The official announcement of Nike’s deal with Liverpool FC is a clear marker that the club have firmly re-established their position within the elite tier of European clubs.

The increasing concentration of wealth amongst fewer clubs (and mooted changes to club competition structures) means that this group of clubs is now more entrenched than ever, and as a result, talent, eyeballs and money will continue to disproportionately flow to these teams. It is, therefore, little surprise that an ‘arms race’ has developed between Nike and adidas to acquire the elite European club assets.

The deal between Liverpool and Nike has attracted much attention due to both the rare and public nature of the dispute between Liverpool and New Balance and the commercial terms of the deal, with a much lower base rights fee compared to Liverpool’s competitive set (and indeed the current New Balance deal) and higher royalty fees payable to the club based on sales of licensed products.

While the structure of the deal is common (base fee plus royalties), a larger proportion of Liverpool’s total cheque will be directly linked to sales versus the competitive set. The construction of the deal in this way was likely driven to a great extent by the (recently agreed and long-term) base fee commitments of Nike to PSG, FC Barcelona and Chelsea.

There is a belief that the football licensed market for the elite clubs is immature compared to major US sports leagues due to the comparative globality of football. The size of the opportunity for both Nike and Liverpool, two of sport’s most global and powerful brands is large.

The below factors, which are common to football licensing business, will be most influential in driving total sales figures and, therefore, the potential upside for Liverpool in opting to switch to Nike rather than continue with New Balance.

Maximising the value of the ‘Hero Product’: As rights fees of elite properties have increased for the likes of Nike and adidas, so has the recommended retail price of the key licensed product that drives overall sales volume and value – the first team shirt.

Pricing strategy has become an increasingly important consideration, a balance between pricing potential consumers out and maximising value from those who are willing to pay a premium for the shirt. This has led to both Nike and adidas creating different ‘tiers’ of the official shirt – the version that is the exact replica of what the players wear (sold at a premium) and the more commonly sold ‘replica’. For the 2018 Fifa World Cup, Nike also launched a lower price/quality version of replica products.

This creates complexities in how different versions of the same product are marketed and supplied to the market and the overall revenue opportunity is maximised without cannibalisation.

The female fan also provides a large and – until recently – untapped growth opportunity. Catering to female fans through specific sizing, design and pricing of the shirt (it remains the number one product regardless of gender) is essential to maximise sales. Finally, the PSG-Jordan example is the proof point that different shirts can be used to target different consumer segments, drive incremental purchases and appeal to football fans through the lens of fashion and style rather than club support.

Optimising the product range & supply chain: While the various iterations of the first team shirt drive the majority of sales, a broader product range is required to maximise the opportunity by catering for the full range of demands; for example, products at a lower price point, style- or fashion-led products, subtle products that don’t overtly show club association etc.

A wide product range is also required to cater for market specific preferences; the fan in China demands a different product to the fan in the UK etc. The key issue for the likes of Nike and adidas is supply chain and speed to market.

A large product range may maximise the total opportunity but requires lower minimum order quantities, an ability to react to demand and replenish stock and the ability to capitalise on key moments in the season with fast product launches; in effect the Zara fast-fashion model. The businesses of Nike and adidas (and their competitors) are not set up in the optimum way to capitalise upon all opportunities, unlike a company such as Fanatics.

Growth in emerging football markets: While the elite European clubs are very much global entities, licensed product sales continue to be most concentrated in the home market and Western Europe. China and the US represent large growth opportunities but have completely different market dynamics that need to be considered.

The previous points on price and product range also apply to maximising growth opportunities in these markets, but distribution is also a critical point; an area where Nike and adidas have clear superiority over the likes of New Balance and therefore Liverpool’s sales growth opportunities in these markets appear large.

Marketing: There has been cynicism about Nike’s commitment to use top non-footballing stars such as Lebron James and Serena Williams, which will impact sales of LFC-licensed products. This should not be looked at through the lens of the omnipresent first team shirt which needs no further visibility, but rather the wider range of lesser marketed off-field products and ‘limited’ ranges. Using top talent and celebrities to promote the wider product range ensures these items are promoted to the right audience in the right context and should help grow the size of the total licensed pie.

Dan Haddad is the head of commercial strategy at Octagon.