I have been thinking a lot on various comments made both here and over at Cold’s blog (specifically his Opportunity Cost Part 2 posting), all related to the variance between the market price of mats and of the market price of finished products. It seems like a no-brainer to say the market price of finished products moves independently of the price of mats – even beginning auctioneers can pick up on the fact that, say, cut gems generally go for more than uncut gems, or that profit can be made on making flasks at certain herb prices, and so on. It makes intuitive sense that by adding work to an object, i.e. turning apples into applesause or herbs into flasks, you increase the value of the object.

But… how do we thus explain when the finished product ends up being valued below the cost of materials? We already answered that question: the market price of finished products moves independently of the price of mats. The only real connection we could have is that when, say, flasks go “underwater” (e.g. become worth less than the mats needed to craft them), it becomes less likely that more flasks would be created. I say “less likely” because there is no real way of knowing what price points other Alchemists bought their herbs at, or if they are the type of people who overestimate the 15% Elixir Master bonus, or perhaps the people that sell whatever they have at whatever the current going rate is regardless of “paper profit.”

What this is leading me to do is codify a new crafting paradigm for myself, putting numbers and words to a concept I was subconsciously doing anyway.

Twilight Jasmine = 4.32 – 10.5 | (x8) 34.56 – 84 (avg 59.28)
Azshara’s Veil = 4.4 – 10.65 | (x8) 35.2 – 85.2 (avg 60.2)
Volatile Life = 8.07 – 12.5 | (x8) 64.56 – 100 (avg 82.28)

Draconic Mind = 132.54 – 241.55 (avg 187.04)

Highest End Mats = 269.2
Lowest End Mats = 134.32
Avg Mats = 201.76

60 flasks = 12,905.76 flasks (60 + 15%) – 12,105.6 mats (60) = 800.16 = 11.6 per flask

To put it into words, on average, you only ever make ~11.6g in profit making a Flask of Draconic Mind as an Elixir Master alchemist based on the last two weeks of TUJ numbers. Profit is increased when you buy mats below average and sell flasks above average, obviously. However, in comparison, the profit you would make buying 60 flasks’ worth of Azhara’s Veil at it’s lowest price of 4.4g/each (2112g) and selling at it’s average price of 7.5g/each (3600g) is immense: 1488g profit before the AH cut. Buying Azshara’s Veil at 88g/stack and selling it at 150g/stack is on average more profitable than making flasks, without even considering the price of the other herbs.

Almost a “duh” moment, right? Flipping a 88g item into 150g is a 62g return that no one would miss, let alone the opportunity to do that with a bunch of stacks of herbs. As I mentioned though, this is a new crafting paradigm for me, or way of looking at things. Alchemy is one of my go-to professions, and thus I have an unconscious bias towards making things even when it appears to make no economic sense. Why even bother having professions if you are not going to use them, right?

In other words, in this paradigm it is not enough that a profit could be had by purchasing mats at X price and crafting something to sell at Y. The price at which I can sell Y has to be higher than the highest price of X, or I was probably better off just warehousing the mats until their market value swung higher.

I say I have been doing is subconsciously, and the reason is basically my Foundation article on Finding the Margin. By keeping my personal margin relatively high, I was inadvertently keeping myself from jumping into “profitable” albeit volatile markets which were prone to going underwater. With a personal margin of 30g, I would avoid making flasks at 11.6g average profit and thus expose myself to less risk. When mats are really cheap and flasks are really expensive, that margin increases up to 100g per flask – an obvious market signal that I should move in and set up shop… for a while at least.

One thing I wish I could do is be able to present this data in a graph or picture form, but I have no idea how to do so.

Posted on March 23, 2011, in Uncategorized. Bookmark the permalink. 10 Comments.

1. Well Said, seems we think alike.

This is another reason why I prefer not to mega-craft ahead of time. By not pre-crafting, I can play the markets of both the end product and the raw materials. This is a lesson in Flexibility.

Again – Great Post.

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2. I went ahead and added a link to the specific post of yours, Cold. Those comments continue to fascinate me between the folks that believe we take market theory too serious in a videogame about virtual wealth to the very thought-provoking “your friend gives you 100 stacks of Hypnotic Dust; have you gained 100k gold?” and related idea of paper profit vs paper losses. A lot of great thinking material there.

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3. Thanks for the link brother.

Those comments are all over the place on both the original posts. I didn't mean to casue such a stirring debate with those posts, lol.

Some people still don't understand why crafting for a loss is a poor choice for your materials.

