Brands are playing a 'deadly game of Russian roulette' with celebrities that's costing them millions

It only took one brand to drop Ryan Lochte before the rest of his sponsors followed suit. First Speedo dumped the decorated Olympic swimmer, then Ralph Lauren. The rest cut ties soon after.

The episode was a cautionary tale for brands that spend millions endorsing celebrities and athletes.

"Celebrity brand endorsements are risky business," Jeetendr Sehdev, professor of marketing at USC, wrote in an email to Business Insider. "As the costs of celebrity endorsements get bigger, many brands start playing a deadly game of Russian roulette."

There's no question brands bet big on atheletes. Michael Phelps has made $12 million in endorsements this year, according to Time. LeBron James' lifetime endorsement deal with Nike is reportedly worth more than $1 billion.

ESPN's Darren Rovvell reported that Lochte lost about $1 million in endorsements.

When celebrity endorsements go right, they're a powerhouse tool. Sehdev points to successful deals like Michael Jordan and Nike; Jennifer Aniston and Smart Water; and Mark Wahlberg and Calvin Klein.

There are several reasons why brands want to work with celebrities in the first place.

The most critical point, Sehdev notes, is that utilizing a celebrity could make a brand appear relevant. Celebrities can make brands cool and make them stand out. They can also help foster trust. 

"A brand at its root is about trust," Eric Schiffer, chairman of Reputation Management Consultants, told Business Insider. Using a celebrity, he says, encourages as sense of "familiarity" with a brand, so that when shoppers go to the store, they already feel like they have established, trusting relationships with certain brands. 

On the flip side, Schiffer points out, celebrities can destroy that same trust. And that's pretty much what happened with Lochte.

Lochte landed in hot water after he claimed he and other US swimmers were robbed at gunpoint in Rio during the Olympics. He later backtracked, saying he "over-exaggerated" the story. Lochte has since been charged by Brazillian police over the false robbery claim and he is being summoned back to Rio.

Sometimes, Sehdevs points out, celebrities can come out of a scandal much better off than brands. 

"Starstruck CMOs be warned," Sehdev writes. "More celebrity endorsements are being overlooked by savvy consumers and brands are becoming the laughing stock while celebrities are walking away with reality TV show deals."

Which is why Sehdev says it's a matter of weighing the risk versus the reward and there are four things a company should consider when deciding whether to drop a celebrity. 

The first is how severe the issue is. In a survey that Sehdev executed of 1,500 people living in the United States between the ages of 18-59, 1 out of 5 people said they would be less inclined to buy a product backed by a celebrity convicted of a DUI, but 4 out of 5 said they wouldn't purchase a product backed by a celebrity who was convicted of domestic violence or rape. 

Also important is how heavily consumers associate the celebrity with the brand. The third thing to consider is how famous the celebrity is. The fourth most important thing is how big the contract was. Sehdev says that lifetime endorsement contracts - like David Beckham's relationship with Adidas - tend to not be a good idea because they can lose their effectiveness over time.

Sehdev told Business Insider that typically, brands don't have to follow through with a contract if a celebrity or athlete does something salacious. But when brands do back out of endorsement deals, they lose any money that has already been paid out. 

One of the worst celebrity endorsements of all time was Subway's relationship Jared Fogle. Fogle became famous after losing 200 pounds on a diet of Subway sandwiches. After earning millions as a spokesperson for the brand, Fogle was sentenced to nearly sixteen years in prison for possession and distribution of child pornography and traveling across state lines for sex with a minor. Subway cut ties with Fogle before he was formally charged with the crimes. 

But not all bad behavior is so detrimental.

"The risks are not always devastating for an endorser in the event a celebrity misbehaves," Sehdev writes. "Sometimes, it helps brands shed their stodgy images. Burberry reembraced Kate Moss after her alleged cocaine snorting scandal. Both brands remain perfectly aligned [to] date." 

A celebrity's bad behavior can actually create opportunities for a brand.

By choosing to cut Lochte from their endorsements, Schiffer said, brands like Speedo and Ralph Lauren had big opportunities to send a message about their values. Sehdev noted that 4 in 5 people said Lochte's bad behavior raised greater awareness of Airweave and Syneron-Candela, two brands that sponsored and then publicly dropped the athlete, Business Insider's Cork Gaines reported.

Pine Bros. Softish Throat Drops decided to ride the Lochte publicity wave this week by offering to sponsor the athlete and feature him in upcoming ads for the brand. 

Of course, celebrities can also bounce back from their mistakes. The best way for Lochte to do this would be to focus on what he does best, Schiffer said, which is winning in the pool.

For any brand or celebrity, Schiffer says the important thing to do is to ask for forgiveness.

"Everyone makes mistakes," he said. "No one's perfect."