Wednesday, May 4, 2011
Demand Side Economics
Goblins require that someone "need" our items. We can supply all we want but if no one is buying what we list, we don't make any gold.
We often look at gold earning through this lens--"what can I supply that will sell for a profit?"
We might even ask, "Of all the things I can possibly sell that will earn a profit, what can I list that will make the best profit in the shortest time?"
These questions frame the analysis from a supply standpoint. Let's quickly look at this picture with the demand lens to see if additional ideas are discovered, and if so, if they are helpful.
In the picture above Raul correctly anticipates that 21' ladders will be useful. He read the patch notes I suppose. Selling the old 15' ladders is no longer viable. Sure, some people might buy the 15' ladders but 21' ladders are soon going to be needed by anyone wanting to get to the next level.
Will Raul be reselling pre-made ladders? Or will he be manufacturing them in his shop?
If he is reselling, the demand for ladder making materials gets pushed downstream to whomever is manufacturing them. If he is making them in his shop then the demand for materials becomes his to manage.
If Raul pays too much for wood, nails, or paint then his ladder may not be affordable, or desirable. Paying too little may mean the lumber yard, nail maker and paint mixer could go out of business if they can't meet their obligations. Raul may also have expenses for labor--he may not have the requisite skill to produce ladders so he may have to hire someone to make them.
Like Raul, many goblins look at the economy in this fashion--how much am I paying for materials and labor (or completed product), and for how much and how quickly can I sell the finished product? Of course, there are other goblins who are in the materials supply business--they make (i.e., farm) the wood, nails and paint that goblins use in manufacturing. Others are labor specialists--they will "manufacture" scrolls or bars for a fee.
((Note: in the following discussion, "Class" references are not intended to disparage anyone. This is just a simple term that everyone can understand and it flows within the extended metaphor.))
What is your job in WoW?
In the WoW economy, players have different jobs. These jobs pay very different wages. Minimum wage jobs are like players whose only income is from questing. Lower middle class jobs might be those who quest for income and also do dailies. Middle class jobs might be those who quest, do dailies and some dungeons. Upper middle class might be those who quest, do dailies, do some dungeons and raid. Upper class may focus on raiding and dungeons but also earn significant investment income (aka, AH sales).
At each different class level players may take second jobs to make ends meet. The most popular second job is gathering and selling stuff in the AH, followed by those players who build investment income (read: flipping). Then comes door to door sales and telemarketing--aka, hawking skills in trade chat.
Players' second jobs are very often limited by progression level. For example, Level 25 Skinners are not able to farm Borean Leather because they can't get into Northrend--and would get splattered on the lawn by the mobs there if they COULD get in. If they were able to get in and could avoid the mobs, they can't train Skinning high enough at L25 to actually skin anything.
PvP is like eating out, skiing or owning art. It is a luxury that doesn't generate any income but can be a costly habit to support.
Level 25 characters can, however, flip goods in the AH and can telemarket the lower level skills they have available. They can support a L25 PvP habit since the cost to support that habit is often reasonable enough to allow them a chance to succeed.
If you notice in the above examples player level has little to do with overall income level. There are a lot of Minimum Wage workers who have attained L85. There are Middle Class workers who are only L40, or lower. There are Upper Class players who have all professions maxed and can afford to hire an investment banker (aka, Auction House Mule)--and other Upper Class players who built their empires on farming, flipping and smart investing (self-made millionaires).
A player's stable of characters is like a family. If the family has lots of money it is shared among the family members. We see that all the time--L30 players with BoA gear or the best twink armor and enchants available. Similarly, poor families often perpetuate more poverty--a new toon born into a Lower Middle Class family starts off with no silver spoon and is more likely to continue the family business--questing for income and perhaps telemarketing.
Let's now look at this economic picture from the demand standpoint.
Minimum wage and lower middle class jobs don't generally earn enough income to afford PvP. They are also more likely to make their own gear. For these players, materials are end-use in nature. Copper ore is used to skill up and then is re-used for a weapon or some armor.
These players will often farm materials for personal use and sell the excess in the AH. Prices are usually under the market rate for speed of sale. A quick sale for 50s is more desirable than waiting two days for 1g. Why? Because the player has immediate expenses that cannot otherwise be met.
