Friday, May 14, 2010

Getting set up for gold generation

I did some research last night and I realised that the enchanting market on my server is highly inefficient. Many good scrolls were missing entirely and the ones that _were_ there were selling for at least a 100% markup with very little competition.

Let's start with the basics. We make money when we sell an item for more than its cost. "Cost" is misunderstood however, since many people don't seem to understand that it should include opportunity cost as well as the actual gold cost of an item.

I'll start with a simple example: Let's say that I decide to sell a limited supply recipe from Winterspring such as the Healing Potion recipe (http://www.wowhead.com/item=13446/major-healing-potion). I would take a portal to org, run to the flightmaster, fly to winterspring, run to the vendor and pay 10s if there is an item in stock, then I'd recall and head to the AH to list it.

It would cost (I think) 1 silver to list (which I'd get back if it sells) and if I listed the recipe for 55s, I'd be making a 500% profit, right?

Wrong. This computation fails to take into account the oppertunity cost of my time. Instead of doing all of this running around to make 44silver profit (or even 5g profit - a a 5000% profit), I could have done a daily quest and picked up over 15 gold in rewards. Thus, we learn a key lesson that is useful for life as well as for the game: time is money.

I estimate that if I follow a good daily quest pattern and only hit those quests that are most profitable and closest together, I'll get around 8-10 done in an hour with an average profit of about 15g per quest. If I run 2 dungeons or farm or mine some stuff in the same amount of time, I could probably make a little more. Lets call the cost of my time somewhere around 150 to 200g an hour.

With the above "buy a healing potion recipie" plan, I'd gain 44 silver and lose 10 minutes of my time, i.e. 33.3gold. Indeed, if I sell the recipie for anything less than 35g or so, I'm losing money.

This leads to the following equation:

cost of goods sold (COGS) = cost of materials + time to craft ("labor cost") + time to list and relist + failed AH fees + 5% AH "cut" on final sale price

Now, profit = (sale price - COGS)*quantity sold

That's it. That's all there is to it. To increase profit, you have to either sell more (increase quantity), sell at a higher price or lower costs. Ideally, you would do all three.

I am going to start with COGS, since this is the variable that we can have the most control over. Clearly, we want to pay the lowest possible costs for our items. Since I am goign to start with enchanting scrolls, this means the following:

1. Enchanting scrolls have NO listing fee! This means they can be relisted forever without incurring any cost other than lost time.

2. Enchanting a scroll requires the appropriate vellum. Vellums come from inscription and can cost quite a lot if you buy them blank from the AH. Ideally you want to make these yourself, using an inscription alt or a main to mill the inks from the cheapest possible herb sources. To start, I am going to have a guild friend create huge stacks for me and I'll simply tip them well to do so.

3. Enchanting requires a bunch of shards, essences etc. There come from several sources: DEing your own gear, buying them from the AH, buying greens from the AH to disenchant or making greens yourself and disenchanting those. This is where things get interesting.

I am going to become a jewelcrafter and start to make my own items as a source of disechanting mats for scrolls.  Typically, the process goes as follows:

Obtain saronite->prospect the saronite into gems->make rings->DE the rings->make scrolls.

This is called the "saronite shuffle" and is widely known. Typically, you also sell the "side effects" such as blue gems (usually after sutting them for the most markup).

There is lots more to say, of course. For example, you need to find your cheapest input. Sometimes that's saronite, and sometimes it's just buying the gems directly from the AH. At other times, it's buying the shards and dusts and ignoring the whole shuffle. Every step must add value or it's not worth doing - you'd be better just buying the next step from the AH.

So, I am going to start by picking up 5000g from selling scrolls and doing dailies and then dump my mining for jewelcrafting and start doign the shuffle in earnest.

My strategy for selling scrolls is as follows:

I want to have 2 of every scroll that is either best or second best for each slot up on the AH all fo the time. I also want to have 2-3 of commonly used lower level scrolls like Crusader and Fiery and any twink scrolls I can find up as well.

I plan on having some "stock" to refill the scrolls that sell out. Probably around a total of 4-6 total scrolls of each type. (I don't want to flood the market by listing all of my scrolls at one time).

I plan to use the following listing strategy:

1. If there are no competitors, I plan on listing for 199% of my COGS. Why not more? Because this is a long-term strategy. I don't want to encourage competition to step in when they see insanely high profit margins. I'm going to make most of my money by increasing my quantity sold.

2. If there are only a few competitors, I am going to start out by undercutting them by 1 copper. This is just an experiment. I want to see if these people are AH campers (in which case, I'd expect to see them relist 1c below me fairly quickly) or if these people are "casuals" who don't watch the AH closely.

3. If I meet competition that undercuts me, I'm going to get more agressive in my price cutting. This is the Walmart strategy. I am going to be in this for the long haul, so I want to drive my competition out. Anything above my COGS is profit, so I'm happy to keep cutting and cutting until I hit the "floor" of my COGS. If my competition goes lower than this, I'll probably start buying their stock, since I know that selling for a price lower than cost means they will eventually run out of money. And remember, my plan is to have the lowest possible cost in the industry.

I plan on undercutting at reasonably meaningful levels - around 2.5% lower than the other persons price. This will mean the market will come down to my COGS in about 35 "cycles" of listing/relisting if I get into a price war.

Because this will probably annoy some people, I'm planning on posting my enchanting auctions from a level 1 "banker" alt. Once I get my JC levelled up, I'm going to do the same with a different alt for cut gems.

My cycle will be as follows:

morning:
1. Collect mail and scan AH.
2. Work out which auctions I need to craft more scrolls for.
3. Find the materials as cheaply as possible (probably via the "saronite shuffle" and craft the required scrolls to restock.
4. List at least 1 scroll in every category, following the rules above (199% of COGS if no competition, 1 copper lower if undown competition and 2.5% lower if known, active competition). List for 48 hours.

Lunch (optional)
5. Relist single scrolls that are not the lowest in their market.

Evening (6pm or so):
6. Relist single scrolls that are not the lowest in their market.

Late evening (10pm or so)
7. Look for cheapest deals on the AH for raw materials and pick them all up.

I'll obviously be using lots of addons to automate all of this.

Sound like a plan?

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