Tuesday, 28 June 2011

Austerity Measures

economic-recessionAfter penning a begging letter to my competitor who’s been artificially holding the glyph market so low for a while now that there’s no longer any profit to be made in it, as I set out in my last post, more in hope of a reply than expectation; I received a reply!  I’d like to report that my guess as to what he was up to was spot on, and I called it; but as it happens, I was half right.  The glyph market has been dropping on my server a little recently, nothing substantial (since I got involved, but I can’t really comment on the prices before that) but I’ve noticed (now I think about it) that where glyphs would regularly go for around the 100g mark, I quite often see them slipping down to the 75g level, not all, just some.  This when you consider I have around 100 to 150 glyphs listed at any one time, and (used to) sell up to 10 of those per listing session can equate to quite a drop in revenue.

glyph letterNow in my mail communication with the seller (I explained that I write a blog, and he’s specifically asked not to be named so I’m assuming he’s a ‘he’ and will be referring to him as ‘the seller’ from this point onwards) he set out the reasons why he’s doing what he’s doing.  The full text of the letter is shown to the right, he talks about the glyph market being “hugely profitable for months” until recently when the “new guys” (do you think he means me?) have come along increasing competition and thus lowering the prices and the profit to be had.  By setting the prices low, he’s trying to price the other sellers out of the market, by taking away the profit margins, hoping that he has deeper pockets (and more patience) than they do.
This sort of competition is quite a common occurrence in real world economics; a new market comes along, lets say selling trolls tusks.  Someone has spotted a niche for tusks, makes an investment in the R&D of developing a trolls tusk for the market, setting up a selling infrastructure and taking the tusks to market.  All is fine, there's lots of profit to be made an no real competition to speak of, everything is going swimmingly.  That is until one day someone else spots that you’re doing nicely for yourself with you big house and new car and decides they’d like a bit of that pie too.  This isn’t a problem initially, yes your sales take a hit at first as customers can now chose your tusks or someone else's, in the long run the added competition has actually helped you as there are actually enough customers to go round, and you’ve taken another look at your operation and realised that you can save money by streamlining some of it, thus making more profit per tusk.  Even though you sell less tusks, you make more profit per tusk.  All is great until, over the months, ten more tusk sellers come into the market all wanting a their own slice of the shared troll tusk-pie; and what's more, they didn’t bother doing their own R&D, they just copied yours so saved on the costs, meaning that they can sell at a cheaper level that you to such an extent that there’s no longer any profit in the market for you because everyone is undercutting you. 

At this point, something called consolidation will normally happen, either companies will aggressively buy out their competitors or merge, chose to move into a different market, or go bust.  This isn’t always enough to reduce the competition to a level to achieve a stable, sustainable, profit level for all involved.  So other avenues need to be taken, either by differentiating yourself some way(adding tassels to your tusks for example) so that people will pay more for them even though they’re a higher price.  The only other option is to compete on price alone, this is generally accepted to not be a nice place to be – someone will eventually fail if more than one seller attempts this as there can only ever be one lowest cost seller.  Very occasionally, dirty or extremely aggressive tactics will be employed; smear campaigns, aggressive undercutting and much much more can happen, the aggressive undercutting is just what we’re seeing on the glyph market.  In real world economies, the undercutting seller will generally sell their wares at an unsustainable level, either at a loss or at such an insignificant profit they may as well not bother.  This is a brinkmanship game, hoping that their competitors go bust, go away, or sell up before they do.  Once the competition is gone, the prices can be artificially inflated to far higher levels and more profit can be made than was previously possible as there is no longer any competition.  The way this is normally stopped is through legislation by governments and regulation, the government specifically stops companies doing things which will harm competition unfairly, and  ultimately raise prices or lower service levels for the end consumer.

Winding our example back to the Auction House and my current predicament, there are a few differences between real world economics and the WOW economy; Primarily, you cant go bust, you can’t buy other peoples business, and there’s no regulation, and you can’t compete on anything else but price.  People can go away, but not for the same reasons as you’d see in business; The only reason that others will stop selling, is that there is so little gold to be made, it’s not worth their time to play in that particular market.  For example if I only make 1g per glyph in profit, but each glyph takes 2 minutes to create (picking herbs, milling, inscribing the scroll), I might chose to go and make potions at 10g profit per pot for a similar effort.  Additionally, different people will have different thresholds, a school kid with an abundance of time on his hands might accept a relatively low profit, someone who has a full time job, family and drinking habit to sustain, on the other hand, may only have a few hours a week to play and decide their fun is better had elsewhere in the game.

My friendly sellers strategy is brave, but I fear may be misplaced for the reasons I’ve set out above, we’ll see, and hopefully he’ll be kind enough to tell me how he thinks his endeavours in artificially revitalising his market have gone.  I suspect some of the competition may disappear, but as soon as the market goes up they, or other new entrants, will reappear.  He also may be creating a rod for his own back, glyphs are now at such a cheap level that it’s more profitable to farm something or quest for gold and buy them, instead of going out and picking herbs to make the glyphs yourself, potential customers may just buy up all of the glyphs they’ll ever need for them and their alts, and never need to buy a glyph again (until the next WOW expansion is released) thus decreasing the demand.  I know this is happening, as it’s exactly what what I’ve done – it’s not worth my time grinding herbs and creating the glyphs at this price, so I’ve filled out all of my empty slots for every character over level 70.  He’s also running the risk that the competition will simply buy the glyphs at 25g, wait it out and undercut him at the higher levels in a few weeks time; I know this is happening already, it’s exactly what I’ve done.

As for my glyph selling antics, I’m pretty much waiting it out, as I say, I’ve bought a good few glyphs at the low levels, about 3k worth at 25g, which equates to 10-20k at previous prices (whether the market will ever recover to quite this level I’m not sure).  I’m absolutely fascinated by the effect on the economy, I’ll be monitoring the sales closely, and I wish him every success in inflating the market, if it works, it’ll benefit my sales massively.  I’ll also be monitoring the related item sales.  I’ve noticed inferno ink sales, which previously sold like hot cakes, have been slow.  I’ve also noticed that the price of potions has increased slightly, this may be coincidental, or it may be that he’s bought herbs for ink from the AH, pushing the price up.  I’ll have to write and ask…

No comments:

Post a Comment