for simplicity reasons, this was left out. But, this can be easily be solved by replacing the variable A from above with the maximum stadium capacity constraint. This will then influence the other variables of the function.

The effect of pricing

A second important part of fan engagement economics is how much revenue a stadium can create. Stadium revenue is an important source of income of rights holders that don’t receive much media income. Luckily, stadium revenue can directly be influenced by fan engagement activities and is therefore sensitive to marketing activities. In its simplest form, stadium revenue can be calculated by multiplying the ticket prize to the stadium attendance (R = p*A), but we will use a more complete function:

In the above equation, Ri stands for total stadium revenue and pi and ki represent ticket prize and a pre-set profit rate per ticket. Here the instrument of pricing becomes more clear. Via pricing strategies, match organizers can directly influence demand for tickets. If, for example, FC Barcelona and Real Madrid play each other, with both clubs having a large market size, the travel distance between Barcelona and Madrid being manageable and the winning percentage being around 50%/50%, demand for tickets will be very high. In this case, the home club can simply raise the price up to the point where demand meets the maximum stadium capacity constraint. Of course, this does create ethical problems: in this scenario, only fans who can afford expensive tickets would be able to attend the match. This explains, with simple economics, what used to be common practice in the English Premier League: clubs would increase ticket prices so dramatically, fan organizations started protesting against the greed of sports club owners, resulting in fans even threatening their clubs with major walk-outs. This forced a change in pricing strategies. Luckily, this situation in the Premier League has resulted in a trend of decreased ticket prices.

The discussed price effects can also be shown graphically (see picture above). Where a maximum capacity constraint (A0), the ticket price could theoretically be raised up to level P0. However, to prevent issues like the Premier League faced, a league organizer could impose a maximum ticket price. For example, if the English FA would have put the maximum ticket price at level P2, match day tickets could consistently become more affordable to a larger audience. This could be a pricing strategy idea for European leagues which have problems filling up their stadiums. For example, in the case of the Portuguese league, with an average occupancy rate of 26%, ticket prices indeed appears to be the biggest issue (de Carhalvo, Scheerder, Boen, & Sarmento, 2014). Ticket prices are higher than fans can afford, so the economic situation of the country is a factor at play. However, getting the stadium as full as possible does not only benefit stadium revenue. In fact, there are other stakeholders in sports who prefer to see sold-out stadiums.

Sponsors

A full stadium does not only increase direct revenue streams, but also has indirect revenue effects. Empirical studies demonstrate that a full stadium is a catalyst for several other revenue streams (Bennett, 1999) (Forrest & Simmons, 2002) (Wakefield, 2016) (de Carhalvo, Scheerder, Boen, & Sarmento, 2014), such as income from sponsoring. Sports sponsoring has the goal of showcasing commercial products and services to the largest audience possible. The power of sponsorship lies within effectiveness of product remembrance (Bennett, 1999). Logically, sponsors are less interested in half-filled stadiums than a sold out one. Therefore, the higher the stadium attendance, the bigger its sponsorship potential and the more sponsorship revenue a club can create.

Media

A full stadium also results in a better media product. The quality of televised sports is being influenced by the stadium atmosphere. Therefore, maximizing stadium attendance will also result in an improved media product (Buraimo, 2009). Considering the image (see below) from another blog, there remains much potential for European football leagues to maximize profits.

Some sports marketers argue that televised events have a crowding-out effect on stadium attendance, but there is little proof of this (Simmons & Buraimo, 2005). Another study examined whether people prefer to watch a football match at the stadium or on TV (Wang, Goossens, & Vandebroek, 2016). This provides evidence that TV broadcasting doesn’t cannibalize from stadium attendance, but that there is definitely a relation between the two. On the contrary, another study suggested that live broadcasting of matches in fact does significantly result in lower stadium attendance levels by up to 30% (Allan & Graeme, 2008), but this result is only impactful with casual spectators and not with regular visitors. This makes sense given that season ticket holders usually pay up front and therefore have already made their financial commitment.

As the previously discussed dynamics show, average stadium attendance is not only influenced by the level of fan engagement or the ticket prize, but is also by the uncertainty of outcome (Forrest & Simmons, 2002). As a commonly accepted rule-of-thumb, a club’s winning percentage should never be more than 0,67 (Kesenne, 2014) over the entire season. Any score above will lead to a decrease in league attractiveness and thus lowers media interest. In the Portuguese league, for example, there are only a few clubs with a high winning percentage, resulting in predictive match outcomes (de Carhalvo, Scheerder, Boen, & Sarmento, 2014). This damages attendance: if fans are certain who will win the match or even the league, the league becomes less appealing (Forrest & Simmons, 2002).

