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- Part Two: What Revenue Above Replacement Actually Means
Part Two: What Revenue Above Replacement Actually Means
Part Two: What Revenue Above Replacement Actually Means
April 14, 2023
Reminder: Adam Grossman has taken the reigns to JohnWallStreet on Friday mornings. You will find his 'Revenue Above Replacement' column below.
Part Two: What Revenue Above Replacement Actually Means
Last Friday, we explained
. Today, we break down the concept of 'Revenue Above Replacement' (RAR).
Like WAR, it is helpful to break RAR down into two component parts: revenue and replacement.
We start with revenue, and specifically how players contribute to their teams' top line.
I created the RAR metric in 2016 because I recognized athletes were not being valued like other employees. More specifically, their perceived value was being largely –if not exclusively– based on on-field contributions.
The question though is does winning have a direct relationship with revenue generation?
Excel Analytics found a statistically significant correlation exists. Essentially, the more teams win, the more likely they are to generate revenue.
However, teams should not base their player valuation (or business) models solely on winning for several reasons.
For starters, winning is typically only weakly or moderately correlated with revenue generation in multiple sports.
Furthermore, winning means different things to different teams, and player performances impact clubs differently.
For example, a weak three-point shooting team would receive a larger lift from the addition of a good three-point shooter than a strong three-point shooting team would from adding the same player. That is because the stronger team does not “need” the player as much as the weaker team does.
Finally, winning is notoriously difficult to predict–even for the most analytics-savvy franchise. My debut column in JWS explained why expert
often fail both inside and out of sports.
Looking at winning from purely an economic perspective, it makes little sense to value employees on a single factor that is not the sole or primary driver of revenue either.
The RAR model built by Excel Analytics found that star power, as defined by organic reach, player sentiment and audience fit, has a strong and statistically significant relationship to top line revenue. Star power also tends to remain consistent over time (i.e. star players typically remain stars throughout their careers, even as their performance declines).
For informational purposes, organic reach refers to the amount of digital and social conversation there is about the player and/or his/her team. Player sentiment measures how positive or negative those conversations are. And audience fit focuses on the player's ability to reach target demographics.
As a result, player values should be defined by both the player's contributions to winning
and
their star power.
“Replacement” in this model has a similar meaning as it does within the context of WAR.
In WAR, a replacement level player is one that contributes a minimum level of performance at the professional level.
The most commonly cited example is an MLB team can sign a Double-A or Triple-A caliber player, at any position, at virtually any time. Only players that can perform 'above' that threshold should generate more than the major league minimum salary.
In RAR, replacement level players contribute a certain minimal level of winning and star power. Players that can deliver performance, as well as reach, sentiment and audience fit, above replacement level performers have more value to teams.
RAR can be applied outside of player valuation.
Traditional partnership valuations have relied on a similar structural approach.
Partnership valuations have historically focused on a single metric: impressions (i.e. how many people saw the activation). And like winning, impressions are important and have a relationship to revenue.
However, it is not the sole factor with a relationship to revenue.
Reach also has different value to different companies based on their business models.
B2C companies will typically generate more value from partnerships that maximize reach given their goal of reaching many consumers making relatively small purchase decisions.
B2B companies typically want to target a smaller number of enterprise consumers that are making relatively large purchase decisions.
Buyers and sellers should also consider multiple other factors, including partnerships initiatives (what organizations are trying to accomplish), audiences (what demos are organizations trying to target), and channels (what is the best way for organizations to reach their target audiences), to determine if a sports partnership can drive value for their organization; much like teams need to look at multiple factors outside of winning.
“Replacement” in the partnership context has a similar meaning. Companies and teams should expect a minimum level of performance from their partnership assets. Return on Investment (ROI) should be determined “above” this minimum level of performance.
The goal of both WAR and RAR is to help sports industry leaders make better decisions using novel approaches to address critical strategic challenges. That will be a central theme within this column moving forward as well.
About the Author:Adam Grossman is the Vice President of Business Insights & Analytics at Excel Sports Management. He works with companies, sports properties, media rights holders, athletes, agencies, and events to determine the value of their most important assets. He is also a professor at Northwestern University Master’s In Sports Administration program and the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry. He can be reached at [email protected].
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