Wednesday, February 17, 2010

How I made 1000+ Gold Per Day

I couldn’t say with 100% accuracy how much Gold I was earning each day when I quit WoW, but on average it had to be upwards of at least 1000 gold a day. And that’s being conservative since I know there were several weeks when I made well over 10,000 gold in a single week.

Anytime you make a fantastic claim like that, people inevitably come out and call you a liar. To the layman, it seems unfathomable that a single player could generate that kind of profit. This post really isn’t about whether or not it’s possible – I know it’s possible having done it – it’s about how I did it and why it worked.

Vertical monopoly
When people think of a monopoly, the traditional view is of some sort of price fixing of the end-product. For example, owning the only gas station in a small town means that the only limit to the price you can charge is whatever your market will accept before they decide it’s worth driving to the next town.

In a game like WoW, this type of monopoly never really works because it’s virtually impossible to be the only gas station in town. Quite the opposite, there are LOTS of gas stations and each of them is working to undercut the next guy. Healthy competition like this actually serves to drive prices down.

However, there is another type of monopoly, which I’ve heard coined as a vertical monopoly, which has principles that apply very well to online games. The idea behind a vertical monopoly is that you control the entire distribution channel from THE SOURCE to the end product. The key to this type of monopoly is controlling and manipulating the costs of the SOURCE materials, not the end-product price.

Profit is in the conversions
Before I get into the how-to of competing, I think it’s important to talk about where the profits are in these transactions.

All traders follow the model of buy low, sell high. It’s very simplistic, very true and a guaranteed way to make money if you can, in fact, find something low priced and sell it for a higher price. The issue is that the margins are typically very low, so you need to deal in tremendous volumes to make much of a profit and you could take a significant loss if the market drops on you.

So the real money is in buying something low, then converting it to something else, and then selling that as high as possible for the most profit. Each time you convert to something, your profit increases. Or put another way, the more ‘developed’ your thing gets from whatever it started as, the more worth it has to other people.

This seems like a simple idea, but it’s critical to understand.

For example, 8x Borean Leather can be converted through Leatherworking to a pair of green Artic Boots. Those boots can be disenchanted into 1-3 Infinite Dust or 1-2 Lesser Cosmic Essence. Which means that each bundle of (8) leather is conservatively worth at least 1 Infinite Dust and on average, 1.5 Infinite Dust.

So after some simple math, you can figure out roughly what price you can buy the leather at to turn a decent profit. If you can buy Borean Leather for 45 silver (9g per stack) and Infinite Dust sells at 4g each, then you know each disenchanted green is going to net you a minimum of 40 silver profit (1 dust) and up to 8.4 gold (3 dust). Or on average, 2.4g profit per disenchant. And more importantly for you, few people selling enchanting mats look at Borean Leather as a source material to disenchant.

Snapshots or Moments in Time
The other key thing to consider is that the market is fluid. As such, there may be an average price or a typical price, but the market price is whatever the lowest BuyOut price is on the Auction House at that moment in time.

That is worth repeating because it’s consistently misunderstood. The “price” of something is not the price as it’s listed in Auctioneer, WoWEcon, or even what you have typically paid in the past. Nor is it some average of the prices currently listed on the Auction House. No – the market “price” is the price of something if you (or someone else) were to buy it IMMEDIATELY.

Therefore, the ONLY price that matters at that moment is the lowest price. These prices are a snapshot of the moment and are very volatile (see lots of change).

Now that said, there are also average going rates for items. Unlike the snapshot market price, these average going rates don’t fluctuate much over large periods of time without some dramatic market change. A common rookie mistake is for players to look at the Auctioneer or average listing price on the Auction House as the average going rate. That’s a quick way to lose a lot of money.

The actual “going rate” is the average market price. As defined above, the market price is the lowest BuyOut price at that moment of time. So, by definition, the average market price is the average lowest BuyOut over time. That’s the price that you could typically expect to sell or buy something.

Controlling your costs
My core strategy for competing was to aggressively control my costs and influence the costs of others. Implementing this strategy takes a few things:
  • a decent pool of seed money to invest in source materials
  • a very focused and solid knowledge of the materials you are trading (source and the end product)
  • time, to convert things and check prices
The first core tenet of this strategy is to always buy up any SOURCE material that is 10% below the threshold of what you consider the average market price. This means that if the current BuyOut (market price) is 9g and you believe market average is 10g, then buy it. Even if you already have hundreds in the bank. Buy it. Why 10 percent? To cover the 5% AH fee and any listing costs incurred if you need to sell it again unconverted.

At first, the idea of buying excess material can be a bit daunting. The thing you need to remember is that you are buying it at what you perceive to be a discount. And if you have done your homework, it IS a discount. Which means that the very worst case scenario is that you are forced to sell it off on the auction house for slightly more than you paid for it. You need to have faith that what you bought still has value and just consider it part of your inventory.

The good news is that you have plenty of SOURCE material which you bought for well below average market price. And, if your competition wants to buy SOURCE material, they pay the higher prices you left for them on the Auction House.

NOTE: One thing to also consider is that the Auction House isn’t the only source of materials. Keep an eye on the Trade channel for people buying/selling at below market.

Driving up costs for others
So, at the very least, we can keep our competition from buying below market price. But why not push them above market? Contrary to some opinions, you can price fix items in the WoW economy. Perhaps not what YOU sell them for, but certainly the price at which OTHERS buy them.

