While contracting with celebrities to endorse a company’s brand adds to the competitive power of its product offering vis-a-vis the offerings of rivals, one of the big risks of bidding to win contracts for celebrity endorsements is that the payments made to one or more celebrities are virtually certain to exceed the value of any benefits gained unless and until the company’s overall celebrity rating exceeds 150 in each geographic region.
Company managers will:
underestimate the size of the added profits it will be able to earn if it wins the contract for the celebrity,
submit too low a bid, and
thus lose the contract to a rival bidder.
Company managers will also underestimate the increase in the number of branded pairs the company will be able to sell if it wins the contract for the celebrity and not have the capacity to produce the extra volume, thus losing out on much of the added profit potential of signing the celebrity.
A company can bid too aggressively and end up paying the celebrity an amount that exceeds the value of the celebrity’s endorsement — this is because it is hard to forecast whether the incremental gains in sales volume and revenues will be sufficient to more than cover not just the costs of the contract but also the added costs of the additional pairs sold.
Company managers will underestimate the size of the extra profits the company will be able to earn if it (1) wins the bid for a celebrity’s endorsement and then (2) immediately boosts the SVO rating of the company’s branded footwear to B-stars or higher in all four geographic regions for the remainder of the contract period.
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