FanGraphs often cites that one win is worth $9 million, but is that true?
Throughout the offseason thus far, I have tried to keep up with all that is new in the world of baseball by reading articles published on websites such as ESPN and FanGraphs. Because it is the offseason, much of the coverage on these sites is about the value of players currently on the free-agent market. While opinions differ, FanGraphs, in particular, generally values free agents at $9 million per WAR. However, is one win at the major league level actually worth $9 million to the organization?
FanGraphs has arrived at the $9 million per WAR valuation based upon the contracts given to players on the free-agent market in recent years. Unlike organizations in other industries, sports franchises are often evaluated based on something other than dollars: wins. Consequently, the value of a win on the free-agent market may not necessarily correlate directly with an organization’s marginal revenue product (MRP), which, in the case of sports franchises, is the dollar value of a win to the organization’s bottom line.
In order to answer the aforementioned question, I collected revenue and regular-season win data for MLB organizations from 2001–2016, while also noting how far a major league team advanced in the playoffs, if at all, in each of the 16 seasons.
After standardizing for both season/inflation and team/market, I found that a team’s regular-season wins in a particular season do not have a statistically significant effect (at the 1%, 5%, or 10% level) on the revenue generated by the corresponding organization during that same season, other things equal. That being said, making it to the division series and winning the pennant in a given season are each worth roughly $35 million (in 2016 dollars) to the average organization in that same season, other things equal. Furthermore, having made it to the division series during the previous season increases the average organization’s revenue by roughly $15 million, while each win from the previous season adds roughly $1.2 million in revenue, other things equal.
Here is the regression I ran as proof:
These findings seem to make intuitive sense. A team’s win total from the previous season will impact revenue via attractiveness/popularity, which will manifest itself via attendance (i.e. gate revenue, merchandise, concessions, etc.), while a team’s win total in the current season will not impact revenue because, at the end of the season, attendance is a foregone conclusion. Whether or not a team advanced to the division series during the previous season will impact revenue in a similar fashion as does win total from the previous season. Furthermore, advancing to the division series and winning the pennant in the current season will impact revenue via a minimum of three extra nationally televised games and a minimum of one extra home game. It is interesting to note that simply making the playoffs does not have the same effect as making it past the wildcard game to the division series.
My research suggests that the Dodgers and the Astros earned roughly $70 million in 2017 for winning the pennant and will earn roughly $15 million in 2018 for having made it to the division series (AP/Getty).
How do these findings relate to valuing players on the free-agent market? Well, intuitively, teams that are closer to contending for the playoffs will value projected regular season wins (which can be thought of as projected probability of making the playoffs) greater than will teams that are not as close to contending for the playoffs. Correction, not just contending for the playoffs, but contending for the division title, in order to ensure a division-series appearance.
From 2001 to 2016, teams that made it to the division series won an average of roughly 94 games during the regular season. So, for instance, the Cubs, which are currently projected to win 92 games in 2018, may value a win added on the free-agent market at something like $25 million, whereas the Padres, currently projected to win 70 games in 2018, may value a win added on the free-agent market at closer to $2 million.
Of course, the results from this analysis should not be viewed as cut-and-dry for every organization, but rather as a rough estimate for the industry as a whole. This analysis did not consider factors such as the market size or the placement within the “success cycle” of each organization. Nevertheless, the idea that wins are more valuable to playoff contenders may have some merit (and may also partly explain why the offseason hot stove has not been so hot). That being said, please take this with a grain of salt.
Thanks for reading, and see you next time!