As you approach primetime, you can temporarily drive prices well above market. The key here is timing. You want to do this during the times when YOU are trying to sell your items (primetime) and others are logging in to convert stuff and undercut you. Ideally, you do the “push up” before primetime actually starts. This is where having an iPhone applet to the Auction House would be helpful (cough cough).

At a bare minimum, you buy up everything at market price – leaving just what is ABOVE market price as the minimum BuyOut. Rule of thumb was that I liked to see minimum BuyOut at least 10% above average market price. However, I do recommend some caution because being overzealous at this point is an easy way to overextend yourself.

A few of things to consider.
  • You are triggering a snowball effect. As your competition buys the SOURCE materials above market, they will continue raising the BuyOut as they stock up. If it went up high enough, I often listed some of my SOURCE inventory to offload it at the higher prices.
  • There is a psychological impact that may prevent your competition from buying above what they believe is market price. Which means, at least temporarily, they aren’t competing with you because they believe costs are too high.
  • In a high volume market, this is only sustainable for brief periods. Therefore it’s important you time it in conjunction with your selling cycle.
  • You are only temporarily hoarding. If you find you have too much, you can make your profit and then slowly divest it at market price.
Driving costs down for you
So another key principle of market economies you should consider is that for any given product, only a certain amount of volume is going to be traded regardless of price. For example, if only two of something are sold each day, then two people fiercely trying to sell four each day are going to drive the price down to nothing.

This is because the volume for that thing just isn’t happening to support eight of that thing being sold. When volume (or supply) exceeds demand, prices drop.

In my little price control war, it wasn’t unusual for me to find myself with a nice surplus of source materials. Most weeks, I would just slow down operations for a bit and divest it down to a more comfortable level over the weekend. I typically saved my pricing tactics for Tuesdays (the best day to sell due to Raid resets/Arena pts) through Thursdays, with the weekend being the point at which I normalized my inventory.

The exception would be if I saw prices dropping. If that was happening, and I knew of no other external causes, it meant there was a surplus on the market. And so, counter to everything you might think – I would start dumping MY source materials onto the market as well in order to drive prices down.

These were short auctions which I intended to cancel. The key here is to help drop the price without being the loss leader. This is, needless to say, dangerous and something to watch carefully. Done correctly, however, and you drive the market price down. At which point, you cancel your listings, and try to drop it some more.

Once you’ve dropped it as far as you think it can drop – cancel your auctions and BUY BUY BUY. All the way up to your usual 10% off market threshold. And congrats, because you just made a small fortune even if it’s all temporarily tied up in inventory.

I actually first discovered this trick by accident. I had started a new character on a new server and a friend of mine (the reason I switched) was running me through Scarlet Monastery. I collected a lot of Silk Cloth – I mean A LOT. And at that point, I really didn’t have a bunch of gold on that server so I went about selling it to the Auction House. After I sold about half of my inventory, I realized that prices had dropped (due to my contribution) to less than half of what I was making at the start. So I bought everything up (took most of my money) and relisted at the higher price. And this strategy was born. :)

Jewelcrafting + Enchanting
The first profession that earned me a nice chunk of change was Leatherworking. It’s a small market with few source materials that is easy to control. Pairing it with Enchanting was nice because, as I wrote above, I could get rid of a lot of the excess leather I was buying to price control the leather market by disenchanting greens.

However, I tripled my income when my alt picked up Jewelcrafting. The reason is that JC and Enchanting have a very synergistic effect. JC really only has one source material. Saronite Ore. This makes it incredibly easy to price fix using the technique I described earlier.

Ore is prospected into green gems with about a 20% chance of being converted to a blue gem. At first glance, the blue gems are where you make your money. Which is true, and they more than pay for the Ore. But what to do with the greens? Well, turns out that 1 green gem + 2 Crystallized Earth turns into a nice green item which can be disenchanted into 1-3 Infinite Dust or 1-2 Lesser Cosmic Essence.


Yes. That’s the sound of profit. Lots of profit.

Setting up Suppliers
Indirectly related to the price fixing of the source materials is the idea of recruiting regular suppliers to provide items to you at a fixed, previously agreed upon, below market price. For Saronite Ore, I had about three regular suppliers who each sold me maybe 400g worth of Ore every couple of days. I also used to have a guy who sold me leather in such quantities that he was either secretly Chinese or Botting. No way to know that for sure, but I always thought that selling to a guy like me was a convenient way to avoid being circumspect.

Setting up these relationships is smart on a few levels. The first being that you have a guaranteed source below market price. The second being that you are preemptively keeping these low priced items off the market. After all, if I weren’t buying them, they would just be selling them to someone else in Trade. Who may, or may not be, my competition. Let’s just keep it simple and have you sell it to me and I’ll decide when and how it is to be sold on the market.

The myth that so-called Gold Guides try to sell you is that you can make gold easily and quickly. I’ll buy the easily part, but the quickly part is simply untrue.

I’ve said this before, but perhaps the biggest myth is that some guy can make 1000s of gold just sitting at the Auction House. You can. But it takes time. All of the things I have described take time. Time you could be using to do something else. And it takes work and knowledge of your market.

It’s not BETTER than the guy who mines, gathers or quests for his gold. In fact, the only difference is that much of what I can do is unattended through the use of Mail and Crafting addons. But don’t make the mistake of thinking that reading some how-to blog entry or Gold Guide is going to make this a fast process.

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