Greedy Goblin

Thursday, February 14, 2013

Business Thursday: 0.01

The Goons, who fancy themselves as being newbie friendly released their guide. Besides telling poor newbies to rat, they also told "When selling, don’t just accept a Buy Order - you’ll probably lose a fortune for the convenience of a quick sell. Look at all the Sell Orders in the region, ordered by price. Then right click the item again to sell it, and under Advanced put up your own sell order, undercutting the previous lowest sell order by .01 ISK. Remember to check on your orders in your Wallet, to make sure somebody else hasn’t undercut you."

I've been preaching against 0.01-ing since I started to make a billion a day. I wrote that it's cartel, babbled about price elasticity, shown my own results and this horrible thing is still here. I now try to explain its stupidity as simple as possible.

It is obvious that the cheaper something is, the more people will buy it. If you look at the buy orders, you see exactly that: people who are ready to buy for that price instantly. Of course there are buyers for more money too, but less. If you look at the current sell orders, you don't see the current market price. You see items that no one bought because they are too expensive. Of course someone might buy them later, but at the moment no one bought them.

Let's use numbers: there are 5 buy orders of item X are for 1000000, 1000000.01, 1000000.02, 1000000.03 and 1000000.04 and 5 sell orders are 9000000, 8999999.99, 8999999.98, 8999999.97 and 8999999.96. No, it's not exaggeration, I see such imbalances all the time. In nullsec, for a less common item, it can be much worse. What do these numbers tell you? There are 5 people who want to sell for 9M but can't, and 5 others who want to buy for 1M but can't. Do you really think that it's a good idea to be the sixth guy who tries to sell at 9M?

OK, you open price history and see that once a week one sells for 9M. 9M is good money. You can be the guy who sells for 9M, right? Yes, you can, if you are the lowest seller in the moment when an impatient fool enters. How can you be the lowest seller? By being 0.01 lower than the previous one. This is what they all think. So they update their orders often. If everyone updates with the same frequency, you'll have 1/6 chance to be the lucky seller. You can increase your chances by updating more often. But they can defend themselves by updating even more often. At the end you'll be sitting by the market window all day, updating that damn order. I'm still not exaggerating, people (and bots) are doing exactly that.

What can you do? You can set up your sell order for 8.5M instead. Tomorrow you will find that they undercut you by 0.01. Then you update to 8M and you'll see that some of your competitors disappeared: they sold their items. This is the point! By undercutting deeply, you drive the price to the point where all of you sell. For example you drive it down to 5M and you see that there are 6 sells/week. Congratulation, you reached market equilibrium.

Let me show a real example, when I broke down the price of an implant used in armor battleships in K-6K16, the capital of TEST alliance:
The busy people were undercutting by 0.01 at 37-38M but of course no one bought their stuff. I cut to 25M first, then 23, 22 and look how many sold! I got them in Jita for 14M by the way.

The same applies to buy orders. If you want to buy something, don't join those morons who update their orders all day by 0.01 at 1M, set your order to 1.5M and. They will "overcut" you. So cut again the next day, until you finally buy. You will see that for example for 4M they bought too, there are 6 buys this week, everybody made a buy. This is the definition of market equilibrium: everyone buys/sells who wants for that price.

OK, so everybody can sell for 5M and buy for 4M? How? Because people are impatient. They are ready to pay some premium to buy now (for 5M) and sell now (for 4M). If you are thinking that you could buy it for 4M and resell it for 5M... well, you are on the way to never-ever rat, mine, mission or pay real money for the game. Being able to afford a titan before you could fly it is just a bonus.


Anonymous said...

I started doing some station trading on the side a few weeks ago (about a week after I started playing), mostly meta modules. Deep undercutting often yielded suprising results - sometimes when I got into a squabble with another trader with a small stock (50+ items), not single item 0.01 bullshit, they just unload it to my buy order instead of getting into a war with someone who is ready to lower the price by significant amounts. Similarly with buyers - they cancel their orders. Also the turnover for items I treated this way oftentimes doubled or tripled inside a week. I don't even notice single item 0.01ers for most of my items anymore.

Vote1James315CSM said...

I am also seriously considering shipping stuff out of Jita. I am thinking play the major trading hubs off each other. It would be time consuming though. Probably something I would try on weekends when I have a bit more time. Thanks for the guide Gevlon.

Anonymous said...

Prices affects volumes only for items expensive enough for people to pay attention. I've been 0.01 a cheap item in dodixie at 500% its real value, then some guy came up with large stock and drove down the price down below the other hubs sell orders. No changes in volumes at all, but they're now 0.01ing for a whole lot less profit.

Anonymous said...

I have another experience about deepcutting. Back in the wow days, i managed finances of a decent guild. I told them to put every crap they loot to the guildbank and they get back every every enchant or gem for free. Daily basis guildbank get filled with all kind of stuff what end up in ah. If you want to get rid of it, small cutting works on markets where is not much competition. On high competition market, your items just get stuck and wont sell if you make price just a tiny bit lower. At moment you undercut, someone else is undercutting you too and after some weeks, price has changed less then 0.1% and you still got that item unsold. So to actually sell, you must cut 5-10% everytime you wont sell. In bad cituation, after 2 weeks price has dropped 50% and you still have that item. But mostly, you get a sale sooner.

