Greedy Goblin

Saturday, December 6, 2008

Profit vs quantity

We want profit.
No. We need profit in order to stay in business. If I keep on buying materials higher than the product sells, I'll run out of money and stop being able to continue crafting.

We like big profit. We like to make screenshots of great sells in the game and articles in business magazines in real life. We remember the moments when we really made a killing. However aiming for these killing moments is not surely smart. If obtaining the item costs us 100G, crafting/listing/storing/seeking cost us 1 minutes with 3G/min farm money, than selling it for 113G means 10G profit. Selling it for 1103G means 1000G profit.

While we psychologically attracted to the latter, it is not surely the best idea. If we can sell only 1 item for 1103G while we could sell 200 pieces for 113G, it would be 1000G vs 2000G. To maximize profit, we must be able to control the little demon sitting on our left shoulder whispering "Take more!"

To know what is the proper profit margin, one must consider, which line in the picture fits his product most. The lines mean "how many items would be bought for that price". There are 3 main categories of items:
  • Blue: necessities. People will find a way to buy the item. They will farm for 100 hours, they will beg in the middle of Orgrimmar, they relevel profession to craft it themselves, but at the end they will get it. Typical example: Glyph of Lifebloom. Every single PvE restoration druid has one. Without it you are not a restoration druid, but a moonkin who reluctantly respeced. Such items can be sold for insane profit and still they sell. On the other hand decreasing their price won't increase demand for it. A rouge won't buy it, even for 1c. Maybe some moonkins consider buying some for the rare cases when they need to heal.
  • Green: normal items. If they are cheap they buy it, if it's expensive they buy an alternative. The definition of "cheap" depends on their wealth, the wealth distribution of the population defines the curve of the line. Typical example is a BoE blue. If really expensive, only a few would buy it, if really cheap, everyone capable of using it would buy it. The proper price depends on the population but extremes are strongly discouraged.
  • Red: comfort/fun items. No one needs them, for high price not a single one would be sold. For low price, insane amounts would be sold. Typical example are consumables. If sold high, only a few high-end raiders would buy it, if would be for nearly free, even people doing dailys would use them. Proper pricing: the lower the better.
Now let's bring some realism into the scheme: competition and supply.

You cannot produce infinite numbers of items due to material supply and handling costs. Since the materials cost you money, usually the more you want the higher, you must limit the quantities. This effect practically unknown for necessities, moderate in normal items and the major limit in comfort/fun items. There is a reason why you don't find potions for 1s, although it would sell in huge quantities.

In order to sell anything, you must stay below your competitors. The prices of the competitors provide an upper limit for your prices, as long as they can keep up with quantities. The effect of competitors is exactly the opposite as of supply, mostly affect the neccesity-market. I can't sell must-have glyphs for 1000G since someone would definitely undercut me. On the other hand with comfort/fun items I can keep my prices, hoping that the market suck up all my competitor's stock, than buy mine.

Some example of making profit with this rule: I used to sell Armor Vellum III for 39-49G apiece, like everyone else, undercutting each other by silvers. I used to sell 2-3/day. It last until I realized, that this is a comfort item. No one needs it, since you can trade enchants by spamming /2 and meeting face to face. However by buying these you get the comfort of not having to spam trade, but buy/sell with a click on the AH. So I relisted them for 19G (materials around 8-10G), cutting my profit into 1/3-1/4. I sold dozens already.

The infamous 1200G titansteel bar was a normal item. The titansteel items are really good, but not necessary. It was the second Saturday evening after WotLK came, I knew that the few people with 450 mining has used their cooldowns, so there will be no competition. I put them out, fishing for the few people who would pay that amount. This was a one of a time opportunity, since than there are always 10-20 items on the market lot of people has 450 mining and created their own titansteel stuff. So here competition regulates the market prices.

One of the great sources of my wealth, the Greater Planar Essence was a necessity in BC. It was needed for all decent enchants, and you could not raid or PvP in any decent group without decent enchants. So you must bought the essences. I could sell them for any price even 100G apiece (while obtained for less than 5), only limited by the undercutting competition and the often low demand. If someone had no new items, bought no enchanting materials.

So classify your items, set proper prices and don't listen to the little demon on your shoulder! (except when he says: it's pointless to even list it, so do since some dumb will buy it)

1 comment:

Devin said...

Nice regurgitation of basic economic principles. Most people simply don't follow them.
Just a quick post on one thing (among the many many areas) that's worked for me.
Buying damaged necklaces. They are going for about 500g atm on my server, but many people still don't know what they're worth. So every time I log on an AH alt I search for it at the beginning and end of my AH session. I've found about 15 or so listed for 30-200 gold and have always sold them for at least 450g subsequently.
I'm doing a good business on crystalized fires atm as well. The price of saronite ore is very low as well, so prospecting them (requires JC) and cutting is good profit, even with few to no high-end recipes. Buy low, sell high. Goblin style.