Thursday, February 23, 2012

Cheating Yourself Out Of Profit

   Here i am back with one of my rants. Today i am going to try and cover one of the most important things that i have noticed that people do that are basically robbing themselves out of profit. The thing i am referring to is under pricing, or inadequate pricing.

   To try and explain this phenomena i will use two examples. The first one is how the real life economy disparity between countries is. For instance lets say that a person living in country A has pay check of 2000$, another person living in country B has a pay check of 1000$ and a third person living in a country C has a pay check of 300$.

   Now what all these people have in common is the need to buy a TV. Lets say that a nice new TV on the market would be 500$, now that would be an OK price for person A, an affordable for person B and damn expensive for the person C.

   One of the things i have been actually doing for quite a long time in WoW is asking all the people that i ever traded a single question, and that question is "How much gold do you have?" The reason behind this is not because i wanted to sell it for higher if they could afford it, but i wanted to get a general idea of what's the most common gold circulation among the normal/causal WoW player. The answers i got actually did give me a fairly good idea because i came down with numbers that implied that about 60% of the player base are all under 20k gold mark, then you have some 30ish percent that are 20-100k another 5% with 100-500K and about that same number with people over 500k. For similar numbers you might check some blogs or forums, but the problem with those is that the audit is pretty much from people that are on that site exactly for that reason, to make gold, and in return those are the people that fall into the last 10%.

  Well this same example can be seen in WoW as well. The way this happens in WoW is not with a TV but pretty much everything else you are selling. For instance i have seen on way too many instances where a person that has a certain item that he wants to sell it, ends up selling it for a fraction of it's worth and loosing out on the profits that he could have been making. The most common example with this is how people price their crafted items and to a certain degree the transmogrification market.

   The way people usually price their commodities is by the group of gold owners they are in (lets say you have 20K). Just put yourself in their shoes, you have an item that could be worth 10k to a person that is in a higher gold owner class then you , but you deem it too expensive because you doubt anyone would pay 50% of your total gold stash and you price it for 4k which seems like a 20% increase of your gold sum. 

   Now here comes another buyer that has a bit more gold in the sack, and takes your 4k item on the AH and re list it back for 10k. A few days pass but he eventually sells it to someone and makes a 6k profit over doing nothing but buying your item and re listing it back, and there you are happy with 4k profit while you should be pissed for missing out on the extra 6k you should have netted in. 

   But let us take a look at a more direct market with a more direct approach to prices. Let us take a look at the PvP gear and how people usually price their commodities and how they should be pricing it.

   The way this usually plays out is almost always the same. The person that is making the gear deems it a great deal if he spends 100g on the materials to sell it for 200g as in reality that is 100% profit margin, but the problem arises when you take that same item and sell it for 1000g. Then what happens is your 100% profit margin you made is basically still a 100% profit but at the same time a 900% loss as well.

   This same thing can be seen the most with the Transmogrification market. Yes, granted some people sell their items for 5,10,15 gold that you buy and flip, but those are not the people missing out, those are the misinformed, the actual people that are missing out on the profits are the people that are re listing the auctions. A perfect example of those would be a forum post i saw where a guy was asking the same question "am i cheating myself out of my profits" and he explains that he prices the items in 3 tiers a 200g, 400g and 600g and the reason? Well he is probably in the first gold owner class where his total gold sum is lower then 20k and a 600g is a good profit for him, and if you tell him that he could have flipped that for 10k he would laugh, or cry if you show him a printscreen of the actual sale.

   Anyways not to make this post any longer than it has to be i will leave you with a few last words. If you happen to be selling gear, or pretty much anything on the auction house never limit yourself with setting a low price. For instance like i said with the PvP gear, if the materials are worth 100g then set your high price at 1000g and your lowest price at 200g, that way if no one else is nuking your sales you will end up making a 100% in your worst case scenario, and up to 1000% profit in your best case scenario. Just remember there is no going price, the worth of anything is as high as a buyer is willing to pay for it. So one last time, don't be afraid to set high prices for the things you are selling and i am sure you will find your profits to be much higher then you are accustomed to.

   So, like always, keep an eye out for good opportunities out there.


  1. The questions that you need to ask yourself are "What is this item worth to my buyer?" "What is the chance that he will buy at a given price?" "How much of an item can I produce?"

    Assume you are the only player selling an item. Do you post it at 10k or at 3k? The answer is that you need more knowledge to make that judgement. If it is a crafted item that you can make at virtually no cost, you might want to sell it for 3k if you were able to sell one item a week at this price. If it's a rare world drop, you might be better off selling it at 10k, even if it would take you a month.

    You need to make an attempt to judge what the demand for an item is at a given price, not just the maximum price the item will sell for.

    It's basic economics. Demand for an item takes the form Quantity Demanded=K-Price, where K is an unknown constant. Your profit from selling an item is Marginal Revenue-Marginal Cost. The important thing here is to figure out at what price (MR-MC)*Q will be largest, as that is where your profit will be highest.

