I am in a private group of really smart internet marketers. We had a conversation about the movie Moneyball recently. I am not a baseball guy – it is pretty boring to me – but I loved that movie… because as much as it is about baseball, it is about my business.
The movie tells the story of Billy Beane. The GM for the Oakland A’s back in the early 2000’s. The backstory is that baseball is a game of rich and poor. The rich teams can always buy the best players and the poor teams can’t. That’s why teams like the Yankees are always at the top. The poor teams will get a young player who has talent, develop him into a superstar only to have the Yankees make him a big offer that he would be a fool to refuse.
The reason Beane’s story is worthy of a movie is that he took a big risk and implemented a system that hadn’t been used before… and it was a success. The system is called sabermetrics. A baseball stats guy named Bill James coined the term in a series of reports he published in the late 1970’s. The premise of sabermetrics is that you can boil it down to a few key metrics that matter. The most important one being OBP – On Base Percentage. Beane went all in on Sabermetrics and cobbled together a team full of misfits who still somehow got on base a lot.
Their team was significantly cheaper than any other team in the majors and they still made the playoffs and won over 100 games. As a matter of fact, with a payroll of roughly $30 Million they won more games that year than the leagues richest team the Yankees with a payroll approaching $100M. It turned quite a few heads.
The key to the system is understanding the numbers. They knew that they needed x number of wins to get to the playoffs. They then calculated how many runs that would take. And as you can guess, they calculated the number of men on base they needed to get those runs.
Then they went out and found those guys. Not big home run hitters. The guys who were underrated because they did something funny in their swing or pitching motion. The movie shows the scouts making fun of a guy who only got on base because he walked a lot. They put together a team that looked terrible on paper.
They were ridiculed. The scouts said it would never work. The fans thought they were nuts.
But it did. The proof is in the numbers – or so I thought from watching the movie. Then this happened.
I was recently at the Battle of Bristol football game between the University of Tennessee and Virginia Tech and one of the guys I was with is a scout for the NBA. I asked him about fear of sabermetrics type stats replacing him.
He went on a diatribe about how Moneyball didn’t work and the A’s never won a world series, etc… I countered with the fact that the Red Sox won 2 world series and hired Bill James himself to work for the organization. He said the Red Sox won because of the big name players they already had, etc… We agreed to disagree.
His answer about his own position in the game is that stats can’t tell you if a player has balls. If a player has heart. If a player is easy to deal with for the coach etc… I didn’t really try to argue this point as “balls measuring” skills are hard to quantify. I did note that all of the things he said that justify his $250k+ salary are the “intangibles”. The intangibles are often that weird place between hocus pocus and voodoo.
It certainly fits his worldview to think that Moneyball didn’t work. If it did work then his whole way of life would be in jeopardy. So the question really becomes did moneyball work or not? It could be confirmation bias on the part of a dying industry that only sees things the way it wants to see them. Stats can be made to say many things. But the truth is often hidden in there somewhere.
So I did some deeper study because I wanted to figure it out. I know that it is not above Hollywood to take some creative license with the truth. Here is what I have found.
The A’s never won a world series. They did make the playoffs several years in a row with 1/3 the budget of the other teams. Billy Beane said that once you make the playoffs then luck takes over. The series in the playoffs are so short that things like hot streaks take over. But is this just his confirmation bias? See how deep this goes 🙂
And while the Red Sox did use some moneyball tactics in their world series runs, they also had the second most expensive team in baseball behind the yankees. Other factors that I found while doing research include the fact that once a moneyball team like the A’s is assembled and these players become an important part of a winning team – their value goes up. This affects the formula because those players are then lured away to teams like the Yankees with big contracts. So there is an element of having to keep finding these diamonds in the rough. The good thing is that baseball is deep. There are tons of prospects in all the minor leagues so it is possible to do this in theory.
Another really important thing that I learned was that moneyball doesn’t fill stadium seats. Home run hitters do. People come to watch big names. So there is a paradox in baseball. Is it more important to win or to make money? The answer is clearly make money. That is why many teams have not adopted this strategy fully – at least according to the interwebs.
So does moneyball work? Yes.
Is it a magic bullet that beats teams with 3 times the budget? No.
But it allows you to compete. That in and of itself means that it works. Teams with higher budgets will crush you if you play their game. You just can’t overcome stupid money. But you can compete with them if you play all the angles, understand your metrics and find value players that others overlook. They might still win the world series because they do have more talented players who might elevate their games. But without sabermetrics you are watching the playoffs just like me. So from my analysis it clearly works.
The weird thing is that baseball has a reward system where winning ugly is worse than losing pretty. So who knows if baseball will ever really change. The other force against something new like this is superstition, confirmation bias and lots of people who have a vested interest in things staying the same. Why would you embrace sabermetrics if it meant that your job became redundant? You wouldn’t. You would say that sabermetrics can never measure balls or heart 🙂
If you are thinking that there might be larger implications to this then you are right. This has implications for elections, home ownership, college, the widening income gap and tons of other things going on in our country right now. I don’t have time to go into all these and it would take the post off course but think about this… What industries have a vested interest in things staying the same in the face of a new superior system? Those industries – like Real Estate are fighting an uphill battle and using political favors (lobbies) to keep the status quo.
The income gap is because metrics are being used by companies to produce efficiencies that reduce jobs. Also people aren’t interested in change – so they become superstitious about their careers like my friend the scout. Which works until they decide that scouts are a luxury they can’t afford anymore. Face it sports are rich businesses so they can afford to waste money – a lot of businesses can’t.
Enough about all the macro implications of this.
Here is the micro. This is how it relates to me as a small business owner.
The great news is that we can compete with the big boys online. But you have to use sabermetrics to do it. If you are trying to play the branding game, good luck with that. I know a lot of people are proponents of branding right now. Especially because of guys like GaryV and people who use so much social media. But let me tell you a couple things about it.
GaryV already had a very successful business paying his bills while he spent 5 years building his brand. Gary can afford to have someone around him all the time recording his shit. And editing it. Gary travels and speaks to people all the time and has lots of personality. Because he has been doing a video a day for 10 years now.
You likely don’t have any of these advantages. If you don’t need to make money for 10 years because you have something else paying for your bills then by all means its a way to do it. But if you need money now, then you need to start paying attention to the numbers that matter.
In baseball the key metrics are playoffs, wins, runs and obp.
I have 5 businesses so the numbers for me are different in each. But ultimately they come down to some version of these:
LTV – lifetime value of a customer
CPA – cost per acquisition of a customer
There are several metrics that go into each of these like conversion rate, CPC on PPC, ACV, etc…
Don’t run your business on hunches or rely on voodoo like intangibles to make decisions. Learn how to use the numbers. I might do some trainings explaining this later if there is any interest. But knowing your numbers is critical to business success today – and will be even more important tomorrow.
The point for you is that if you know and understand your numbers then you can compete. I don’t have to win the world series to be a success. Just get me to the playoffs and I am happy 🙂