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8/3/2019 TakaFukui_MKT_HW1

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1. Describe the business model of Real Madrid (how does it generate

revenues?) and how it evolved during the years in the cases. Discuss

the potential of growth and risks of each revenue source.

Business model of Real Madrid

Up until 2007, when Ramon Calderon became a new president of Real

Madrid, Perez and his management team made an effort to transform

the Real. Perez set out to build a professional organization and

regarded the Real as content provider. To become a world’s best

soccer club, they identified 4 brand value drivers: (1) size of

audience; (2) frequency with which the audience engaged with the

brand; (3) sociodemographic characteristics of the audience; (4)

bridge that can link the brand and the audience. In addition, the team

set 3 interrelated goals: (1) give Real Madrid the financial flexibility to

acquire top players and expand its brand; (2) assemble a team of top

players; (3) leverage its brand and content across a variety of

channels.

Under the concepts and goals described above, Perez and his team

had subsequently succeeded in acquiring at least one world-class

player into the Real Madrid team each year such as Figo and

Beckham. They believed that superstars would attract more

customers and be a key to expand their international business.

According to the Exhibit 4a, Real Madrid generates revenues from

the following 4 main sources: (1) match-day gate receipts, (2)



international competitions, (3) broadcast and pay-TV, and (4)

marketing that includes the sales of branded goods and sponsorship).

Each source of revenues increased during Perez’s management.

However, as the management team developed the new marketing

strategies, marketing contribution to the entire revenue drastically

increased and became the most important revenue source while gate

receipts and TV rights that traditional business model emphasize were

still important sources.

Potential of growth and risks of each revenue source

(1)Match day

Match-day gate receipts are expected to be stable or gradually grow.

For most top clubs, match-day income is a declining source of

revenue. However, Spanish soccer clubs were less affected by this

trend because of season ticket sales. Real Madrid’s stadium has

80,000 seats but season tickets holders held 58,000 tickets.

Furthermore, 4,000 seats were reserved as boxes and VIP seats. Given

this situation, this revenue source would be stable with few risks.

Stadium deterioration might be a risk, but that kind of risk could be

improved via construction of more modern and comfortable stadiums.

(2)International competitions

Revenue from international competitions can be volatile and risky.

This revenue source depends largely on a club’s participation and

performance in major competitive events such as the European



it hired. The strategy of expanding international market also could be

the potential of growth. On the other hand, counterfeit could be a risk

for the club. In reality, it faced the problem during the 2003 Asia Tour,

cutting Real Madrid sales and disappointing sponsors such as Adidas.

Also, excessive commercialization would be a risk for Perez strategy.

The good example of this is Manchester United which had been

criticized for exploiting its fans by selling too many products and for

constantly changing its strip uniform.

2. Define the customer segments targeted by Real Madrid, describing

their preferences (how do they maximize their utility or consumer

surplus?), their characteristics, and their relation to the revenue

streams in question 1.

Consumer segments targeted by Real Madrid can be divided into 4

categories: (1) socios abonados, (2) socios non-abonados, (3)

supporters, and (4) international supporters.

(1)Socios abonados

Preferences and characteristics

Socios abonados are cardholding members who paid their dues, had

the right to go to the field every game. They can get discounts for

seats and a vote to elect club presidents every four-year term. Season

ticket holders can attend the Spanish League games. By paying

additional 30% premium over league game prices, they can also



attend UEFA and King’s Cup games. Thus, they are the customers who

maximize their utility or customer surplus by purchasing season

tickets, getting discounts for seats, having the right to vote club

presidents, and attending the Spain League games or UEFA and King’s

Cup games.

Their relation to the revenue streams

They are related to all of the revenue streams described in question 1

via purchasing tickets and merchandise and becoming subscribers of

pay-TV.

(2)Socios non-abonados


They are the customers who maximize their utility by getting benefits

from some price discounts on available tickets and merchandise,

attending 2 matches per year and receiving the club’s magazine.


They contribute to the revenue of two match-day gate receipts, and

marketing revenue by buying products. They might be related to

international competitions and broadcast and pay-TV revenue streams

because some of them would attend the international matches and be

pay-TV viewers.

(3) Supporters (except international fans)


They are defined as a nondues-paying member who likes to attend



matches whenever he or she could by purchasing tickets. They might

be a socios of another club, but they would support Real Madrid when

it played UEFA games. They would attend matches together with local

team fans getting benefit from discounts on games.


They are related to all of the revenue streams described in question 1

via purchasing tickets and merchandise and subscribing pay-TV.

