Any number of issues can cause either the buyer or seller–or both–to apply the brakes to the process of putting together a sponsorship contract, but along with the deal’s price tag, there are two other areas where it is often difficult to find the middle ground.

Below, best practices on how to negotiate fair compromises for these commonly contentious issues: determining the value of in-kind contributions and establishing exclusive category definitions.

What Is The Value Of Value In Kind?
The use of goods or services in exchange for sponsorship rights takes on more importance when economic conditions force marketers to reign in their cash spending.

“Value in kind is a vastly underappreciated aspect of the negotiation process,” said Kevin Adler, president of Engage Marketing.

VIK can play a major role in helping sponsors limit their cash outlays. For example, Hallmark Cards Inc. significantly reduced the cash component of its ’02 Olympic Winter Games and U.S. Olympic Team sponsorship by providing printing services.

“The Salt Lake Organizing Committee and the USOC articulated their printing costs in their operating budget,” said Adler, who represented Hallmark while working at agency Relay Worldwide. “We were able to offset that cost for them by providing VIK and using the cash value of that service to buy down the cash Hallmark needed to spend for the deal.”

But placing a cash equivalent value on goods or services is a frequent sticking point between properties and their corporate partners. The challenge: Sponsors typically want to receive the full retail value of whatever is being provided.

While that sometimes is fair to the property, in many cases it is not, and regardless, it can still be difficult to determine the specific cash value.

To reach a fair market value for contributed products or services, it is necessary to first determine which of three categories the donation falls in:

Budget relieving. By far the most desirable form of VIK, this type of partnership helps properties eliminate the costs of goods and services they normally would purchase as part of their operational expenses, such as phones, hotel stays and airline tickets.

Because the subtraction of those costs has a direct impact on the property’s bottom line, such donations typically are valued at their cash equivalent.

But how to calculate the cash value of the goods? Retail cost? Wholesale cost? Published prices? Commonly negotiated discounts or sale prices?

Most properties and agencies contacted by IEG SR value in-kind goods at their retail cost, not wholesale.

“If I make 10,000 widgets, and I can sell them for full price at retail, why should I give them to you at a lower cost?” Adler said.

The picture is not always so cut-and-dried, however. Properties should ask whether the donated products always sell for full price and try to determine if there is an average price that includes typical discount offers, which may more realistically reflect what the property would have to pay for the products on the open market.

A number of properties and agencies say it is a good idea for a property’s sponsorship staff to pull in the organization’s procurement or financial pros to help place an accurate value on budget-relieving deals.

“Sales staff don’t always have the same perspective on a property’s profit and loss statement that someone else may have,” Adler said.

To that end, properties need to use common sense when accepting products and services and determining their ability to use them.

“Properties get in trouble when they only need $40,000 worth of paint, but they take $80,000 worth and paint like crazy,” said Rick Jones, head captain of FishBait Marketing. “That becomes an issue–was it really budget relieving?”

When seeking in-kind deals, Jones recommends properties approach companies late in their fiscal year when they may have excess inventory to share. “If I know I need plastic bags next August, I’ll go to a manufacturer or wholesaler in December and say, ‘Instead of carrying your inventory to the new year, you can make a donation now.’ ”

Non-essential. This includes products a property does not need from an operations standpoint, but which it could use for fundraising (as raffle or silent auction items), to enhance the attendee experience or for some other purpose.

Although these goods and services have the potential to positively impact the property’s bottom line, such results are not guaranteed. Therefore, they should not be treated the same as budget-relieving products.

IEG recommends valuing these items at 50 percent of their cash value, but that figure can be adjusted upward as a negotiating tool to obtain something else or gain a concession from the sponsor.

Requiring additional property resources. This category includes products and services that would require the property to incur additional costs to capitalize on. For example, a sponsor gives the property product it can sell to event attendees and keep the proceeds.

For these items, the value should account for the costs to the property to generate revenue, such as building and staffing an on-site booth to sell the product on site.

In the first year of the relationship, IEG recommends valuing these items at 50 percent of their cash value minus the estimated implementation costs (see Table 1). After the first year, the property can base the value on the revenue it was able to generate and the actual costs to implement.