    1. I agree with everything you said. But my whole point in the post was that people most of the time screw up with severely under pricing the goods they have, be it craftable item or a BoE item.

      And further more they are always hesitant to slap on a high price on an item

    2. While I didn't think you wouldn't agree, i just felt that your post was a bit one-sided. ("So one last time, don't be afraid to set high prices for the things you are selling and i am sure you will find your profits to be much higher then you are accustomed to.") In the long term, a sale at a small profit is better than no sale at a large profit.
      Patience is key, the patience needed to wait for an item to sell at a high price and the patience needed to experiment and figure out the optimal price which will give you the most profit in the long run.
      Otherwise, I agree with the general idea of what you are saying.

    3. I find that people mess up more with a great over inflation of what they think they can sell an item for on the AH. The epic gem market and high end enchants is currently an area where those that put the crazy high prices up just dont sell. If a price is too high....people look for other ways to get it.

      The trade channel is where I see people selling way too low.

      I think your rough estimation of gold is likely skewed too high. Most players I know have less than 50k. In a guild of 150 toons only a few would be above that amount. There are a handful of players in the gold capped and above category and thus what I feel is a relatively small segment in the inbetween area. It is hard to assess the bands...but on my server there are roughly 7,000 level 85 toons actively playing alliance. I would say based on active posters and knowledge from talking with the active selling group it is very very unlikely there are 350 players over 500k. My gold level is approaching 4 million. Even the high sellers on my server are typically under 1 million. The long time regular posters...yes some of them are the double and triple gold capped players but these days many of them have gone dormant.

      My other evidence on the availabiltiy of high end gold people is based on items that often just dont sell. I can wait for a tcg mount or other rare high end item to drop in price. In most cases I can be patient and leave a message with the poster I will buy his item at a very large discount from the original posting price. I have bought over time 6 tcg mounts, a couple of rare drop mounts ie Crimson Deathcharger and 3 vial of the sands. Highest price for any mount was 100k. Most were in the 50-70k range. Vial of the sands I had the mats for one and was giving a 5k tip to get it made. I offered him 40k for the one he had on the AH which was roughly the mats cost at the time. He agreed as he didnt like having his capital tied up in an item that hadnt sold in a few weeks.

      Maybe my view is skewed as I have the power and the patience to offer immediate gold to some that need it. I have always found the AH is overpriced for high end items and trade is where the great deals can be had but that is most often due to their need for quick gold.

  2. I'm new at this and the major issue I have with pricing (largely, I think, because I'm still in that first financial bracket you mentioned, less than 20k) is that my server's economy seems seriously unhealthy. Everything's price -- from greens to purples, crafted to rare drops -- is severely depreciated, to the point that even purple Cata gear routinely goes for a couple hundred gold at most.

    I know the logical thing is to buy up and resell what I can, but the consistent pricing issues have seriously shaken my belief that the community can support the higher prices these items deserve.

    Any tips or tools you'd recommend to help gauge demand?

    1. When all the prices are dirt cheap there is only one thing you need to do ... and that is reset at prices you like and then maintain them for a few days until the server adapts at those higher prices

  3. Sure, maybe you can sell ONE for 1000g profit.... Eventually... Me, I'd rather sell 100 every day for 100g profit each.

    1. You are missing out on the point here. I am not saying don't sell if the profits are lower, what i am saying is don't be afraid to price them higher. One thing i have learned in all the years playing this game is that when a buyer comes with the mind set on buying an item, they are prepared to pay 1000g or 100g whatever the current price is just so they can bail on the fuss of having to find someone to craft it for them, or haggle with someone over price

  4. I have made a few sales by deliberately pricing high and letting the lower priced commodities sell through before mine, but my biggest headaches lately have been undercutting and product dumps. I was selling certain items at more or less a fixed price steadily for months, and in the space of about a week, a handful of sellers have listed dozens of auctions at a fraction of the normal price to the point where they have effectively killed the market.

    I bought them out and am holding onto the goods waiting to relist them when the market bounces back, but they did the same thing again the next day, and the day after. In a similar situation, I have a few AH players who will instantly undercut me on any high priced recipe, repeatedly relisting until the price falls from 30k down below 8k. Again, I can buy and relist, but when buyers see these obvious price wars, they hold onto their gold and wait. If something doesn't sell for 8k, it probably won't sell for 25k, and if I wait too long, another seller will come along with the same recipe and we'll be back to square one.

    Any tips on how to deal with either of these situations? Thanks!

    1. Make sure you are exploring all markets, i love my server because i can buy at less then half the going rate on one side and flip it on the other, and if one side gets bent out of shape they rarely both go off the rails at the same time...unless the other person is doing the same thing(theres only one and they stay away from my areas) you can flip all day long and come out way ahead i make good profit on the alliance side and make a killing on the horde side considering my investment and volume...and with the right amount of volume the margins don't even to be that high just high enough to absorb the neutral AH cut

  5. Interesting post Vile. I have three comments:

    1) You are right in setting prices for higher profit, but only insofar as the item in question is limited supply or low frequency. Very few people are selling Choppas right now on my server so I can ask 20k. I might sell one at that price every week or 10 days. In the interim, I get undercut so I have to repost, but if I started at 16k instead of 20k, I would still be undercut frequently. Starting at 20k means I might sell at 17k, but starting at 16k means I eventually sell at 14.5k.

