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Wednesday, March 9, 2011

Opportunity Cost Part 2

Opportunity Cost Part 2

Yesterday's post, Opportunity Cost and Farming - A Listener Question, had some great discussion.  Be sure to review that post and get caught up on the topic of Opportunity Cost.  Today I am continuing on the same topic as I received a lengthy email on the post.  Here is that email in its entirety.  I have included some comments in between the paragraphs in blue.  Those are my thoughts, not the readers.
"The idea that people shaving their profit or even undercutting to "below cost" is wrong is a bit hazy. For someone with infinite gold, playing the patience game and waiting a day, two days, a week to make max profit on one item is all well and good, but for those of us who are still small fish in the pond, nibbling off your prize meals is how we stay fed, get bigger."
Undercutting below cost is a poor business decision.  Your costs may be less than your competitors.  That's fine, but don't undercut the finished product lower than the cost of materials.  Just look at the current enchanting scroll market.  It is flooded with items posted for much less than the cost to craft.  Many people are just trying to dump scrolls they made just to level their enchanting.  Ok so maybe you are just trying to recoop a few coins you spent on leveling, or maybe your poorly planned leveling scheme costs you well more than it could have?
"In your example of the guy who undercut the 160g item to 120g with his farmed mats, yes, given the proper time he could move it at 200g, but he also probably farmed enough for a couple. So now that's 2 sales he's made, cash in hand to do more investing, while youre sitting on yours waiting for it to earn money. Is that lost opportunity cost for you? Is that why you call him stupid? Because you're mad he took your sale?"
Ok so you farmed enough materials to craft two.  So you craft those and sell them both undercost.  Congrats!  You just lost twice the profit margin you squandered away just because you can't wait a day or two.  If you keep the same pattern up, you aren't going to be getting very far with accumulating wealth.  And your competitor is probably the one who bought your 2 underpriced items and flipped them for profit because he has patience and you don't.
"Lets use a different part of your scenario. Sell the mats instead of crafting them. Well there's desperate undercutters there too (picked up 10 stacks of cinderbloom at 18g each!) So the guy looking to make a sale NOW sees the mats at that price, and snatches those up and crafts that 120g item instead. It seems to me that in every scenario discussed on gold making blogs, its all about getting cheap mats and crafting them into more profitable items, or using your considerable force of gold to buy all of those cheap mats and bully people into buying them from you at a premium. Both valid methods."
Um, you can't change the numbers around just to support your own argument.  Given the numbers I gave in the original post, selling materials was the obvious better choice.
"There's really a market beneath the market. There's the slow, plodding, sure thing sales that the journal shows us occur. And there's the deals and steals we talk about on the consortium forums. These are the sales people with less gold live off. Potential profit does not equal actual profit for most people.

Its the main reason i think the gem array is irritating on TUJ. you look at it and see "oh, delicate inferno rubies are selling for 169g. ...nope. Those 23 DIR have been sitting on the ah for 2 weeks at that price and some poor desperate schlub with no JC buddy bought one on Monday. Does that really make that the market value of that particular item?"
The market value at any given time is determined by what the current price is at that time.  Add-ons provide an average market value, but we all know that fluctuates daily, sometimes by the minute or hour.  I know the market value for Accurate Scope is around 3 gold, but I have still sold them for 250 gold.
"But i digress. Opportunity costs is a saloon door. Swings both ways. Its all in what style floats your boat."

Summary

In no way should you craft an item if you can sell the materials for more profit.  I'm going to stand behind that reasoning.  It is people that are hasty and don't want to wait that drive the prices down below cost.  If you are one of those people then you maybe shouldn't be crafting at all.  Just sell your raw materials.  You will probably get much faster results selling raw materials, since you have a mentality similar to that of gold farmers anyway.  Bots, farmers, Chinese farmers, etc. that move mass amounts of goods for prices under floor costs or deeply undercut just to make a sale.  Let me get one thing straight.  The point of crafting is to make a profit.  If you are crafting at a loss, then you shouldn't be crafting.  Go back to farming or doing dailies, but then again, you're probably the same guy that disenchants everything, even if the materials sell for less than the item you disenchanted.

18 comments:

  1. How enlightening post, again. The mentality in the comments you comment on this post is exactly the one of a person complaining about not having gold, gold making taking tons of time and always being broke.

    This is - however - the mentality of the majority of the people playing WoW because it's not gold they are playing it for, but for the leet loot they get from instances.

    C out

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  2. Godamn, I made a huge post the other day and now realize I didn't post it. I'll just try to repeat what I had written already:

    I regularly craft gear and sell below mats price. Especially on mid and low pop servers, market saturation comes into play when posting huge amounts of mats and the mats price can't be used in your calculations as a fixed price anymore.