(4) International supporters


They are Real Madrid fans from all over the world. They are the

customers who purchases products through Real Madrid’s worldwide

retail network. They can maximize their utility by getting discounts

from the Real Madrid fan card. Cardholders receive a free official club

magazine, ticked preferences, and commercial discounts from partner

companies. They might feel involved with the business of the Real

Madrid.


They are mainly related to the revenue streams of international

competitions and marketing via purchasing tickets and merchandise.

3. What is the lifetime value (LTV) of one individual “socio” (that is,

the most loyal consumer that lives in Madrid) of Real Madrid and the

LTV of one individual international fan? Approximately, what is the



total value of each these two segments for Real Madrid? Using your

findings, provide recommendations for future marketing

investments in the two consumer segments, including how you

would allocate a marketing budget between them.

Socio

In this case, we can use the following formula.

( ) AC r d

d m LTV −

−+

+=

11

Gross margin per socio (m) = Spain League games (370) +

International games (150) +

Merchandising (100) + TV demand (100) – promotion and gifts

cost (120) = 600

(Promotion and gifts cost should be included as maintenance cost)

Discount rate (d) = 5%

Retention rate (r) = 100%

Acquisition cost (AC) = 0

( )600,120

%100%51

%51600=−

−+

+= LTV

International fan

We can use the following formula to solve the longtime value of an

international fan.

AC d

r r r am

d

r r am

d

r am LTV −

+

−

+

+

−+

+

−=

3

32133

2

2122111

)1(

***)(

)1(

**)(

1

*)(

Gross margin (m) = Game tickets (150) + Merchandising (200) + TV

demand (100) + Real Madrid fan card annual



fee (38) = 488

Maintenance cost (a) = 120

Discount rate (d) = 5%

Retention rate (r) = 50%

Acquisition cost (AC) = 10

(In 2001, Real Madrid fan card was launched at a cost of 1.9mil and

the Real issued 190,000 cards. We assumed that each international

fan has a fan card and AC is 10.)

28810%)51(

%50*%50*%50*)120488(

%)51(

%50*%50*)120488(

%)51(

%50*)120488(32

=−

+

−+

+

−+

+

−= LTV

According to the LTV of each customer segment, LTV of socio is much

greater than that of international fan. It seems that focusing on the

domestic market is more effective than international market.

However, the number of potential international customers is much

larger than that of potential domestic customers. Given the fact that

Chinese market for sports merchandise was attractive, and that Real

Madrid’s marketing department believed U.S. market could be worth

as much as 45% of global sports merchandise returns, we recommend

that a certain amount of budget should be allocated to acquire

international fans. (I have no idea about allocation in detail….)



4. Calculate the value of a player, using as example the purchase of

“David Beckham” by Real Madrid and applying the Net Present Value

(Discounted Cash Flows) approach. Discuss your results in two ways:

(1) profitability of the decision to transfer the player to Real Madrid,

and (2) impact on the brand image and equity of the club.

(1) Profitability of the decision to transfer David Beckham

to Real Madrid

According to the calculation above, the decision to transfer David

Beckham results in net present value of - €5.48 million. Additional

economic profits that are expected to be gained by acquiring

Beckham don’t cover his transfer fee and salary. In terms of

profitability, the decision doesn’t make sense unless the club can

benefit from other intangible values. Perez’s Galacticos strategy

works only if the club has enough money and the star player improve

the club’s brand image for sure.

(2) Impact on the brand image and equity of the club



Acquiring a star player such as Beckham can immediately improve

the club’s brand image. It is difficult to estimate the increased value

of brand image, but superstars can attract people’s attention through

media and many companies as a sponsor. Once people recognize the

brand, the effect may last long even if a star player moves to another

club. One good example of this is Antlers, the Japanese soccer club. In

1992, it acquired Zico who was one of the famous and popular

Brazilian soccer players. At the time, soccer was not a famous sport in

Japan, compared to baseball. However, the Brazilian superstar

attracted a lot of attentions from Japanese media and soccer fans.

The number of Antlers’ supporters drastically increased. In addition,

he was not only the player but also the coach for other players.

Actually he took command in games and led the team to win the first

prize of the J League (Japanese Professional Soccer League) in 1993.

He retired in 1994, but the club has been one of the most famous,

wealthiest, and strongest soccer clubs in Japan since Zico joined. His

contribution to its brand cannot be numerically estimated but it is

obvious that the increased value of the brand went beyond the

financial burden of his transfer fee and salary.

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