    2) I think you are off-base for high frequency sales. Crafted items (pvp armor, leg armor, bags, etc.) are much more dependent on TODAY'S materials cost than one might imagine. Very few players maintain an inventory of materials, or crafted items. If I see Embersilk at 40g/stack then I know my Vicious Fireweave sets will be lower priced than I like. Same goes for Savage Leather (85g/stack), Elementium Ore (90g/stack) etc. I'm one of the few on my server that maintains an inventory of materials. I have 4 guild banks with stack after stack of cloth, bars, ore, gems, herbs, volatiles, etc. that I bought at certain prices. My cost to make a Vicious Pyrium Helm is fairly static at 120g yet I see them listed at 1,200g. By setting my TSM threshold to -100g with a minimum of 150g, I cancel and re-post frequently. I'll sell all the way down the chain (thus keeping your basic premise of higher profits) but by forcing the market below the cost of TODAY'S materials I eliminate the casual sellers.

    3) Don't underestimate the power of market manipulation. I know my competition and watch the prices of raw mats closely. By purchasing raw mats below a certain price regardless of my current inventory I can maintain sufficient supplies to craft what I need when I need it. I frequently buy out my competition if they are too undervalued and re-list for much higher margins. Sometimes this means buying 4 or 5 Vicious Charscale Gloves (say for 179g each) and re-listing them at 999g. One sale and I make my investment back, two and I've realized significant profit. By then controlling the raw mats prices I eliminate my competition's ability to fight back with low priced options.

    I guess my point is: maximize profit based on market variations. Sometimes this means selling one unit at 20k and other times it means selling 10 units at 199g. Don't be married to a single strategy.

  6. It really depends on server, faction and market. On our server, Leather PVP gear on alliance side sells for 50% of Horde side. I just buy the items on Alliance and mark them up 250% to list on Horde side. Even with undercuts profit rarely dips below 50%.

    PVP plate gear is a completely different matter. Half of the gear is listed below mat costs and no items are priced more than about 100g more than mat costs. (average of about 140g). Given the number of items listed, its impossible to reset the market to anything higher. Believe me I've tried.

    The same thing is now happening with gems. Demonseye and ember topaz custs are selling for less than raw nightstone and Hessonite. There are just too many JC's and too little demand since the patch. The AH campers will immediately cut prices down to the numb after any attempt to reset a gem cut. The only people making any sales those camping and selling in volume a very low prices.

  7. I'd like to add that philosophies described that "force the market below the cost of TODAY'S materials to eliminate the casual sellers" really handicaps the ability of 85% of people that play wow to make enough gold just to pay repairs.

    AH goblins spend significant amounts of time dominating markets and monopolizing raw materials and marking prices up to stratospheric levels.

    Someone who logs on for a few hours a week to raid wants to craft a few items to sell to make back their repairs and maybe dream about putting some inferno rubies or enchants on their gear. I got 2 lfr gear drops and If I had to buy the 5 red gems and enchants from the AH to outfit it, I would have spent 4000G.

    At some point people get fed up. There are now people who actively harass AH campers by announcing their whereabouts and when they log on in trade chat in order to organize boycotts of their items on the AH. Based on TUJ info, one JC AH camper lists continuously from 10am until 2am the next morning in the AH. He undercuts every listing within a minute.

    I fully expect Blizzard to institute some type of cap to eliminate this type of behavior.

    1. What do you mean by cap, Scugger? A cap on the amount of auctions posted at one time? Where would the line be drawn, though? Would it be per day, per character, account? While I don't camp the AH all day, I do list a large amount of auctions every day. You can't expect all aspects of the game to cater to just you specifically, at all times. While you find it difficult to make gold, I do not. While you see 4000g as a lot, I do not. What you're getting angry over is someone doing something better than you do. As far as repair bills go, I make enough gold that I supply my entire guild with free unlimited repairs. That is how little I think of the problem your scenario presents. Also, that problem isn't experienced by a single guild member in my guild, because I finance all of their deaths. If someone is better than you in any specific market, then I suggest you switch markets.

    2. When a market is in equilibrium, marginal cost=marginal revenue. Which means that crafting items at material cost will net you no profit. When material costs<item value, we have a situation called overnormal profit, where there is more money to be made than there would be if the market was in equillibrium. When this is the case, more players will enter the market until the market is in equillibrium, and those who are not making a sufficient profit will leave. Those who stay in a market in equillibrium have a competitive advantage, for example the ability to keep their material costs under the market price.

      The TL;DR of this: If you can't stay competitive you should find greener pastures. No one can withstand the forces of economics in the long run.