    I once lowered the Hypnotic Dust price from 11g to 4g within a week and it took a long time to recover. To avoid this happening, I'd rather take all those mats, craft a bunch of high-demand, still high-priced items and sell those instead. The market won't react as quickly to an increased supply of those as is the case with farmed mats. People will try to hold onto their high prices and will often hold onto their stuff before playing the undercutting game with you.

    Me I can get rid of those epics real quick without anyone even noticing what happened. Hit em hard and hit em quick! The other day I sold 46 Darkmoon decks within 9h at exactly 9k per deck (414k) average. Thats about 2/3 of their going price on that server (mid pop). Now this is still above mats price (12.5% profit compared to mats price, last dupes wouldve to be sold in singles, I included them in a final deal where I got rid of the last 17 decks).

    Imho that's the best way to get rid of huge amounts of mats aside from cod's.

    This is of course only a valid strategy, if the amount of mats you have for sale would make too large an impact on their price.

    Continued in next post

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  3. Often I will just craft different things from the mats, some with profit, some with loss compared to the raw mats price, cause I know th various products will sell a lot quicker. That gives me bag/bank/mail space and allows me to focus on another niche while the old one is sorting itself out over time. Needless to say this kind of flooding the market with underpriced epics gets a lot of people very pissed, so I'd recommend an alt for this occasion alone.



    *Scenario: Tons of mats in our possession!
    ------------------------------------------
    Options:
    --------
    A: Sell the mats over the next few weeks at more or less the current price.
    --> Takes very long, you're gonna have to list and relist and fight undercutters off, gonna have to watch the market price. Chances are there will still be a decrease in price no matter how slow you're taking it.

    B: Try to sell em via cod/trade channel slightly below the going AH price
    --> Good option, but if you don't have a trading infrastructure yet it'll be very hard finding someone with that much gold willing to buy all those mats cause they will be facing the same problem

    C: Try to sell the mats as quickly as possible through the AH at a slightly lower price. People will accept the fact that prices are dropping, will massively undercut you, until the price is half of what it used to be or even lower. Massive loss preprogrammed. Market adapts fast to this kinda flooding

    D: Craft epics, sell em over time at the current ah price - Quite stressful without knowing what kind of changes the next patch will bring, how demand and supply for those epics will be changing. You will have to observe, relist, have good timing, bag space, be online frequently, watch other folks get desperate and lower their price.

    E: Craft epics, sell em below what the mats would score at their current ah price: Always proven the best way for me to get rid of epics and freed room for shifting my focus on other opportunities. Those 46 decks are a great example atually (even if they're still above mats price as mentioned above). Most folks took their decks off the AH and stopped advertising. I got about 50 /w's in those 9h with the most creative insults. Funny part is: Half the people claimed I'm ruining their market, selling way too low, could just as well give em away for free etc. The other half still laughed at the extraordinarily high prices for "just a trinket" lol. This shows how severely people are hit emotionally by witnessing an epic item flood like that. A lot of them wouldn't even take them for free cause they envy you so much. A few people will smell opportunity though. It really works even better if you take the time to only list 1 epic at a time and then constantly relist until they're all gone. Advertise on /2 that they're up on the AH and they'll be grabbed in notime (!), no matter if the buyers want to resell or equip.

    To get back to the example: No way I could have sold all the mats I used for half the price in one day on that server. Sorry if this is all a bit messy and long or not elaborated well enough in some parts, but I have a massive headache going on here and need to pick up my kids. yay. Also for some my comment might seem unfitting to the initial blog post, but remember I'm just trying to explain a scenario where it does in fact make sense to craft and sell below mats price. And that's when you would already love to get busy with other opportunities but are still completely stuffed with material to sell.

    Hope I could give some people a few new ideas here, I haven't been playing the economy for very long, so I can't say if 414k in 9h is impressive on a mid pop server, but I've never managed that with mats.

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  4. @ Anonymous: This is actually one of the corner cases where it is important how you got the mats. If you bought them on the AH for 5-10 % more than you sold them for (thus making approx 460 k into 414 k), this is not such a good idea. I can see that if you farmed it yourself, it would be difficult selling all the mats to full price. Then there would be a point to the "selling slightly under price". What I see from your post, it's rather you snagged up some cheap mats earlier for a lower price and then sold the items when prices on mats increased. That's a wholly different ball game, since you'll make profit. But turning 460 k into 414 k is just bad, that should be obvious.

