Welcome Vince Gennaro, Guest Blogger

I come to you, today, on a cold and blustery late-April Wednesday in Minnesota. The Twins and Rays had their game postponed last night, by a combination of rain, sleet, cold, wind, and all-around miserable conditions, and frankly things aren’t much better today but this evening’s 7:00 pm start is still on the docket. Frankly, it doesn’t seem much like a baseball day. The odd snow flake fluttering from a gray sky will do that…

So, rather than force the issue with memories or tales from warmer days on fields of green grass and finely raked dirt, we thought it best to bring aboard our first guest blogger today, here at Bob On Baseball.

Vince Gennaro is a member of the TPGF Advisory Council, and he brings a wealth of important experience and talent to our mission. A former executive at PepsiCo, Vince is now widely known for his innovative and insightful baseball analysis programs, as well as for his book “Diamond Dollars: The Economics of Winning in Baseball”.

Today, Vince brings to us an insightful essay on the ultimate importance of post-season play, in terms of the impact playoff appearances make on any baseball franchise’s bottom line.

Many thanks to Vince for providing this cogent and well-written article about the business side of baseball.  Enjoy!

Bob Wilber

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For MLB Teams, It’s All About Reaching the Postseason

by Vince Gennaro

There are many things MLB teams do to inject some life into their revenues. Some will charge one dollar for hot dogs at the concession stand and ride the alliterative Dollar Dog night all the way to the bank, as fans pack the building for discounted ballpark fare. Giving fans a bobblehead of the team’s star player, like the Seattle Mariners do year-after-year with the likeness of Ichiro is another sure shot way of bringing them in. Another popular pastime of MLB teams is to lobby the schedule-makers to load them with home games from mid-June through August, when school is out, families have more leisure time and baseball is the only major sport in town.

While each team has their own unique way of marketing their ballclub, there is another revenue generating plan to which every team aspires—if not this season, then ultimately: reaching the postseason. A contender for the playoffs will bring more people to the ballpark, particularly during the second half of the season when pennant races emerge, but a team that succeeds and reaches the postseason will deliver incremental revenues for years to come. Reaching the playoffs is like an injection of adrenaline into the revenue veins of a big league club. Every marketing promotion will perform a little better, the ballpark experience is more enjoyable, and even the players are likely to have a bit more bounce to their step, all of which tends to bring fans back to repeat the experience.

The financial benefits of reaching the playoffs begins with the first division series home game in October. The pattern of events that follows is remarkably consistent across the various MLB cities:

• Fans scramble to find playoff tickets, but some are dissatisfied with either the choice of available seats, or the price of the seats in the secondary market
• Vowing to avoid the scene in the future, many fans step up and purchase either full- or partial-season tickets for the following season
• The higher season ticket base for the year following a postseason appearance not only generates revenue, but triggers other fans (non-season ticket holders) to buy tickets further in advance, as they worry about availability
• Teams often monetize a playoff run by raising ticket prices for the following year, more than they might have if the team had not reached the postseason. The data show that teams that reach the playoffs raise ticket prices approximately five percentage points more than teams that go home in October

Beyond the increased revenues from greater ticket sales and higher prices, luxury suite demand is greater as the team provides an even better entertainment for a suite holder’s customers. Corporate sponsors jockey for position to increase their “spend” with the winning ballclub. Broadcast ratings rise allowing teams to charge more for ads to their broadcasts. (This depends on the length and structure of the teams broadcast contracts.) Merchandise sales rise as fans want keepsakes of their winning team and every promotional giveaway on the schedule is more attractive to fans.

The best part of this revenue phenomena is its sustainability. Even if the team does not reach the postseason two consecutive years, the revenues gained after the first appearance only slowly dissipate through attrition in fan interest. So a playoff appearance in 2005 will likely carry benefits into 2009 and 2010. Take the Chicago White Sox as a case in point. They not only reached the postseason in 2005, but truly capitalized on their opportunity by winning the World Series, for the first time since 1917. Their season tickets nearly doubled for the 2006 season and still remain above their pre-championship levels as they entered the 2011 season—this despite having two seasons with a losing record and reaching the postseason only once since their championship.

Is this effect universal and does it happen in every market after every trip to the postseason? Not exactly. Not all postseason appearances are created equal. The magnitude of the postseason effect depends on the size of the revenue opportunity, the elapsed time since the last postseason appearance, and the depth of run into October. The size of the opportunity depends not only on the size of the market, but the availability of empty seats. For teams like the Chicago Cubs that operate with near sellouts, the ticket revenue opportunity emerging from a postseason appearance is focused on ticket price increases that fans will absorb and potentially adding additional high revenue seats to the already cramped Wrigley Field. Conversely, the Pittsburgh Pirates’ revenue opportunity is penalized by the size of the market, but aided by the upside in attendance from the current availability of 50% of their seating capacity.

My analysis also shows that consecutive, or even repeated playoff appearances reduce the positive impact of each successive trip to October. When the Milwaukee Brewers reached the postseason in 2008, for the first time in twenty-seven years, the impact on fan interest and revenues was dramatic. For teams that have consecutive playoff runs, like the 2007, 2008 and 2009 Angels, each successive year still adds to the coffers, but yields less incremental revenue each year. For teams that seem to be mainstays like the Red Sox or Yankees, the incremental revenue has a more direct link to championships or World Series appearances, rather than just reaching the postseason.

Another factor affecting the postseason revenue opportunity is the team’s playoff success. Losing the division series, particularly if they are swept, mitigates the positives of getting there. In an extreme example, the 2005 San Diego Padres eked into October by winning a mere 82 games, and then were swept by the Cardinals in the division series. When an 82-win team reaches the playoffs, they need to show success in order to validate their qualifications and legitimize themselves as a playoff team. The Padres failed to put up even a fight, going quietly and virtually wiping out any postseason revenue effect.

At the other end of the scale, four World Championships by the New York Yankees in a five-year span from 1996 to 2000 provided the platform to completely re-build the Yankees brand, launch a lucrative regional sports network that changed the economics of the entire industry, and build a new $1.5 billion stadium. No one would deny the Red Sox are a different brand with numerous additional revenue opportunities since their two World Championships in 2004 and 2007.

I developed a “revenue opportunity” formula to estimate the value of reaching the postseason that captures factors such as a team’s unfilled stadium capacity, the elapsed time since their last playoff appearance, the size of the market, their average ticket price, whether they own a regional sports network, and other key criteria. Comparing to two teams—the White Sox and the Twins—helps to illustrate some of the factors that drive the estimates. The table below shows the changing dollar values of reaching the postseason over a recent five-year window. The dollar values represent estimates of the net present value of the multi-year revenue stream created by an average postseason appearance (e.g., winning the division series, but losing in the league championship series) in the year listed. Notice how the value of reaching the postseason drops for the year after a team has gotten there. It’s a case of diminishing returns from a second consecutive appearance.

The revenue of a postseason appearance by the White Sox dropped off significantly after the 2005 World Championship was in the books, from an estimated $42 million to a $27 million opportunity for success in the 2006 season. It took a slight further dip after the 2008 loss to Tampa Bay in the division series, but eventually climbed to the 2005 level by the 2010 season. The Minnesota Twins follow a somewhat different pattern, with postseason appearances in 2006 and 2009 and the opening of a new ballpark in 2010. The 2009 playoff appearance was particularly well timed as the new ballpark and higher ticket prices gave the Twins multiple ways to monetize their surge in popularity. The bottom line—the postseason is a powerful revenue driver.