Economic Value of Celebrity Endorsement: Tiger Woods’ Impact on Sales of Nike Golf Balls

In the endorsement business, golf has been the leading sports industry to have endorsers.[11] “The Fortunate 50”, a list of the 50 top earning American athletes in salary, endorsement and appearance fees compiled by Sports Illustrated, ranked Tiger Woods and Phil Mickelson 1st and 2nd, respectively in their 2008 and 2009 rankings.[4] It is documented that Tiger Woods has consistently earned significantly more off the course than on the course by a variety of endorsers. Thus, this begs the question of just how profitable are the endorsements for the firms sponsoring these athletes? The objective of this paper is to study the effect of endorsement in terms of profit by looking at Nike and its endorser, Tiger Woods. Studying Tiger Woods is fitting because it was believed in 2008 that Tiger Woods was on his way to becoming the first $1 billion athlete. In 2007, his earnings from on the course were $23 million while his endorsement deals totaled $100 million.[12] In addition, with the recent revelation of the golfer’s infidelity, we are in a position to quantify not only the positive effect, but also the potential negative effects of endorsement contracts on profits. We develop and estimate a consumer demand model for golf balls by using a rich data set made available by Golf Datatech LLC. Taking into account Tiger Woods’ inherent quality as a player, Nike’s advertisement expenditures, and other PGA tour players, we find that not only did Tiger Woods’ Nike endorsement result in a significant number of existing customers switching toward Nike products, but it also had a positive effect on the golf ball industry as a whole with increases in primary demand. By sponsoring Tiger Woods for 10 years, we find that the Nike golf ball division reaped additional profits of $60 million through the acquisition of 4.5 million customers who switched as a result of Tiger Woods’ endorsement. In fact, as a result of Tiger Woods switching away from Titleist to Nike in 2000, we estimate that the Titleist golf ball division experienced a decline of revenue of 7.48% (-8.11% in profit). We also find that the recent scandal regarding Tiger Woods’ infidelity had a negative impact, resulting in Nike losing approximately $1.3 million in profit with a loss of 105,000 customers. Meanwhile, it cost the rest of the golf industry a loss of $6.2 million in profit. However, we conclude that Nike’s decision to stand by Tiger Woods was the right decision because even in the midst of the scandal, the overall profit was greater by $1.6 million for Nike with Tiger Woods than without him. This finding may be of interest to firms that use endorsements as a marketing strategy to promote its products. Lastly, we find that the endorsement business in general has a primary demand effect where the overall number of consumers increases in the golf market. This suggests that endorsements are beneficial for the golf ball industry, which may be of interest for business policy makers.