What is a risk companies sometimes face when they use a celebrity endorsement?

Word-of-mouth marketing is often touted as one of the most “grassroots” and “organic” methods to positively promote a brand. Brands love having their fans talk them up to their friends and family, post about how great their products are on their social media channels, and willingly wear or use their products for all to see. It’s a fantastic way to earn third-party credibility while promoting a product. We all know Diet Coke thinks Diet Coke is great, but what does your sister think about it? Your best friend? Their opinions are always going to be more important to you than that of a paid spokesperson.

But what if that person is a celebrity?

Celebrity endorsements are nothing new. They originated in the mid-1800s when purveyors of medicinal tonics would earn the endorsements of religious leaders and those in the monarchy to help sell their wares.1

The concept of celebrity endorsements also is rooted in a significant amount of science and psychology. This is partly based on Pavlov’s research with dogs. You know the one. Pavlov rang a bell every time he fed his dogs. The dogs began to create an association between food and the ringing of the bell. Eventually, even when the food wasn’t present the simple ringing of the bell caused the dogs to salivate.

Ok, we’re not dogs, but advertisers are counting on that same association between their brand and the celebrity endorsing it.

The short version of this is that when we see someone famous promoting a product we tend to translate the qualities we’ve assigned to that person (beauty, strength, likability, athleticism, etc.) directly onto the product. Example: If you consider LeBron James to be a great athlete, Nike automatically gets a boost as being a product great athletes wear, because LeBron is featured in its ads. So, if you want to be a great athlete (or at least look like one), you should wear Nike.

So what happens when that celebrity falls from grace?

We’ve seen it plenty of times in the last few years. OJ Simpson, Michael Phelps, Martha Stewart, Michael Jackson, Kobe Bryant, Tiger Woods. And most recently, Jared Fogle.

Studies indicate approximately 20% of the ads on television today feature a famous person, but that number may be declining as brands weigh the risk and potential repercussions of having a famous face associated with their brands.2 Not to mention the associated cost in a world where brands must more carefully watch marketing budgets.

Within the first two weeks of the scandal involving Tiger Woods hitting the mainstream media, his top three sponsors (Nike, Electronic Arts and PepsiCo/Gatorade) lost over 4% of their aggregate market value. That loss can turn into a competitor’s gain. And in the sometimes razor-thin margins of brand-commodity competition, that could be the difference between a good and bad quarterly report to stockholders.

Enter morality clauses.

Morality clauses give the sponsor an out in an otherwise ironclad endorsement contract if the spokesperson commits an act that falls within the purview of the clause. Typically that is “…defined as behavior that is criminal, scandalous or otherwise publicly reprehensible.”3 These clauses typically are some of the most controversial and heavily-negotiated provisions of an endorsement contract, but they’ve been held up as “…valid and enforceable because the advertiser is paying for the use of the [celebrity’s] good name and image.” 3 That advertiser may wish to end that relationship when that person’s actions damage that name and image.

Hertz, Kellogg’s, Kmart, Pepsi, McDonalds, Gillette and Subway (the sponsors of the above-mentioned celebrities involved in very public scandals) all ended their endorsement deals with their respective celebrity once the scandals broke, because scandals sell tabloids…they don’t sell products.

Sure, people make mistakes. No reasonable person would deny that. But with celebrities, their mistakes are often played out on a very public stage. The celebrity who currently is bringing a brand a positive, sophisticated and alluring association could at any time flip to a negative, taking your brand down with it.

So, is it worth the risk?

Resources:
1 Celebrity Endorsements, Firm Value and Reputation Risk: Evidence from the Tiger Woods Scandal

2 Marketing with Celebrities

3 A Moral Dilemma: Morals Clauses in Endorsement Contracts