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Clubs that beat the market

In the Summer of 2017, Liverpool signed Mohamed Salah from Roma for around €40m. A few months later, they sold Philippe Coutinho to Barcelona for €120m. Two years later, it is hard to argue that having Coutinho was three times better than having Salah; whereas Salah led Liverpool to the Champions League title and to what is likely going to be their first League title in 30 years, Coutinho quickly fell out of favor at Barcelona and was loaned to Bayern Munich. How did Liverpool manage to improve their performance for one third of the price?

We have studied player transfers over the past several seasons and determined the factors that influence player values. Many of the key drivers are what we would expect, such as age and goalscoring record. However, one surprising piece of information proved to be extremely important in predicting transfer values: which club is signing the player. Some clubs pay way above market rates for transfers, while others consistently beat the market and get players at half of their “true value” or less.

English clubs in general pay a high premium on transfers. Their signings cost, on average, 43% more than we would expect. Out of the 25 clubs that are paying the highest premiums, 20 are English, including all of the top 12. The money from the Premier League broadcasting deals over the past few years has certainly been a driver of this “English Premium”, in two ways. One, clubs are now more willing to spend money, because they have more money. Two, English clubs are now less willing to sell their players, and as they do a lot of their recruitment within England, this has caused a general inflation of player valuations within the English market.

It might be argued that the external factors at play here make it simply impossible for English clubs to compete on equal footing with clubs from other leagues. However, even within England there is a club that does consistently beat the market, a counterexample that proves it is indeed possible to pay transfer fees that are the same or even lower than other competitors. Brentford have leveraged a different approach to recruitment to find value in the transfer market and pay much less for the same player than any other club in England. They pay 41% less than market value for their signings, saving around £20m in transfer fees since 2013.

It’s important to stress that even though some clubs pay a premium, this doesn’t mean that they are wrong to do so. For example, for a club that is investing heavily in improving their squad, it may be worth it to pay a premium to secure as many deals as quickly as possible. Signing a player from a direct competitor has the double benefit of improving our team while weakening the other team’s, thus doubling the overall effect on our chances of winning the competition. In other words, paying a premium is not always the wrong strategy – but it is important to be aware of whether we are paying a premium or not, and if we are, to be able to understand the reasons why we are paying extra

It can be very difficult to know what the true market value of a player is. There are many different factors at play – age, experience, position, performance, inflation, and so on. We have spent several years studying the factors that drive transfer values to give the best estimates of what a “fair price” would be for every player, because we believe in winning by outsmarting our opponents rather than outspending them. The most important thing to know when signing a player, is to know whether we are getting a good deal.

About Luis Usier

Luis Usier has created 17 entries.