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  5. If you see a ton of crafted items being sold on the AH at below mat cost then you have a bunch of people power leveling a profession. Find out what items are next on the "power leveling list" and post the needed mats on the AH - the same guy posting for below crafted price will surely buy up all your raw materials.

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  6. There is a major disconnect between farmers and buyers.

    Because farmers spend their time gathering materials their bank account balance stays even. It may even increase a little if they kill a mob or two or complete a daily here and there while gathering. The relationship between time and gold is therefore indirect for them.

    Buyers see a direct relationship between time and gold. They buy materials and craft the items to sell for a profit. As a result, the account balance goes down and then up after the sale.

    The issue for the farmer (and the reason he cannot understand the buyer's point of view) is that the time spent farming is usually all he can do or knows how to do with that time. He can't imagine taking the risk or doesn't have the profs leveled to take advantage of buying and crafting.

    The buyer usually has farmed in the past and knows the value of time and how to maximize opportunity. He is able to (usually) see both sides.

    The deep undercutter is more often than not the farmer, but can be the crafter too. The issue for deep undercuts can be selling below market value of the materials; it can be not having patience; or it can be an AH PvP mentality.

    I did a long post in January found here http://kammlerskorner.blogspot.com/2011/01/king-arthur-and-opportunity-cost.html that addresses this in greater detail.

    I agree that deep undercuts are bad for the overall economy but they will not go away. We have to manage through them.

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  7. "Ok so you farmed enough materials to craft two. So you craft those and sell them both undercost. Congrats! You just lost twice the profit margin you squandered away just because you can't wait a day or two. If you keep the same pattern up, you aren't going to be getting very far with accumulating wealth. And your competitor is probably the one who bought your 2 underpriced items and flipped them for profit because he has patience and you don't."

    If you examine this situation in isolation, you might be right. But if you're continually generating the mats, then pricing below "market value" to move them makes more sense. You say wait a day or two to move your scrolls at the "full price", but in that day or two, I've generated the mats for 2-4 more scrolls that I'll also need to move (either as mats or as a scroll). Wait the several days to move those at the "full price" and I've generated 10 more scrolls' worth of mats. At some point, you have to weigh your "losses" from discounting against the risk of your stockpiled mats depreciating in value.

    My point, I guess, is that just because the current AH price point for mat X is Y per stack, does not mean that your stockpile of 50 stacks of X is worth 50Y. Supply, demand, depreciation all factor into the valuation of your mats. Because of that, it can often make sense to sell a crafted items made from X at price less than Y.

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  8. @Anon just above me

    "But if you're continually generating the mats, then pricing below "market value" to move them makes more sense. You say wait a day or two to move your scrolls at the "full price", but in that day or two, I've generated the mats for 2-4 more scrolls that I'll also need to move (either as mats or as a scroll). Wait the several days to move those at the "full price" and I've generated 10 more scrolls' worth of mats. At some point, you have to weigh your "losses" from discounting against the risk of your stockpiled mats depreciating in value."

    Maybe you should move to a different market if you can't generate a profit based on what the materials are worth. Perhaps another market using those same materials will be a much more positive value. I sell tons and tons of enchanting mats that can't be used to craft many scrolls. Why? Because all of the scrolls are priced at well below material cost. So I chose not to craft those scrolls because I have the opportunity to make more money by not crafting. Regardless of the fluctuating price in mats. If the price dips too low, I don't sell. When it is up to what I want to sell at, then I relist on he auction house. Concept is pretty basic.

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  9. I agree, Cold. Maybe someone should offer another example besides scrolls... If you have enchanting mats coming in consistently, there are a good 15 - 20 different scrolls to make with them. The odds are that one of them will be profitable.

    Even if there aren't, don't make more scrolls for a loss! Sell the mats. This will either keep the cashflow rolling, or it will drive the price of enchanting mats down to where the scrolls become profitable again. The anon further up is right, turning 460K into 414K is easy - any fool can do it...

    The only time I would justify selling for a loss is if you are trying to drive competition completely out of a market to bring your profit margin up, but this is extremely hard to do, and takes a lot of time and effort, so in terms of opportunity cost, your time is likely better spent elsewhere, anyway.

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  10. I have to say, I barely pay attention to the price when I post things, I have made a fortune in wow...well over 3mm gold. I have never had less than 400k liquid. My strategy is simple...slow and steady in volume wins the race. I make most of my gold off glyphs and gems. For gems, I buy all ores at the price I believe to be a good price. I sell all the green gems, cut the blues and epics. Glyphs, always buy herbs of all kinds whenever they are posted at <1g each. I post EVERYTHING at 1c undercut and post 2x per day (canceling undercuts, reposting to where everything I have the ability to make has a quantity of three on the AH). Except green gems, those I post in stacks of 20, 10, 5 and singles.

