Deion Sanders, NIL Payments, and Opportunity Costs
Coach Deion Sanders has the Colorado Buffaloes off to a 3-1 start (with Oregon running over the Buffs last weekend). The Colorado QB is Deion’s son Shedeur Sanders, who is considered a first round NFL draft prospect, should he go pro after this year.
But with money from Name, Image, and Likeness (NIL) payments in college, he might not go pro for another year.
This boils down to a question of opportunity costs, which I’ll explain in a minute.
NIL Payments- or NFL Contract?
Shedeur Sanders has to weigh two options:
NIL payments: Several sources estimate that, given Colorado’s success and Sander’s talent, the QB could make $10 million in NIL payments during the ’24-’25 season. He may also be the #1 QB prospect going into the next NFL draft- increasing his first NFL contract substantially.
Rookie NFL contract: So, what’s the difference between the #1 player taken, and someone who is drafted lower in the first round? According to Yahoo: “No. 1 pick in 2023 is roughly $41,217,000 in total value, with an estimated signing bonus of $26,976,000.”
If you’re drafted 10th overall?
$22.6 million in total value- which is $14,241,000 less than the #1 pick.
There’s also the risk of injury before entering the NFL. Fortunately, NFL prospects can buy insurance policies based on their potential NFL contracts.
Let’s focus on Sander’s opportunity costs.
Here are Sander’s choices, assuming that he would be the #10 pick in the ’24 draft:
Stay in college another year:
Potentially earn $10 million in NIL payments and become the #1 pick in the ’25 draft. He gains ($10,000,000 + $14,241,000 increase in total NFL contract value).
However, if injured next year in college, runs the risk of getting an insurance policy payout- but never plays in the NFL.
Leave for NFL after this season:
Earn $22.6 million contract, give up $10 million in NIL for the ’24-’25 college season. Avoids the risk of getting injured next year in college- and losing an NFL contract completely.
Defining opportunity costs
In business, opportunity cost is defined as the potential revenue (or cost savings) and profit that you give up by making one decision rather than another.
Why do business owners have to make these decisions?
Every business has finite resources: limited capital, a certain number of employees, and only so much time. You can’t do everything, so think carefully about what you choose- because you’ll give up something.
Here’s an example.
Sales mix decision
Sales mix refers to the percentage of total sales each product represents. Large manufacturers and retailers may sell hundreds (or thousands) of different products.
Let’s assume that you manufacture baseball gloves, and that you make two models: a normal, fielder’s glove and a catcher’s mitt. Here are the cost and sale price details:
Fielder’s Glove
$100 sale price - $60 total cost = $40 profit (40% profit margin)
Catcher’s Mitt
$135 sale price - $85 total cost = $50 profit (37% profit margin)
To make an apples-to-apples comparison between products, businesses use profit margin. Profit margin is the percentage profit recognized on each dollar of sales. You’ll note that product with the highest sale price (Catcher’s Mitt) is not the most profitable (37% vs. 40% profit margin).
Why not only sell products with the highest profit margin?
Because you lose the opportunity to sell other products to the same customer- and generate more total sales.
This is why big box stores (WalMart, Target, etc.) sell so many products: With a larger selection, the chances of the customer buying something increases. Over the long run, the mix of large and small profit margins works out to a decent profit level.
Food for thought.