Thoris said...

It's not as clear cut as you always make it sound Gevlon. Ther's anecdodic evidence for both scenarios. Imo it mostly depends on the item group. Your strategy works excellent for the more valuable items like implants, faction mods etc. I can attest to that.

It doesn't work well for other things in my experience particularely high volume, fast moving items with lots of competition. For example buying ores and reprocessing items you want to keep the margin wide (within reason, say 10%)because these things are traded a lot regardless and thers always multiple people continuing to isk even when the profit margin is close to 1-2 %. I see it again and again in Jita that someone pops in with a huge order deeply undercutting and guess what he doesn't have the market for himself because of this. Other people just isk him regardless. The same happend to me when i tried your strategy with these items initialy. All that's achieved is that there isnt much profit on this item for a while. Spite certainly also plays a role in these markets. I sometimes undercut such orders myself with a large order just to show the other trader that he isn't the boss.

Another example is selling t1 rigs. People buy some of them for any price in my experience. Hell i sold margin scammed rigs and offered people afterwards to sell them back to me and they insisted that they actualy bought them to put on their ships. The deep undercutting there sometimes work when you only have a small number to sell. With a large stock people will just go with your price. They don't sell quicker. Just recently i deeply undercut sell orders on one particular rig in Amarr. From 22m to 12m subsequently and everybody just kept undercutting me. I still didnt sell more and nobody bought up my stock. You can get lucky and someone buys up all your stock but thats not a given because fingers get easily burnt sitting on a large stock of rigs. They are too easy to produce in large quantities.
I bet it's the same for many other items in this price/volume region.

Granted my experience is mostly about the Jita and Amarr markets. Different approach might work better in other stations with less fierce competition.

maxim said...

The interesting part here is how much does it actually cost you to provide that item to the market?

For example, buying stuff in Jita and reselling it in some other place costs you Pj + Ph * T, where Pj is price you paid in Jita, Ph is price of one hour of your life and T is amount of this time you need to spend hauling stuff from Jita to that far-off place.

You can easily notice that the Ph part of this equation you are deciding for yourself.

Now, when you encounter a situation where you can deep undercut, you are essentially faced with a simple question.
Do you go for a deep undercut, reasoning that it is good enough to just get due compensation for the time of your life... OR
Do you feel that the amount of due compensation you deserve for all that hauling is larger?

The reason people would rather stay in a single place and undercut 0.01 instead of just listing an item at a price more representative of it's actual acquisition cost is because they all somehow think that hauling time is more costly than "sitting there and undercutting" time.

That makes a weird sort of sense, too. Every time you put up a high price item, you are rolling a sort of roulette, which is a bit fun. Whereas hauling low-cost items all over the place is only fun if you are into infrastructure building. In the 1 million versus 9 million example, with market equilibrium shown to exist at ±5 mill, the price of that little bit of fun amounts to 4 million per unit. And obviously as long as all suppliers insist that their fun must be paid for by other people, the market refuses to function.

True industrialists differ from undercutting time-wasters in one and simple way. True industrialists find doing a large amount of simple value-generating things fun, whereas undercutting time-wasters find doing a large amount of simple value-generating things boring.

Gevlon said...

@Maxim: the market cares little about my hauling cost. If the equilibrium price is below my expected profit, than I lost. But it's better to close the deal at loss than not close it wishing and hoping.

Johnicholas Hines said...

maxim is right - it is not good to ignore your costs in favor of a simple "50% of current margin is deep enough" when setting prices.

Gevlon responds that 'It's better to close the deal at loss' - true enough when it's applicable, but the question is not just about your hauling costs, but about your carry costs - having a sell order up costs you one sell order, transaction costs, capital tied up in that inventory. If there is some price elasticity, then yes you sometimes want to decrease the gap between sales (decrease your carry cost) by reducing price - but sometimes you'd prefer a slightly less immediate sale at a considerably higher price (increased revenue more than covers the increased carry cost).

Essentially, you want to be in an "indifferent to sales" situation, where for each day, if the object sells, then you're happy with the price you got, and if it doesn't sell, then you're equally happy to have the item in your inventory.

gallego said...

I too have subscribed to the aggressive cut strategy, it has more often than not driven away my competition.

Anonymous said...

I don't know about you guys, but I had many situations when I deep undercut with sells and buys to end up within less than 3% margin, then market swing happens and I no longer can sell at a profit my stock. Of course trading is still happening within lower price range. This is very common problem I run into.

Anonymous said...

The problem is when people stock up on an item before the deep undercutting starts - then they get desperate and try to sell everything off for minimal loss by 0.01ing you. Very few players, traders or otherwise, like to sell an item for less than what they got it for.