From a demand standpoint these players are more likely to buy only what they need, and they will buy only when they can afford it. For example, if this player needs a Star Ruby to make a new ring, he might be more willing to pay 1g for a single ruby than to pay 10g for a stack of 20. Even though the per unit price is lower on the stack, it is untenable financially for him to invest 10g and wait a few days to sell the surplus gems.
Middle class players may also farm for personal use but also farm for re-sale. They are usually willing to wait a bit longer to sell something since immediacy of expense is not as great. This player has an income stream that is fairly predictable and will usually spend within those parameters.
Even though he needs only one Star Ruby this player is more likely to buy the stack for 10g and resell the remaining 19 gems for 75s each. With a slightly more distant urgency horizon he is willing and able to recoup his investment over a few days, and expects to turn a decent ROI. Selling all 19 Rubies at 75s will earn him 14.25g, a profit of 4.25 gold AND his crafted item.
Upper Middle Class and Upper Class players probably don't need the Star Rubies for anything at all. They see these gems at 50s and buy all of them at that price simply because they are undervalued. They will turn around and resell at 1g each or more. If it takes a week to sell them that doesn't bother this player. He has lots of other investments too. This income stream is marginal, and the income over time effect of many small investments will add up for nice profits.
Upper Middle Class and Upper Class players are much more likely to have demands for finished goods and luxury items than for raw materials--but even this scales. These players may have businesses that supply high end gems or armor, so their demand is for high end raw materials like Elementium Ore and Volatiles.
For goblins, knowing how other players fit into the economy is very important. Understanding the demand part of the supply and demand equation is just as important as predicting when to sell 21' ladders instead of 15' ladders.
Similarly, it is in the best interests of the goblin to promote economic growth among the lower classes. If Minimum Wage players suddenly had 2x the disposable income they would be more likely to spend it than to save it. They would probably buy goods that (hopefully) we supply. This would in turn increase our income. Whether we stockpile our wealth or buy expensive toys, having more gold allows us to do more within the game.
By promoting economic growth in the players at the bottom of the income scale, goblins help promote growth of the whole economy. By and large the spending habits of these players do not change--they still buy new armor, weapons and enchants. Now they can just buy more frequently and higher quality goods.
There are several things goblins can do to help promote economic growth for these players.
Keep the cost of bags down. Bag space is directly proportional to income. More space means more items I can carry, whether for vendor sales or AH sales or personal use. It also means fewer trips to the mailbox, meaning there is more time to quest or run dungeons thus earning more gold per hour.
For example, I buy Netherweave at 10g per stack and below. I craft 30, 50, 100 bags at a time. AFK crafting during dinner, at the end of the night instead of logging off, during a bio break doesn't cost me any real game time. I give bags to guildies for free. "Anyone need 16 slot bags? Speak now". I mail 1 to 4 bags to anyone who asks.
The remaining bags I sell in the AH for 10g each. I put up 40 to 100 at a time. Sure, some sell to other players who then try to relist them at 15g or more but by and large when they see wall after wall of cheap bags they move to something else. I get notes in the mail "why are you ruining the bag market?" and I simply say "sell yours cheaper or find something else to sell."
Result? I see more guildies buying my goods in the AH all the time. My AH toon is anonymous so they aren't motivated to return a good deed. Losing a few gold here and there on bags is a good thing. More bag space for lower income toons means they earn more, and thus they buy more.
Engage door to door salesmen and telemarketers. There are two ways to help the economy by helping players with these part time jobs. First, buy from them. You can resell the scroll or gem even if only at break even pricing. More importantly you can learn more about the player. It gives you a great way to begin a dialogue. You may discover they don't know any other way to earn gold, or they can't afford to buy enough materials to make and resell their goods.
Whether you buy from them or just ask them via whisper, find out if they need gold help. If so, it is a great opportunity to direct them to any of the gold blogs for tips. You may not see immediate results and it may not work all the time, but if they are able to change their behavior and move up the economic ladder the overall economy will prosper.
