This is the first of four posts explaining the O.F.F.E.R. statistic — On-Field Financial Efficiency Rating. The O.F.F.E.R. statistic is a comprehensive, yet imperfect formula developed by the author as a loose measurement for MLB franchise financial efficiency. Factors include individual team payroll, regular season wins, playoff games/wins, and projected revenue production per win. The O.F.F.E.R. statistic values organizational productivity without factoring irregular variables such as city/market size or the financial worth of individual owners.
In 2014, the Los Angeles Dodgers spent $235 million for 94 wins, an NL West division crown and the chance to play for 11 more wins in the postseason. The Kansas City Royals spent approximately $92 million for 89 wins, a home wild card game, and after defeating the A’s on Tuesday night, the same chance as the Dodgers to play for 11 more wins.
From an organizational perspective, making the playoffs is only the first step on a long road to the ultimate goal, a World Series championship. From a financial perspective, both organizations have already won.
Why? Because in Major League Baseball, a shot at the playoffs comes with major league pay-off.
Part 1: It pays to play in the playoffs
Fans pay for wins. The more a team wins, the more fans will support the team, which leads to higher broadcast ratings and larger sponsorship deals. Which leads to greater revenue.
Its no secret that large-market teams such as the Yankees don’t need to be as cost-efficient with their payroll as smaller-market teams. Everybody’s seen or read Moneyball. There’s a reason why the Dodgers can throw around salary money like a Monopoly banker, while the Rays and Twins are forced to re-tool and look for bargain values in free agency every year. But at the end of the day, every team puts together a 25-man roster (at whatever cost) in an attempt to win as many games out of 162 as they can.
Vince Gennaro explains the impact that winning has on revenue in his book, Diamond Dollars. According to Gennaro, “While winning regular-season games is a significant revenue driver, at the extremes, a (regular season) win or a loss means far less.”
Gennaro goes on to describe the four layers of value that winning can create throughout an entire season. The first layer, win dollars (Win $), represents the change in attendance, broadcast, concession, and other local revenues based on regular-season win totals.
The second layer is the projected revenue stream generated as a result of a postseason appearance (PS $). Postseason dollars represent the probability of reaching the postseason, multiplied by the postseason revenue opportunity — i.e. the incremental revenue stream that is expected to accrue from a playoff appearance.
Postseason dollars are mostly measured in future revenue, unlike win dollars, which are measurable for the current year. Once a team reaches the playoffs, it can count on an additional revenue stream over the next four to five years as a result.
The third level of value that winning can create is the additional profit boost that an organization sees when it actually does win a World Series (WS $); and the fourth level is an adjusted value for “chronic winning” or “chronic losing.” These last two values are not relevant for purposes of analyzing a single season in which a World Series champion has yet to be determined; so ignore those for now.
Individually, every team’s win-revenue curve will look different than the figure pictured above, which measures the average profitability per win for all MLB organizations. This is due in large part to those uncontrollable variables such as market base and ownership.
But as the win-curve value chart demonstrates, the largest hike in revenue production occurs when an organization reaches the postseason; and every team will have the same slope showing higher revenue totals for playoff seasons over non-playoff seasons.
Therefore, every organization is forced to make a conscious decision on how to budget resources based on its win-revenue curve, and must determine a point on the financial spectrum where costs would exceed total revenue generated.
Exactly how much each team stands to profit from a playoff appearance is dependent on a near infinite number of variables (and would also require a ridiculous amount of research and public records requests). But with some creative Excel artwork and a little number crunching, it’s possible to estimate how valuable, on average, a playoff appearance can be to a franchise.
The color coordination helps differentiate the varying slopes for revenue in both a playoff season and a non-playoff season. By picking five equidistant points (approximately) on the two win-curve slopes and calculating the percentages of increased profitability in a playoff season over a non-playoff season, the average value of a playoff appearance begins to come into focus.
So, if an 87-win AL team that misses the playoffs would generate $100 million dollars on average, an 87-win NL team that makes the playoffs would generate roughly $120 million. That’s a 20 percent profit increase just for making the playoffs, even though it had the same number of wins as the AL team.
Applying the same formula to all five marked points on the graph (87 wins, 91 wins, 96 wins, 100 wins, 105 wins), the results look something like this:
|87 wins||91 wins||96 wins||100 wins||105 wins|
|Non-Playoff Season||$100 million||$120 million||$150 million||$175 million||$187.5 million|
|Playoff Season||$120 million||$150 million||$187.5 million||$225 million||$235 million|
|$ Increase for Playoff Appearance||$20 million||$30 million||$37.5 million||$50 million||$47.5 million|
|% Increase for Playoff Appearance||20%||25%||25%||28.6%||25.3%|
Not a bad financial bonus for achieving a goal that the franchise was trying to reach anyway.
The latter end of the scale is a bit impractical in application, since it is unlikely for a MLB team to win 96 or more games and not reach the postseason — especially with the new playoff system and additional wild-card spots. But it’s not at all uncommon for a team to miss the playoffs with 87 to 91 wins.
The Mariners fell one game shy of an AL wild-card spot this year with 87 wins. If the Mariners win-curve slope is even somewhat similar to the league average, Seattle might have missed out on $20 million in future revenue by one win.
The Rangers missed the playoffs on the last day of the 2013 season with 91 wins, a total that would have been good enough to qualify for postseason play in the National League, but not in the American League. Missing the playoffs meant that $30 million future profits, more or less, went down the drain.
The Dodgers may have spent 2.5 times the amount the Royals did on player salaries, but the Dodgers have that luxury because a 20-25 percent revenue increase in the L.A. market is significantly more than a 20-25 percent increase in the Kansas City market. That’s just the way baseball economics work without a salary cap.
But a 20-25 percent jump in revenue totals are margins any organization would be ecstatic to see.
Marlins owner Jeffery Loria consistently has one of the lowest payrolls, but once or twice a decade he’ll double the payroll, load up on talent for a playoff run, then hold a fire-sale a year later. He knows how enormous the profits are for just making the postseason. After that’s accomplished, its money in the bank coming his way for the next four to five years. Lather, rinse, repeat.
Long story short, it pays off to make in the playoffs. On average, about $20-$30 million worth.