The National Football League has long been a business that segments its customers and attempts to value-price. Segmentation is a process of creating groups of customers with similar needs or behaviors and identifying the products that best fit each group. Value pricing is the process of determining how valuable the products are to each segment or customer and setting prices that match the value. The NFL applies these concepts for seat prices and broadcast rights. Better games and time slots command higher prices for broadcast rights, and better seats and services command higher ticket prices. Similarly, NFL players attempt to value-price their services to the teams, within the constraints of the collective bargaining agreement (CBA) and existing contracts. The current CBA negotiations provide an interesting test of players’ ability to value price.
Customer Value
In most markets, sellers of products or services can sell their wares to anyone who wants to buy them at whatever prices the buyers are willing to pay. The amount those customers are willing to pay (the value) for a specific product is determined by how much better off the buyers will be with that specific product than with their next best alternative. Most often, the next best alternative is offered by a competitor.
In the professional football market, players are selling their abilities to run, throw, catch, block, tackle, etc. Their competitors are other players with similar skills. The buyers, the NFL teams, can create more value of their own by assembling teams with more skilled players, and therefore they will pay more for players who have demonstrated superior abilities.
Competition
The players and teams have learned over the years that the league is healthier and more valuable when there are more competitive teams. To ensure that, they have created a structure where the teams and players:
- share revenues
- establish working conditions for the players
- restrict the ability of players to switch teams
- set minimum and maximum salaries for each team
- run a draft process in which teams take turns selecting players who have not played in the NFL, giving the drafting team exclusive rights to the players selected
- establish a pay scale and contract period for drafted and undrafted rookies
- determine the structure and financial rewards for playoffs
These are all part of the Collective Bargaining Agreement, and they place some limits on players’ ability to value-price their own services.
Negotiations – the CBA
The first limitation is drafted players may offer their services and negotiate pay only with the team that drafted them. Also, the players are not allowed to price their services outside the pay scale designated for their draft position.
Although the contracts for any player drafted are potentially worth millions of dollars, the contracts are not guaranteed. Players drafted in later rounds receive small signing bonuses and their pay, if they make the team, is often near the league minimum. The players drafted highest receive millions in their signing bonuses, but their contracts are not guaranteed. Players who perform poorly can be cut, losing some of the value of their contract. If they perform very well, like Patrick Mahomes and Lamar Jackson, they can’t capture that increased value until their contract expires at the end of the fourth or fifth year.
The players who are best able to value-price their services are veterans coming off expiring contracts. As free agents, they can sell their services to any team (with some limits), for any price another team is willing to pay. The players who have performed the best or are perceived to provide a team with the best chance of winning capture the highest salaries. As an example, last year there were six quarterbacks each earning at least $30 million, while the median salary of all players was only $860,000. Since the average tenure of an NFL player is only three years, most players never cash in.
The CBA expires at the end of the 2020 season, and the team owners have proposed a new agreement and submitted it to the NFL Players Association (NFLPA). The proposal’s biggest changes include:
- an increase to 17 regular-season games, which will increase the value of broadcast rights
- an increased salary cap from 47% to 48.5% of revenue
- increased minimum salaries
- one additional playoff team and playoff game in each conference
- slightly more days off
- an increase in roster size from 53 to 55
- an increase in practice squad from 10 to 14
- improved health and pension benefits
The Vote
Many of the elite players with huge contracts have indicated they plan to vote no on the proposed CBA. They already earn plenty of money and do not believe the new structure would appropriately compensate them for a 17th game. I agree with them. The expanded risk of concussion and debilitating injuries is not worth it.
The players at the bottom of the compensation scale would receive a relatively larger financial benefit from the higher salary cap and expanded rosters, but they must decide if the extra pay is enough for the increased beating they would take. Is it enough for the additional risk of concussion and CTE? They should also consider whether it improves their ability to capture the value they deliver to NFL teams.
Since there is only one CBA, both elite and non-elite players will be bound by any agreement. They must come to some consensus or compromise. The owners are betting that there are enough players at the lower end of the pay scale who will be attracted by the increased money to more than offset the very highly paid players who do not see the value.
In my opinion, the proposed agreement does not improve the players’ ability to value-price their services. It provides a little more money, but I don’t think it is worth the risk to their health. Adding a 17th game would bring huge financial value to the teams and their owners. If the players want to capture their share of that value, many of them would be better off with clauses in their rookie contracts allowing them to opt-out after two years. Teams can cut a player who is not playing well. Allowing the players to get out of their contracts early would enable those who have performed better than their competitors to price their services at amounts that reflect their value.
I wrote this post about the NFL in part because the CBA vote is due this week, but also to illustrate that value pricing has many forms. When negotiating prices, figure out what is important to your customers – how they get value from your services. Then figure out what is important to you, and how your customer can pay you some of that value. It may be simply a higher price, but it also might include performance incentives, purchase guarantees, larger shipment sizes, faster payments, etc. Value comes in many shapes.