Tuesday, October 06, 2009
How much is a glyph worth?
After running a glyph business in World of Warcraft for two weeks, I started getting hate tells of the kind that Gevlon regularly publishes on his blog, basically saying: "Why do you sell glyph for 6 gold if they are worth 60 gold?". If I reply, "What makes you think a glyph is worth 60 gold?", the answer is invariably, "Because I sold glyphs for that much". That brings us to the question of how much a glyph is really worth. Or the related question of whether a glyph is more like a Van Gogh painting, or more like a pencil.
The value of a Van Gogh painting is determined by the highest bidder, because the painting is unique. If you want to maximize your profit from selling Van Gogh paintings (not that you're likely to have many), you'd wait for that highest offer, even if that means your business is going rather slowly. But once you sell the painting, you get so much money, that all the waiting was worth while. Now in principle you could try the same with pencils. You open a pencil shop with only very few pencils on display, with a $100 price tag, and wait for somebody who is so much in need of a pencil that he'll pay $100 for a pencil. In practice that isn't such a good idea, because pencils aren't unique, they are fungible (that is one is pretty much like the other). They are easy to make in large quantities, and somebody else is probably selling one quite close by for much less. The value of the pencil is not determined by what the highest bidder is willing to pay for it, but by what the lowest seller is willing to sell it for. All it takes is one industrialist to build a very efficient factory for making cheap pencils, and he can flood the market with pencils at the cheapest price, while still making a decent profit due to low production cost.
Glyphs cost around 3 gold to make on most World of Warcraft servers. If you were the only person on the server able to make them, you could probably make a huge fortune in a very short time by selling them for 60 gold each or even more. But in reality that works about as well as the $100 pencil shop: Somebody else will come and undercut you. The higher glyph prices are on your server, the more people will be tempted to get into the glyph business. So the glyph mass market strategy works more like the industrialists pencil strategy: Find out the cheapest way to make glyphs, decide what would be a decent profit margin, and start posting cheap glyphs, as long as you still make a profit.
Now if the competition is selling glyphs for 60 gold, you might be tempted to undercut them by a little, and sell your glyphs for 59.95 or 55 gold or something. Then the other guy undercuts you again, you undercut him again, and so on. If you are online all day and do nothing but cancelling auctions that have been underbid and reposting them a bit cheaper, you'll "win" that, but only at the cost of a considerable effort in time. So if you are going for a deep undercutting strategy anyway, which is designed to make other inscribers quit the market, you might as well speed it up by directly going from 60 gold to somewhere between 6 to 8 gold, hoping that the guy who thinks his glyphs are "worth" 60 gold quits the business in disgust. As with the pencil mass market, the ultimate value of the glyph is determined by the lowest value anyone is willing to sell it for. And if you minimized your production cost, that could well be you, giving you a high market share. Even if you reach a high market share it isn't wise to raise prices to 60 gold again, because the other sellers will be back immediately.
But what if you are already selling your glyphs at just above your production cost of around 3 gold, and somebody is still undercutting you by a lot? Well, you know it costs you 3 gold to make that glyph, and having studied the market for herb prices, pigments, and ink, you know the competition can't produce much cheaper than you. So either you let the other guy sell at a loss until he gives up, or if he completely undershoots prices and sells glyphs for 1 gold, you buy them and resell them for 3. As long as you make at least a small profit, you can keep that up forever, while the guy making a loss will sooner or later give up. In other words, a glyph is more like a pencil, how much it is worth is determined by its production cost, and if you have production optimized, you'll know the true value exactly, and can react accordingly.
Furthermore there is the issue of who is actually buying all these glyphs. Much is known about producing and selling glyphs, but who buys them all is only speculated about. It is likely that there are several types of customers, the ones that only buy glyphs once, when they have an open slot, and never change it. And the ones which switch glyphs more often than that. The guy who needs a glyph just once is the guy who is willing to pay 60 gold if necessary, he doesn't buy more if the prices go down. The customer who is considering switching glyphs in and out on the other hand might well be tempted by lower prices, and buy a glyph for 6 gold he wouldn't buy for 60 gold. So by using a lower maximum sell price for your glyphs, you not only discourage the competition, you also increase the size of the market, and ultimately your profit.