Fan welfare maximization

There are commonly two economic paradigms sports economists usually handle: win maximization (clubs or leagues that spend all of their budget on the best players) and profit maximization (clubs or leagues that only hire the required amount of players necessary to maximize profits) (Kesenne, 2014). Sports economist Paul Madden proposes a new, third paradigm: fan welfare maximization (Madden, 2012). Following the tradition of German ‘vereins’, clubs could decide to work within the paradigm of optimizing fan welfare. This naturally includes lower ticket prices, lower wage expenditures and higher attendance levels (see table below).

Subject to a non-negative profit constraint, Madden calls this choosing the ‘failure of profit maximization to produce a socially valuable outcome’. He states that fan welfare maximization therefore equals maximizing match attendance. It’s obvious that fan maximization, as a new paradigm on leading a sports club or league, requires constant fan engagement stimulus. In fact, this approach seems rather effective thus far. Fan welfare maximization also leads to increases in identification and passion. Passion is not only a strong predictor of attendance but also of media consumption and social media behavior (Wakefield, 2016). Therefore, fan engagement activities will result in a positive loop from enhanced passion to increased stadium attendance, which lead to concurrent increases in stadium revenue, increased sponsorship interest, media attractiveness and therefore creates a win-win business situation.

A key finding of the above data is that stadium atmosphere of televised sports influences the decisions of fans–casual ones in particular–to attend the game in stadium. Conversely, the effect is minimal on season-card holders who have already made a financial commitment. However, this effect is only observed when the stadium experience and the media experience are identical. Therefore, crowding-out effects of televised sports can be mitigated by offering a unique stadium experience which cannot be substituted by televised sports. Fortunately, an upcoming best-practice trend is that clubs are drastically improving the stadium experience. A second conclusion which can be drawn from the above study is that a full stadium does not only benefit stadium revenue, but also sponsorship value and media-attractiveness. Therefore, the effect of continuous fan engagement and enhancing stadium experience is not limited to occasional income-spikes or increased goodwill, but actually many tangible and meaningful effects. Clubs and leagues which fail to put fans first and do not engage their fans with the sports product are thereby not only neglecting their social roles, but are in fact limiting their own profits! It apears that the business paradigm of fan welfare maximization includes all of these aforementioned effects, and therefore should be considered by more clubs and leagues.

About the author:

References:

• Allan, G., & Graeme, R. (2008). Does Television Crowd Out Spectators? New evidence from the Scottish Premier League. Journal of Sports Economics, 592-605.
• Bennett, R. (1999). Sports sponsorship, spectator recall and false concensus. European Journal of Marketing, 291-313.
• Buraimo, B. (2009). Stadium attendance and television audience demand in English league football. Managerial and Decision Economics, 29(6), 513-523.
• de Carhalvo, M., Scheerder, J., Boen, F., & Sarmento, J. P. (2014). What brings people to the stadium? (Part 2). Leuven: KU Leuven.
• Forrest, D., & Simmons, R. (2002). Outcome Uncertainty and Attendance Demand in Sport: The Case of English Soccer. The Statistician, 51(2), 229-241.
• Garcia, J., & Rodriguez, P. (2002). The Determinants of Football Match Attendance Revisited: Empirical Evidence from the Spanish Football League. Journal of Sports Economics, 18-38.
• Kesenne, S. (2014). The Economic Theory of Professional Team Sports: An Analytical Treatment. Cheltenham, UK: Edward Elgar.
• Madden, P. (2012). Fan welfare maximization as a club objective in a professional sports league. European Economic Review (56), 560-578.
• Simmons, R., & Buraimo, B. (2005). Television Viewing and Stadium Attendance: Cannibalization or Complements? Lancaster: Lancaster University, UK.
• Wakefield, K. (2016). Using Fan Passion to Predict Attendance, Media Consumpion and Social Media Behaviors. Journal of Sports Management (30), 229-247.
• Wang, C., Goossens, D., & Vandebroek, M. (2016). The Impact of the Soccer Schedule on TV Viewership and Stadium Attendance: Evidence from the Belgian Pro League. Journal of Sports Economics, 1-31.