Advertising: The Value of Celebrity Endorsements

What's the value of a celebrity endorsement for your brand?  Harvard's Anita Elberse and and Barclay Capital's Jeroen Verleun examined this question recently.  They looked at how a firm's sales change as they sign a star athlete, as well as how revenue changes with major accomplishments by the athlete.  Elberse and Verleun found that a firm's sales do rise with the signing of a star athlete - on average by approximately 4%.  Moreover, revenue increases with each subsequent major accomplishment by the athlete.  In other words, winning helps drive the firm's sales.  However, they found decreasing returns to winning.  In other words, sales increases tend to diminish in size as the athlete racks up subsequent victories (the first Grand Slam victory by a tennis star yields a bigger jump in firm revenue than the fifth Grand Slam victory).  The researchers argue that firms need to keep these decreasing returns in mind as they contract with star athletes.  For instance, providing bonuses of equal size for each major victory would not necessarily make sense, since the associated economic benefit for the firm falls over time.  Moreover, the decreasing returns might suggest that long term deals should be negotiated with caution.