August 6th, 2012
I’ve spent a lot to time analyzing the financial payoff from winning, including the role the postseason plays, but have not written much about it since Diamond Dollars. Arecent update of my analysis confirms many of my original conclusions. There is strong evidence the biggest financial payoff from winning comes from reaching the postseason, not just having a competitive 85 or 90-win season. Improving win totals can add to revenues, but only marginally when compared to the financial gains from the playoffs. A postseason berth carries a huge psychological halo for fans, particularly under the old (1995-2011) playoff structure where there was little differentiation between the division winner and the wild card. Beyond fans basking in the hope of a 1-in-8 chance at a Championship, October baseball initiates a series of events that typically give the revenue engine a jump start, particularly for teams that have not been to the playoffs for several years or more. It begins with fans scrambling for October playoff tickets, only to be disappointed by the seat choices available or the prices in the secondary ticket market. Full of their new found optimism about their ballclub, they often make the decision to become a partial- or full-season ticket holder for the following season. Since season ticket holders typically get the first crack at postseason tickets, fans view it as an “option” on future playoff seats. When enough fans hold this mindset, it can significantly move the needle on a team’s season ticket base.
The magnitude of the increase in the season tickets is driven by several factors, including the size of the current season ticket base and the available seating capacity of the stadium. The amount of time since the last postseason appearance and the frequency of being in the postseason in the last four or five years, also impacts the financial return. For the Yankees, the postseason is built into fan expectations and is a critical factor for season ticket retention, but after 14 appearances in 15 years, does little to increase their total. Another major factor dictating the size of the financial payoff is a team’s playoff success. The 2005 Padres won the NL West with a modest 82-80 record, slipping into the playoffs only to go three-and-out to the 100-win Cardinals in the division series. The combination of an unimpressive win total and complete failure in the postseason doused cold water on any fan hopes and left the Padres with virtually no postseason payoff. Conversely, that same year the White Sox won their first World Series since Pants Rowland was their manager, 88 years earlier, and nearly doubled their season ticket base. Perhaps the best news about increases in the season ticket base is its “stickiness”. Fans typically don’t cancel their season tickets if the team fails to fulfill on the imagined promise of a forthcoming dynasty. Following their Championship season with a 90-win (no postseason) and a 72-win season certainly cost the White Sox some season ticket renewals, but they still retained many of the their new-found subscribers who jumped on board after the 2005 season, as it can take up to five years of postseason abstinence to completely dissolve the financial benefits of a deep run of October baseball.
Let’s look at the revenue math, using a conservative example. If a team generates 4,000 new season tickets from a postseason appearance at an average price of $35 per ticket, it represents $11.3 million in revenue over 81 home games. But that’s just for the first year following the postseason appearance. If we assume the team plays 80- to 85-win baseball over the next 5 years, but fails to reach the playoffs, we can expect the attrition rate to be about 20% per year. That means the total gross ticket revenue from a postseason appearance would reach about $34 million—three times our first year total. Some teams might experience less of a bump in season tickets, while some would likely expect more. If a team performs poorly in the years following their playoff appearance, they could experience a steeper falloff in their new found customers, so this is just an illustration of the potential magnitude of the impact.
The revenue from new found season ticket commitments are just one means of monetizing October baseball. Next year’s advance ticket sales of single game tickets see a boost. Ticket price increases for playoff teams (in the year following their playoff appearance) are about double the increases for non-playoff teams. Luxury suite demand surges, as companies acknowledge the greater value a postseason team provides for entertaining customers or rewarding employees. Companies tend to jockey to increase their financial commitment as corporate sponsors of a playoff team, because of the prestige and fan affinity from being on board. Broadcast ratings rise, some of which the team may be able to monetize, based on their broadcast arrangement and contracts. Finally, the playoff games themselves can generate some additional revenue, although the players’ pension fund is entitled to a portion of game revenues. When you combine all of these incremental revenues (and in some cases deduct the portion a team may need to pay into the revenue sharing pool) a team can generate from $25 million to say, $70 million, over a 5-year period, from reaching the playoffs just one time.
This means the highest value wins—those which carry the greatest financial gain—are the wins which increase the probability of reaching the postseason. Historically, in the National League a team that improved from 86 wins to 91 wins, increased their probability of qualifying for the postseason from 23% to 80%. In other words, the most valuable wins to a NL club were typically wins 87 through 91, which increased a team’s playoff chances by 57 percentage points. I call this steepest portion of the win-curve the “sweet spot”—the range where wins have the highest value. (In the American League, because the two super-powers—NYY and BOS—typically upped the ante for the wild card, the highest leverage wins tended to be wins 90 through 94.) Using $20 to $70 million range as our incremental revenues from the postseason, you can see how much value a team places on improving its on-field performance. The five wins referenced above can be worth from $3 million to $8 million each, just due to the allure of the postseason (57% x the postseason dollar opportunity). Add another $1 to $2 million for each win for simply moving up the win-curve, independent of the postseason opportunity and you end up with about a $4 to $9 million value per win. Contrast this with the financial rewards of improving from say 73 to 78 wins, which may be worth only $1 million each in revenue, since the postseason is not in play. Quantifying this postseason effect, helps us see why teams shop in the pricey free agent market to add the “last piece of the puzzle”. For a team at or near the sweet spot on the win-curve, even a hefty free agent signing can make financial sense.
In my next post, I’ll discuss some new findings and wrinkles to this framework, including why it breaks down for a club like the Tampa Bay Rays, as well as how the new wild card format impacts the win-curve.