    There are days when something I posted maybe posted significantly lower than it should have. But to offset it, there are days that a wrath epic sells x4 for as much as 249g when I paid 7g for the gem.

    The point is that I save a lot of time, don't sweat the details, focus on speed, efficiency and volume...I have 1000-1500 auctions posted at all times and it takes me two eighteen minute sessions per day. It makes me a lot of gold in the end. So much and so fast that I easily afford to buy anything I want for my 8 level 85 toons. They are all iLevel 348+ without raiding. They all have any mount they want, consumables, vanity items, blah blah - yet I am never below 400k gold liquid.

    You guys make the AH a job, it should just be an efficient means to supporting game play in my opinion.

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  11. Deep Undercutting is the strategy for gold making that Gevlon has been using for years... and it works! Because you get your materials (mats or crafts) sold and cash in pocket, instead of spending time watching the markets and trying to assume things have a 'correct' price. There is something to be said about using your mats to craft 'inferior' items and making less money, but that isn't the point of the discussion.

    Example: I have a new toon, and i've decided to take Skinning and Mining as my profs. I'm just going to level this toon, and skin/mine everything along the way, not paying special attention to farming, just gathering everything I can. My GPH for just leveling at level 10 is about 1/2 g... UNTIL i sell these mats. Copper ore might sell for 50s a piece, but i'm going to sell mine for 45s, because I know it will sell. the 'correct' price of copper ore may be 50s, but i'm going to sell mine at 45s and you won't sell yours at the 'correct price'. Who is experiencing opportunity cost now? You could purchase my ore and 'flip' it to the correct price, netting you a profit of 5s per unit... which does indeed take you less time to do than me 'farming' the material... but who makes out in this situation? Whose bottom line is affected here, mine or yours? My only consideration at this point should be whether or not to convert said ore to bars for a potential of higher profits per unit. Those ores/bars are worth 45s each to me, at this time, which IS, in fact, ALL PROFIT, as these materials were collected as a part of me leveling. This also includes all of the Fish Oil, Stringy Wolf Meat, Malachite, Linen Cloth, anything else I picked up along the way. All Profit. You really only fall into opportunity costs when you are spending money on mats for crafting.

    Now, in the situation where you have a stack of enchanting mats, it is a wise choice if you are intending to liquidate them to check the cost of the mats vs the final product. I recently lost money on Frostweave bags because i didn't check this: Bags sold for 135 instantly... but the cost for a single stack of Frostweave was 70g! no WONDER the bag sold instantly, I just crafted 300g worth of material to make it! Point being here is that it is exceedingly difficult to project something like opportunity cost, short of making a quick check of the mats vs craft before making the decision to liquidate.

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  12. OK, hang on, 'Opportunity Cost' !?!?!?

    It's IMAGINARY GOLD! No one is taking food from your mouth or forcing you to eat cat food in your retirement by undercutting your sales of IMAGINARY crafted items.

    Get over yourself.

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  13. "Perhaps another market using those same materials will be a much more positive value. I sell tons and tons of enchanting mats that can't be used to craft many scrolls. Why? Because all of the scrolls are priced at well below material cost. So I chose not to craft those scrolls because I have the opportunity to make more money by not crafting. Regardless of the fluctuating price in mats. If the price dips too low, I don't sell. When it is up to what I want to sell at, then I relist on he auction house. Concept is pretty basic. "

    Obviously if the demand is there for you to sell your mats at the "market value" or if you can extract a higher value from those mats in a
    different market, then you would be foolish to downconvert those mats to scrolls and sell at a loss. I'm not arguing that.

    Let's try a thought experiment. Say hypnotic dust currently sells for 100g per stack on the AH. Your friend decides to quit WoW and gifts you 1000 stacks of dust before he deletes his account. Did you just gain 100kg? Can you sell all of that dust at 100g per stack before the price depreciates? Let's assume that every crafted item you can make using dust values dust at less than 100g per stack, and the demand is such that I can only sell 10 stacks a day at the 100g price point. It's going to take me 100 days to sell that entire stockpile. Is a stack of dust going to retain its 100g value by the end of those 100 days (fwiw, on my server, dust is selling for roughly 50% of what it was 1.5 months ago)? If I can sell 30 stacks a day
    at 95g (either through undercutting or crafting or some combination of the two) is there value in paying that 5g per stack so that I can move everything in 1/3rd of the time?