The other way you can help these players is to hire them full time. Ask them if they want to become your production toon for XXX item. You send the mats and a small fee for the tip and they send you the scrolls or gems or whatever. It might not change their behavior long term but if they have the coin in pocket and supply your goods for you, then they aren't selling to the general public anymore--so more people are inclined to buy in the AH instead of /trade.
You might also realize a time savings, which would therefore let you spend your time on other profitable ventures.
You may discover these players don't want to make items for your resale purposes. That's fine. If you can get them to a gold blog that is a start. If not, c'est la vie.
I currently have a scroll maker who makes BC and WoLK scrolls for me at a set price per scroll. It varies by type, but with my materials the production cost is almost as low as if I made them myself. The upside is, while my margins are down a bit, he doesn't sell in /trade anymore. Another player I engaged also doesn't sell in /trade but now is an aspiring goblin. I see his auctions for gems and some cloth items pretty much every day.
Fewer players selling in /trade doesn't drive down demand--but it does help manage supply. Without these direct to consumer sales the buyers have to go elsewhere. Sure, it might just be to a different salesman but it might also be the AH.
Recognize "demand" opportunities and seize the moment. Over the weekend, to gear up my toons, I bought two Gurubashi Destroyers, Amani Armguards (for my DK) and Charmbinder Grips for my Warlock. I bought all of these from players selling them in /trade and I used the same strategy for every purchase.
I operate under the assumption that people selling in /trade are either unwilling to fight the competition and/or pay the AH fees, or need a quick sale to finance some other activity. Sometimes both are true, and I'm sure sometimes neither is true.
However, when I see someone barking "WTS Gurubashi Punisher, 10k", I immediately think this is someone who wants a quick sale. There are few purple 353 items available for purchase BoE. As all goblins know these items usually take a few days to sell. When I see a Cataclysm purple in /trade this way I immediately think "this could be a deal".
After he had barked about 4 times, I wsp'd "2k, firm offer". He replied, "way too low--not in same ballpark". I replied "ok, np--my offer stands until I log off."
I continued my AH activities and he continued barking. The price came down to 8k and then to 6k. I was done and ready to log off so I sent one final wsp, "kk, i'm about to log--last chance, 2k."
"3k is as low as I can go" came the reply.
"oh, sorry then. not willing to pay more than 2k. good luck!"
I decided to count to 10 and then log off. 1, 2, 3, 4, BAM! "fine, its yours" was the answer. We met and made the trade. He had a distinctive name, XXXhunter (xxx appeared to be initials). He made a couple of comments about how I was taking advantage of him, which I ignored. I just said "thanks, my DK will love it" and let it go.
Funny thing is later that day, XXXpally bought a full set of Bloodied Pyrium gear. Did I just get my money back? Maybe. I did get a great deal on the Punisher. TUJ shows it selling for 2.5k to 6k.
The other items were similar deals. One more Punisher for 2k. The Amani Armguards I got for 1.5k (TUJ says 3.7k to 6k), and the Charmbinder Grips for 1.5k (TUJ says 2.8k to 5.2k).That these players had to or were willing to sell for so much less than market prices is more a function of their demand needs than it is of anything else. If they had the capital to buy NOW whatever it was they wanted they could afford to list these in the AH and wait a few days for the sale--making more gold.
The point is that these players all needed quick sales for capital. They more than likely bought goods in the AH, mine or someone else's. Being able to recognize their need (demand) and meeting it with good negotiation skills enabled me to capture very good deals for my toons.
Before anyone suggests otherwise, I don't believe I took advantage of anyone's desperation. At least not unfairly so. These players all could have said "no sale" and moved on. Some may have found other buyers, others may have listed the items in the AH. In any event, my offer represented the amount I was willing to pay.
This is no different than seeing an item in the AH listed at a lower than normal value. Do we pass on it, saying "gee, too bad I want to pay more for that nice purple weapon"? No, we just buy it and giggle.
When someone barks in /trade for an item, don't just ignore him. Make an offer. Worst case, he says no. Best case? You get a nice shiny thing for cheap and he gets some gold.
