The Behavior of the Sports Consumer
9 minute read · Issue Number 120 · May 13th, 2022
If you have not been following the public markets or the macroeconomic environment recently, you should know that the perspective is not optimal.
Inflation is rising (i.e., most things are getting more expensive), supply chains worldwide are struggling to keep up with demand, and some commodities are becoming more scarce, amongst other problems.
To counteract these economic effects, central banks and governments worldwide are using the most powerful tool at their disposal – interest rates.
Today’s Sports Tech Biz edition is a premier on interest rates, how they’re used, and their impact on the sports consumer.
What are Interest Rates?
Simply put, the interest rate is just the cost of money.
Sounds weird? Bear with me for a minute, and it will make sense.
The central bank is the most important financial authority in a country because it controls the money flow at a country level. They lend money to regular banks, who then lend money to you and me.
The interest rate is the ‘cost’ at which central banks lend money to other banks, who then lend money to the public.
This rate represents the amount (in percentage terms) to which lenders need to pay the interest back to the bank for the time they borrowed the cash.
Say you need 100 dollars to afford a Dallas Cowboys game but don’t actually have the $100 currently; what do you do?
You go to the bank and ask for a $100 loan. The bank agrees to give you $100 but asks you to pay an additional 5 dollars (or 5% interest) on the loan at the end of the agreed period.
If rates are low, it is cheaper to borrow, so more people will get loans – but if rates are high, it becomes expensive, so fewer people will end up asking for them.
That’s why the best way to think about rates is to consider them as the cost of money.
Rising Interest Rates
In a broad sense, interest rates have the power to control the amount of money that is flowing in any economy.
A stable economy goes through different cycles, including growth and peaks when things are going well and contractions that lead to recessions during more challenging times.
Interest rates serve as a tool to boost or diminish the amount of cash flowing around, depending on the stage of the economic cycle.
When there’s tons of money in the economy, things tend to get more expensive because more people can afford to pay for various products, services, and experiences, particularly items with a fixed or limited supply.
For example, suppose Manchester United could only host 40,000 fans in their stadium.
Prices are set optimally to address that supply and fill it with 40,000 fans. Although, what happens if more people could afford tickets and ManU would suddenly have 70,000 people trying to get tickets?
They raise prices to counteract this effect.
That’s the origin of what’s called inflation – it just gradually happens at every level of consumer spending.
Inflation is good until a certain point, and it cannot go on forever. Products need a balance in price.
However, if you add to that the fact that the supply chain and commodities have been limiting the number of available products out there, then it makes sense for things to get more expensive faster.
Central banks then raise interest rates to limit the amount of money flowing into the economy, reducing demand (due to decreased purchasing power) and requiring companies to lower prices again.
Suppose a guy named Fred lives on a monthly budget of $10,000.
Fred pays his rent, insurance, gas, food, social activities, the season ticket to watch his hockey team, his fitness membership, the Netflix and Disney+ accounts, some merch of his favorite team, the NBA League Pass, and some other expenses.
Fred lives a charmed life and never wants to change his consumption.
But what happens when out of a sudden, things get pricier, and $10,000 is now not enough to cover his usual spending?
What if Fred would now need $12,500 to have the same lifestyle he had before?
What would Fred do?
Consumer behavior theory says that Fred will have to order and prioritize his spending based on what brings him the most utility.
The Maslow Hierarchy of Needs says that Fred will first cover their primary needs (food, water, shelter, etc.) and then look for products that fulfill other secondary requirements like experiences and entertainment.
Rising Rates in Sports Consumption
Going back to Fred in our previous example – assuming he has no way of earning or getting more money for his monthly budget. What expenses do you think he will cut first?
Based on the hierarchy of needs and the theory of utility, I guess that entertainment and leisure will be the first ones to go – Netflix already lost +200k subscribers this year, and they estimate they will lose about 2 million in 2022!
For the most part, sports are entertainment. And while entertainment is excellent, it is not something humans need to survive. Overall and at a macro level, I would expect people to stop attending games, paying for season tickets, or having diverse sports streaming subscriptions instead of eating less or stopping paying rent.
The Bottom Line
Central banks use interest rates to prevent the economy from going into a crazy inflation loop where things get more expensive to infinity (like what happened in Venezuela and Argentina).
A higher rate means higher borrowing costs and fewer people borrowing money and limits people's purchasing power, making them choose where to spend their money.
The sports industry will most likely be affected by higher rates because of its role in people’s hierarchy of needs and how they prioritize spending.
With less cash in hand in the economy– fewer demands for games, entertainment, and overall spending on sports seem like it will happen next.
🎙 Halftime Snacks Podcast
Rob is the Chief of Content, Development, and Strategy at Learfield – the leading media and technology company in college athletics. They connect brands with passionate fans through media, technology & data.
We talked about Robert's specific background in the military and the experiences that built his mindset around content and marketing.
We then discussed the product mix strategy for Learfield through learning the reasoning behind projects like The Varsity Network and Learfield Studios.
Lastly, we chatted about diverse trends around content, data, digital media, and innovation in college sports.
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