Navigating Category Exclusivity
Determining where to stake the fence that defines sponsor categories is difficult because the property lines are constantly moving thanks to factors such as deregulation, industry consolidation, technological advances, mergers, retail changes and sponsors’ shifting priorities.

“Look at the financial services industry. Are insurance companies financial services companies, and do banks compete against insurance companies? The answer is yes, sort of,” said Paul Duffy, vice president of partnership marketing with Next Marketing, an agency that represents Principal Financial Group, Inc. and other corporate clients.

The challenge of negotiating category exclusivity typically comes into play when a sponsor wants to lock up broad exclusivity that would include categories the property has a reasonable chance of selling separately (see Table 2).

Although companies should not assume they can own as many categories as they want for the price of one, it is reasonable for them to expect not to have to pay the full cost for each category when purchasing more than one.

To reach a compromise that is fair for both parties, IEG recommends the following steps:

Define sponsor’s core competency. This can be either the sponsor’s primary business category, or, more relevant to many sponsorship discussions, the primary products the deal will be used to promote.

“Sponsors need to be honest and realistic about what categories they legitimately need versus what categories they want,” Adler said. “A quick-service restaurant asking for exclusivity across the entire food and beverage category is unrealistic.”

Adler believes sponsors should try to secure exclusivity in categories “that represent choices in which consumers might reasonably divert spending from your brand to another.” Under that parameter, McDonald’s and upscale steak house chain Smith & Wollensky would not be deemed competitive, he noted.

Next Marketing asks corporate clients to identify categories of interest in legal terms, not marketing language.

“From a marketing perspective, Principal Financial Group can be defined very broadly,” Duffy said. “We try to hone in on the legal side, where there is not a gray area on which services it offers and which it doesn’t.”

Having a defined core competency helps make the negotiation process smoother, he said.

“When we speak with properties, it’s not about what they are losing by selling to The Principal, but what they still have available.”

Case in point: When negotiating The Principal’s sponsorship of two Dale Earnhardt, Inc. NASCAR Sprint Cup Series teams, the agency purchased exclusivity in two categories: retirement and financial planning, administration and investments; and group health benefits, which includes vision, dental and health insurance.

“We took the core categories for our client and left a number of bigger-ticket, more lucrative categories available for the team to sell,” said Duffy, referring to retail banking, credit card and other types of insurance.

For properties it can come down to asking a potential sponsor to identify which categories it plans to activate against.

“Our litmus test is, ‘If I give you these 15 categories, how will you market against them, or do you want them just to lock out the competition?’ ” said Russell Wallach, Live Nation’s president of national alliances.

Discussing a prospective sponsor’s core competencies can actually open up the possibility of working with another company that a property may have assumed to be a competitor.

For example, Traverse City, Mich.’s National Cherry Festival this year worked with two energy companies, each of which titled a parade at the event.

“There appears to be a conflict, but they agreed to coexist because one of them doesn’t sell electricity in this market,” said Chuck O’Connor, the festival’s director of marketing & corporate partnerships.

Once a core competency is defined, the sponsor should be prepared to pay the full established price of the package to lock up the category.

Determine property’s ability to sell additional categories and price accordingly. When a sponsor wants to obtain categories beyond its core competency, the property needs to assess the likelihood of selling those categories to other companies.

The property can then offer those categories to the original sponsor with discounts applied to the full package price based on how likely it is that the property could find another buyer at the full rate (see Table 3 for a hypothetical example).

Rhode Island’s Newport Harbor Corp. took such an approach to its deal with the local Pepsi distributor, allowing the sponsor to lock up multiple non-alcoholic beverage categories at a price below what each category would cost if purchased separately.

The property included the energy drink category at no additional charge because category leading brand Red Bull is not an active sponsor in the market, said Gail Alofsin, Newport Harbor Corp.’s director of corporate sales.

Regardless of whether the company purchases one or multiple categories, the parameters of exclusivity should be clearly spelled out in the contract.

That language should include detailed information on the categories locked up; a list of categories the sponsor can pass through or resell to other companies; and a list of companies the sponsor designates as competitors, and thus off limits for soliciting.

Editor’s note: This article does not constitute legal advice and should not be regarded as a substitute for legal advice.