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4. Anonymous

So I went into McDonald's yesterday for a Big Mac, fries, and a coke. I was about to put in my order when I noticed something strange: McDonald's offers this thing they call a combo, where I can get a Big Mac, fries, and a coke for about \$1 cheaper than if I buy them all separately. How strange. Don't they know that they lose a dollar each time they sell a combo? Why would they price their combo item at less than the cost of the materials that make the combo? I figured I'd help them out by talking to the manager to explain to them why selling combos for \$1 off the cost of their materials was a dumb idea. Funny thing is that he just wouldn't listen to me. He told me that by selling combos, they can move more cokes than if they don't offer combos, and since cokes cost them practically nothing to make, selling more cokes is a good thing. I tried to explain to him that it didn't matter that making cokes was “free”, that due to opportunity cost, his cokes actually cost the \$1.50 that they are listed for on the menu. At that point, I was escorted out of the building. Stupid McDonald's, I don't know how they stay in business.

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5. Anonymous

There are other market forces at work than making gold in the World of Warcraft. For example, the guild cauldron achievement that allows guilds to create cauldrons that produce flasks for everyone in the raid. Getting that achievement requires guild crafters to craft 1000 flasks for the first level, then there is another achievement at 3000 flasks.

Many crafters are selling those flasks created to meet the requirements in order to make some cash to buy more herbs. This will keep the price of flasks depressed for as long as guilds are attempting the acheivement.

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6. Anonymous

[quote]So I went into McDonald's yesterday for a Big Mac, fries, and a coke. I was about to put in my order when I noticed something strange: McDonald's offers this thing they call a combo, where I can get a Big Mac, fries, and a coke for about \$1 cheaper than if I buy them all separately. How strange. Don't they know that they lose a dollar each time they sell a combo? Why would they price their combo item at less than the cost of the materials that make the combo? I figured I'd help them out by talking to the manager to explain to them why selling combos for \$1 off the cost of their materials was a dumb idea. Funny thing is that he just wouldn't listen to me. He told me that by selling combos, they can move more cokes than if they don't offer combos, and since cokes cost them practically nothing to make, selling more cokes is a good thing. I tried to explain to him that it didn't matter that making cokes was “free”, that due to opportunity cost, his cokes actually cost the \$1.50 that they are listed for on the menu. At that point, I was escorted out of the building. Stupid McDonald's, I don't know how they stay in business. [/quote]
As soon as teh AH gives us a way to tie sales together this will be a wonderful strategy in WoW.

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7. Anonymous

“As soon as teh AH gives us a way to tie sales together this will be a wonderful strategy in WoW.”

And here I thought I was being a little too on the nose with my analogy. Let me try that again. Big mac, fries, coke = raw materials. A combo = a crafted item.

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8. WRONG!

Big Mac, Fry, and Coke = Crafted items.
Combo= Combo of crafted items.
Raw materials = meat, buns, potato, condiments, water, syrup, and CO2.

Loss Leader = We are ok losing money on the sale of these items because they bring in buyers who get overcharged on other items.

So they can sell a \$1.50 crafting cost burger for \$1 b/c the \$1.50 soda only costs 5 cents to craft.

WoW example: Selling inferno inks for undervalue because your MFCs already got u a profit on your herbs.

But isn't McDs basing their profits off of the combo prices and then just OVERcharging on the ala carte items?

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9. Anonymous

For gods sake. You really want to quibble the semantics of what a “crafted item” is and what raw materials are? Actually, buns aren't a raw material, they're made out of (among other things) flour, water, and yeast. Oh wait a minute, flour isn't a raw material, wheat is. It doesn't change the point. The constituent parts of a combo sell at a higher a la carte price than the combined cost of the combo. This is done to move more product than they otherwise would.

And your loss leader explanation is exactly my point. For example, let's say embersilk bags sell for 300g per unit. Let's say that the current AH price of embersilk cloth is 3g per cloth, but there is so much cloth on the market, and I know my competitors have so much stockpiled, that to move any amount of cloth in quantity, I'll have to keep on undercutting and so will only average about 2.5g per cloth. Let's also say that hypnotic dust is 6g per dust. A naive person might say “The raw mat cost of the bag is 75*3 + 15*6 = 225 + 90 = 315g, therefore I shouldn't craft it”. A more wily person might say “In order to extract 3g per cloth, I will sell some of it raw on the AH, and I will package some of it in groups of 15 with 15 hypnotic dust @5g per dust (acting as my loss leader) by crafting embersilk bags and selling it for 300g”.

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10. Anonymous

That of course should be “groups of 75 with 15 hypnotic dust @5g per dust”

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