Player Value: The Postseason Effect

In Parts 1, 2 and 3 of my recent article on measuring the dollar value of a player to his team, I took readers through my process of estimating a team’s marginal revenue attributable to a player’s on-field performance. The core of my analysis is a series of regressions to estimate the all-important relationship between winning and revenues for each team. The highlights of my conclusions are:

There is a measurable relationship between winning and revenue. For each team, there is a statistically significant relationship between winning and attendance. Changes in attendance are a bellwether for fan interest and revenues, such as those from concessions, broadcasts, and ad and marketing sponsorships.

Significant variations occur across teams. Each team generates a different level of marginal revenue from an identical improvement in wins. Market size is only one factor in explaining the difference, as the Cubs and White Sox have different win-attendance-revenue relationships. Also, contrary to the market size argument, St. Louis has a greater revenue impact from improving their wins than does Detroit. Each team’s fans have a unique relationship with the team, loyalty factor and expectations, which shape the win-revenue relationship (win-curve).

Location on the win-curve has the greatest impact on value. The win-curve is not linear. The value of each win differs, depending on the degree to which it enhances a team’s competitiveness. If a 5-win player improves a team from 88 to 93 wins, the economic value is much greater than the 5-win player who improves a team from 78 to 83 wins.

In previous articles I made frequent reference to an important “open question” for player valuation – the revenue stream accruing to a team as a result of reaching the postseason. Since that time I have quantified the value of a playoff appearance for each team and assessed its impact on player value. As a result, I now have completed my estimates of the marginal revenue, and hence player value, for every win for each team.

This 2-part article will focus on quantifying and interpreting the value of the postseason and incorporating it into the dollar value of a player. Since the financial rewards to a team for achieving a playoff appearance can be equivalent to as much as 25% of a team’s annual local revenue, it can have a dramatic impact on the dollar value of the player(s) whose performance elevates his team into October baseball.

In fact, the value a player generates for his team can be as much as two or three times greater if he is the “last piece of the puzzle”—improving a team to say, 94 wins—as opposed to improving a team to a .500 level.

Before we delve into quantifying that value, let’s understand why the postseason comes with a hefty reward. As a competitive team strives to clinch a playoff berth, fan interest swells (as captured in the win-attendance curves presented in earlier articles), but once a team reaches the promised land, the mad scramble for playoff tickets ensues. Fans’ struggles range from the choice of seats remaining for markets where availability is less scarce, to the exorbitant price of tickets on the secondary market for teams like the Cubs or Yankees, where demand is already high.

The primary solution for some fans is to avoid the problem in the future by enlisting in some form of season ticket plan for the following season. As a result, the primary driver of value for a postseason appearance is season (or partial season) ticket sales to fans who want guaranteed access to playoff game tickets, now and in the future. (In mid-January the White Sox announced a new record high season ticket sales for 2006.) A second source of value is ticket pricing leverage.

Since 1995, when baseball returned from its work stoppage by adding a wild card spot to the postseason, teams appearing in the postseason have averaged ticket prices increases nearly double the price increases for teams that did not reach the playoffs. The pricing power that comes with the playoffs can be counted as “value”, as it’s an additional way to monetize the increased fan demand for tickets. Other sources of revenue from a playoff appearance include increased luxury suite demand, greater ad and sponsorship opportunities, advance ticket sales for the next season and broadcast bonuses or upsides.

It all adds up a financial bonanza for the ballclub—a revenue stream over a four to five year period—that needs to be incorporated into the marginal revenue estimate of value for players who elevate their team to the perch of the postseason, or at least increase their team’s chances of getting there.

By analyzing team attendance for the years immediately following a team’s initial postseason appearance, and adjusting for the team’s number of wins and other important factors, such as the new stadium effect, I was able to quantify the attendance and revenue effect from a postseason appearance. It is important to differentiate an “initial’ postseason appearance, defined as the first trip to the playoffs in a 3-year period, from successive postseason trips.

Many of the same benefits accrue from a second and third consecutive appearance, but the dollar value is diminished. There is ample evidence to indicate additional ticket packages are sold (which also drives concession revenues), and ticket pricing upside still exists, but at a reduced rate. So for a team whose initial postseason appearance generates a revenue stream with a net present value (NPV) of say, $20 million, a second consecutive playoff berth would yield approximately $13 million NPV, while a third would generate an incremental $9 million NPV.

As an example, Figure 1 shows the marginal revenue curve for the Phillies. I’ve layered the value of the postseason (PS $) on top of the estimation of the win-curve (Win $), the concept and principles of which were detailed in parts 1 and 2. While in my earlier articles I established the notion of the dollar value of a win increasing as the performance of the team improves, the effect is considerably more dramatic when adding in the postseason effect.

In order to translate the team’s postseason financial rewards into the dollar value of a player, I quantified the team’s probability of reaching the postseason, based on their win total. By looking at history of the wild card era (1995 to present) and applying statistical techniques, I was able to estimate the playoff probability associated with each win total.

I can quantify the value attributable to a player by simply calculating the expected value of the postseason—the probability x the dollar value. For example, an 85-win team has a 10% chance of qualifying for the postseason, while a 90-win team has a 57% probability. Using a hypothetical example, let’s say the Phillies win 90 games next year, and Jimmy Rollins duplicates his 5-win performance of this year. Jimmy Rollins’ value has two components: He gets credit for the 86th to 90th win, worth $3.5 million of value (Win $), plus his postseason effect.

He would elevate the playoff probability of the Phils by 47 percentage points (10% to 57%), increasing their chance at the $14 million revenue stream that would result from their first postseason appearance in over a decade. The math (Figure 2) behind Rollins’ value is $3.5 million over replacement value for helping the Phils improve from 85 to 90 wins, plus $6.6 million in postseason value for improving their playoff odds, for a total of $10.1 million of “value”.

Jimmy Rollins’ Value as a 5-win player to a 90-win Phillies team*

                           ∆ PS
                        Probability    PS NPV$         $ Value          
Win $ Value                 ---         ---           $3.5 million	    
Postseason $ Value          47%      $14 million      $6.6 million      		
Total $ Value                                        $10.1 million

*Assumes Rollins performs at a 5 WARP level

Before we make the leap to say that a player’s salary, in any one year, should be equal to his value, there are a few things to consider. First, it’s more sensible to evaluate a multi-year time horizon when trying to relate salary to “value” created. “Does the value a player can create over a four-year period, justify his salary demands over that timeframe?” is a better approach to matching salary and value.

Also, paying a player the full value he generates may not adequately compensate the ballclub for bearing the risk of a potential injury or sub-par year. To return to our example, Rollins cannot guarantee a 5-win performance to the Phillies, which may entitle the Phils to some “discount” to his value as the team bears the risk of variations in Rollins’ performance. Incentive-laden contracts have become an effective method of defraying the team’s risk, while still rewarding the player for his performance.

Furthermore, if Rollins’ teammates perform below expectations, then Rollins’ value declines. The reality is that there is less economic value created by improving an 82-win team versus an 85-win team. Five wins added to an 82-win team only improve the playoff odds by 21%, less than half the improvement of five wins added to an 85-win team. Improving a 79-win team by five wins creates even less value (See Figure 3).

In my final installment on player dollar value, I will delve deeper into the “last piece of the puzzle” economics and explore how a player’s value can differ dramatically, depending on his team’s win total. I will also discuss the relative importance of three important variables in the player value equation: the player’s performance, his team/market and his team’s win total.