    Now instead of a friend gifting you the dust, let's say you can generate 10 stacks a day, every day, for the cost of 50g in raw mats from the AH. Hypnotic dust sells for 100g a stack, but due to the supply and demand in your market, you could sell 1 stack a day at 100g, or 10 stacks a day at 90g (again, either through undercutting or crafting). At the lower price point, I can make 400g a day everyday (at a 100g "paper" loss). Or, I could stick to the 100g price point and make 50g a day and bank 9 stacks a day for later sales and hope that those stacks will sell at 100g eventually. Only there's another 9 stacks coming in tomorrow, and another 9 the day after that, and the day after that. Or maybe I should just make the 1 stack a day, because 50g profit a day is much better than the 100g loss I was making selling 10 stacks at 90g. Right?

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  14. Just to be clear, I'm not suggesting that it is never wrong to sell crafted items "at a loss". In many(most?) cases, it is clearly the wrong move. But let's not pretend that demand on most of the things we are selling is inelastic, or that depreciation doesn't exist, and these things should be taken into account when you price your product.

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  15. These comments are simply fascinating.

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  16. Lots of comments but I see really some different points.

    Use the case of the 9k decks. If your mat cost was greater than 9k a deck....it doesnt make sense to craft an epic and sell it. If you are making a profit but mat costs relate to more than 9k....sure you may be making a loss.....but as you say...you may not sell all the mats without forcing a drop in prices. Inks are one item that I find are grossly mispriced. I see high ink prices but no sales at high prices. Inferno inks and blackfallow inks are another whole topic on how to value and what their cost truly is.

    If you refer to what mats cost on the AH....too many see the price as at that one particular time. Take elementium ore. On my server it fluctuates from 40g to 100gold a stack. It really depends on the day and time as to what price you get. I buy always at less than 55gold a stack so my cost is at most 55 gold a stack. Average price on the AH may actually be say 65gold a stack. I can sell my ore at a higher price or I can craft an item and sell it but I should never sell it for less than my mats cost. If the ore is at 100gold...i may still craft items to sell that work out to 70gold a stack and I will still make money. Could I have sold at 100g....possibly....volume will play a large roll here.

    But I agree with Cold....dont craft an item if you can sell the mats for more.

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  17. @ Niko first, differnt perspective, "they are free mats i was leveling an alt..." perspective and opinion on what oportunity was and is, but by my estimation, and oportunity was lost to be playing on your level ?? and probably making a lot more money... err gold... or... w/e,

    Its a game and we are all in in to have fun and will never get a consensus abou it, i enjoy being the devil's advocate to a point in heated conversations... or you could say this time on this blog is lost oportunity and its costing me.. but in it to have fun and in it to win it too... what am i out to win... get to the goal and be happy for a while, then set a new and more lofty goal and do it again... faster better and smaterterererer.... cuz eye dew vant tah bee smurt about it...

    @ anon "OK, hang on, 'Opportunity Cost' !?!?!?"

    Your attitude rings of an elitist comment or worse... You miss one key element.. time is real, and every toon in this game is supposed to have a player behind it.. and for the most part does. its very real. Your comment stinks cause you come across like it does not matter in a tone like you have gold... are you competitve about nothing? do most who ever play baseball, soccer, football or any number of other "hobby" sports gain any monetary value of significance...

    Get over yourself... this is an active exchange of active minds in a discussion that shares many points of view and opinions that do not coincide. but a productive conversation and comentary shared by many on the subject... all but you...

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  18. you're oversimplifying when you say it's never correct to sell below cost

    as others have mentioned, you have to take volume, price variations, etc. into account

    if you can make more gold per hour by selling things below material cost, then you definitely should do that

    it's not always a question of one or the other either

    in high volume markets (which is how to make the most gold), your profits aren't determined by the value of the mats in your guild bank, but by the amount of stuff you can sell

    when you're dealing with really large volumes, it's generally ideal to sell the mats and the crafted materials

    take jc and the shuffle for example:
    a jc using your paradigm will sell only the most profitable cut of each gem and sell only the most profitable scroll because he wants to get the highest possible price for his mats

    compare to someone maximizing gold per hour (or per day) rather than gold per mats (or whatever you want to call your philosophy)

    he's selling gems of most or all cuts, raw gems, dusts, essences, most or all popular scrolls (even if some of them sell below the market price of the mats)

    the second guy beats the first guy by an immense margin

    Materials don't have a "true" value. They're worth what you can actually sell them for. How much you can sell things for often relates to how much of something you can sell. I'd rather sell 100 things for 50g profit each than 1 thing for 300g profit.

    tl;dr all that matters is the bottom line

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