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Did Nike Really Gain From Tiger Woods' Scandal, as the Numbers Suggest?

From a financial point of view, Nike (NKE) was right to stick by Tiger Woods despite the scandal that enveloped him in 2009, but the fascinating new study that makes this case also suggests that when brands encounter controversy they ought to destroy the village in order to save it, so to speak. That can't be right.

Carnegie Mellon University's Tepper School of Business looked at Nike golf ball sales from the pre- and post-Woods scandal periods, in which most brands chose to sever their ties with Woods. The academics compared that to the effect Woods had on Titleist before and after he ended his endorsement of that company in 2000. Overall, the scandal cost Nike $1.7 million in sales and lost the company nearly 105,000 customers, the study shows:

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However, Woods' endorsement -- which cost $200 million -- was so lucrative to Nike that despite that decline the company still saved money* it would have lost had it abandoned the golfer:

... from November 2009 to April 2010, we find that Nike made an extra revenue of $2.0 million from Tiger Woods' endorsement effect which we estimate as additional $1.6 million in profit. From this, we conclude Nike's decision not to join the likes of Accenture, AT&T and Gatorade was the correct decision.
The quant-y MBAs who predominate in the ranks of marketing vice presidents will love this study: It puts some hard data on the nebulous question that perennially bedevils the field: How do my marketing dollars affect sales?

But advertising clients would be wrong to conclude, as the Tepper folks do, that just because Nike eked out a $2 million saving then sticking by Woods was the right decision. That $2 million came at a great cost, not just to Nike but to the golf category in general, and it doesn't account for the non-quantifiable credibility hit that Nike took, especially from the "did you learn anything" ad, in which Woods is shown moping into the camera while the voice of his dead father lectures him from the grave.

This is a classic example of one of my favorite management flubs, which (for want of a better alternative) I'm going to christen the Edwards Quant Fallacy:

  • There's a difference between collecting good data (what quants do) and applying good judgment to data (what good managers do).
This fallacy -- in which otherwise bright managers make stupid decisions because the data in front of them suggested so -- has popped up recently at Google (GOOG), Roche (RHHBY) and Clorox (CLX). After burying themselves in their own data, those companies concluded, respectively, that "cougar" dating sites are less family-friendly than "sugar daddy" sites;* that the extraordinarily dangerous acne drug Accutane was not dangerous; and that Latinas love mopping floors.

Here's what Nike's $2 million saving cost the rest of the category, according to the Tepper study:


That's $10.2 million in sales down the drain and 441,000 customers turned off. Bear in mind, golf is a mature industry with little room to grow. Every customer counts. And everyone knows that increased demand across the category will either benefit the category leader (Nike, in this case) or at least provide benefits to all competitors. The Nike-Woods strategy, then, was the opposite of this: It destroyed chunks of the category in order to leave Nike more dominant over the pieces that remained.

We don't know, unfortunately, whether Nike would have saved those extra sales anyway if it had followed Accenture et al. and dropped Woods (or if the company had kept the contract but stopped actively linking itself to him). But I strongly suspect that in the long run, the Woods scandal was not good for Nike. (Obviously, Woods overall was a net positive.)

To put it another way, why don't you walk in to your boss's office and say, "Can I execute a marketing plan in which our celebrity endorser makes us look ridiculous if it saves us $2 million in sales but lowers demand in the category overall?" If you work at a company that reaps $5 billion in revenues per quarter, like Nike, I'm guessing the answer to that proposal will be, "No."

*Correction: This item originally incorrectly characterized the $2 million in relation to the Woods endorsement effect identified by the Tepper study. It's a savings of $2 million, not a gain. Had Nike walked away from Woods, the loss would have been $2 million greater than it was, the study says. Apologies for the error.
*Correction II: Google's alleged double standard on cougar dating sites turns out to be a myth created by the New York Times.
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