Don't shy away from gold discussions. This is an area where I can improve. My desire for anonymity keeps me fairly mute when these discussions occur in /guild chat. My AH toon is anonymous for a reason. I don't want people asking for loans or otherwise giving me a hard time. Plus, I don't want anyone in the guild to feel like I'm bragging or anything.
Recently, I have begun to engage some players via private tell with fairly passive notes. This has been much easier to manage and has led to better results.
For example, the other day some dude in /g chat said "my friend on XXX server is the richest person in WoW. He has over 600k gold". This led to all sorts of discussion. I stayed away from the general back and forth. Hell, I was staring at 585k in the bank. Others were more than willing to point out the error in this person's example.
((Interestingly enough, one of them was Phuggley's alt)).
One of the guildies seemed fairly even tempered and more mature, just given the comments and vocabulary. She commented things like "I never have enough gold for my repairs" and "If I could just afford to buy gear good enough for Heroics I'd be happy". I sent a private tell, mentioning that I didn't want to get involved in the public discussion but I might be able to help with the gold earning issue.
We had a nice discussion, I offered some tips, including blogs to check out. A few days later she sent me a note in the mail saying she tried the tips and read the blogs. Said most of it worked for her and not only did she have enough for her new gear, she was sitting on over 3k gold in the bank. She wrote "I've never had this much gold with nothing to buy--what do I do?"
I replied, "you just took a step up the Economic Ladder--invest wisely, and turn your 3k into 6k and then 12k--you will need it later for something and be happy you have it then."
Buy from players who aren't already goblins. This one is tougher--both to implement and to manage. AH players seem to gravitate to names like "Buymycrap" and "Bαñk". I will usually not buy from these toons if I can avoid it. They are the competition. Players usually have more in-game sounding names. I will buy from them if I have a choice and the prices are close.
Another thing I do is buy lower end goods just to add a boost to the economy. If I see Copper Ore in large quantities for say 75% value, I will buy a bunch and resell at the same price or a bit lower. I figure the player from whom I buy will use the money for something he needs--like maybe my armor and weapons.
I also buy and sell large quantities of linen, wool, medium leather and low end herbs. Most of these I just package in different quantities and resell but the herbs I use for Enchanting Vellum, which I sell in the AH for 2g per unit or more. A stack of Silverleaf for 50s turns into 4 Vellum at 2g each. Very good ROI.
Conclusions and Summary
Recognizing that demand is a market force in and of itself can help goblins earn more gold. It is very hard to find a direct causal relationship between any of these concepts and a tangible result. Anecdotal evidence suggests that in at least one instance, when I bought from a player he used that gold to buy my armor sales--but I can't prove it was the same player. Reasonable to assume so, but not necessarily a fact.
Despite the lack of firm evidence, a basic understanding of human nature (player nature?) suggests these are all good ways to stimulate growth. The more income players have the more stuff they will buy. Usually players tailor their gold making activities according to what they need to buy--need a new Sword, run more dungeons.
Having a new way to earn gold won't make the average player suddenly become a goblin against whom we have to compete on a daily basis. More likely they will use this skill to buy their desired item sooner than they would have otherwise, which means they can run higher dungeons and will soon need better gear. The cycle repeats.
It just seems to make sense. In non-WoW life, studies suggest that the fastest way to stimulate the economy is to give poor people food stamps. Why? Because when they buy food at the local market this money gets turned over several more times up the chain into the economy. The store owner buys more inventory, wholesalers have to buy more from suppliers, etc. This is why studies suggest that for every dollar spent on food stamps $1.73 is generated into the economy.
I'm not going to turn this into a debate about real life economic principles. However, the underlying premise does translate to WoW. Players who live "paycheck to paycheck", or from quest to quest, will buy more goods when they have more gold. They can get more gold if they have bigger bags, if they can sell door to door or via telemarketing, if their sudden demand opportunities are successful, if they learn new skills, etc.
All in all these are good things for the WoW economy. Tracking your sale today back to a subsidized bag listing last week is nigh impossible. It does make sense though. The stronger the economy gets overall the better it is for goblins. Goblins live on top of the highest waves--more water in the ocean makes the waves crest at new heights.
Posted by Kammler at 8:18 AM