As requested, here’s a pseudo update to the post I did three years ago on the concept of market value. The same basic concepts I wrote in that post are still true, but the numbers have changed a bit, and obviously, not all of you have been reading the blog for three years.
Free agency begins today, as teams can begin negotiating and signing players from other clubs. As always, most of the contracts signed by free agents this winter will be bad deals for the clubs, as they compete against each other for limited talent in a market that doesn’t correctly value actual on field contribution. Today’s big free agent signing is more likely to be tomorrow’s immovable albatross than franchise savior – this is just how the Winner’s Curse works.
So, how do you tell which free agent signings are better or worse than others? And what is market value now? Well, we won’t know for sure until the winter has played out, but based on previous signings, I think we can make some educated guesses.
According to the USA Today Salary Database, MLB teams spent just under $2.5 billion in player salaries last year. Obviously, some teams spent more than others, but that was the overall payout from teams to players for their performance last year. History has shown us that a team of league minimum players and Triple-A castoffs can win about 50 games a year, so what teams are actually paying for is every win above 50. We often call these marginal wins, and refer to those players as replacement level.
To be a true contender, a team needs to add about 45 marginal wins in any given season, and every dollar they spend above $12 million or so goes towards that effort. If a team that is trying to contend has a $100 million payroll, they are essentially trying to spend $88 million on about 45 marginal wins – that works out to just under $2 million per win.
So, pretty much any contract that is returning value at a cost of around $2 million per win is helping the team reach their goal of contending for a playoff spot. The further from $2 million per win you get, the more the contract is a bad deal for either the player or the team.
Now, because MLB has a non-free market setup for a huge population of the players, where their salaries are either determined by the team (if they have less than 3 years of service time) or by an arbitrator (if they have 3-5 years of service time), teams have a built in advantage with younger players where they can get strong returns for minimal costs. Thanks to research by Dave Studenmund on how teams spent last winter, we know that the average pre-arbitration player only makes about $500,000 per win, arbitration eligible players make about $2 million per win, and free agents make about $4 million per win. Obviously, having talented players under team control is a huge benefit, as their cost per win is eight times lower than comparable free agents.
This is why the smart teams mostly eschew free agency in roster construction, instead building through player development and trades. Unless you can turn a proftit with a payroll north of $150 million, you’re just not going to be able to build a competitive team using free agents as a core building block. The cost is just too prohibitive. With inflation, we should expect the cost per win this winter to be more in the $4.5 to $5 million range, driving salaries even further away from the ideal $2 to $2.5 million per win that teams should be aiming to spend.
Now, that’s not to say that every contract needs to be valued at $2 million per win or less. If a team has a significant amount of cost controlled talent on the roster, to the point where they’re getting 30 to 35 marginal wins for $50 million in payroll and they have a $100 million budget, that gives them somewhere in the $50 million range to buy another 10-15 wins. At that point, they could justify spending $3-5 million per win on a couple of free agents to round out their roster and make a real run at a championship.
Free agency is best served to find role players to fill a short term hole or to get the final piece to the puzzle. It is, without a doubt, the least efficient way to add talent to an organization, and in many cases the cost more than offsets the value the player adds. We’ve certainly seen the Mariners run into this problem – their spending on mediocrities such as Richie Sexson, Jose Vidro, and Jarrod Washburn are eating up enough payroll space to keep them from being players for true all-star talents while not returning enough performance to make this team a legitimate contender.
This is why we advocate a roster building philosophy that focuses on paying premium dollars to premium players (Ichiro’s extension is a perfect example of this), ignoring the overpaid middle class, and surrounding your stars with young players who haven’t had their salaries determined by free agency. It simply doesn’t work to try to fill out a roster with good-but-not-great players in free agency.
So, when someone argues that if you want to improve the team this winter, you have to pay what the market will bear, just ignore them – the free agent market is just one (not very good) way of adding talent, and the smart teams will usually ignore it entirely. Let other people throw big money at mediocre players hoping for a quick fix – market value isn’t actual value, and competing with other GMs who are spending money like fools is a great way to end up with a high payroll and a .500 team.