Goblin Mindset: The Logic of Large Undercuts

Today we will talk about pricing. I believe that both overcuts and large undercuts are useful tools to maximize your total profits. In my last post we examined the goal of gold making. I stated it as “Maximize the total amount of gold on your characters over the long term“. Obviously we should use prices that help us attain this goal.

The normal pricing strategy is to undercut the cheapest auction by the minimum, 1 copper. Two other strategies you should use are overcuts (as I use for flipping Legion materials) and larger undercuts. A lot of people disregard large undercuts, but unless you repost constantly you should be aware of when it is a good idea.

Obviously this is a bit of an unpopular opinion, but large undercuts is a very legitimate strategy and you should be using it.

Some theory

I think it is useful to give a big of the theoretical background of why large undercuts can make sense. The idea is taken straight from microeconomics. If you are familiar with the subject this will likely be obvious to you.

 

Supply and demand

Supply and demand are two words that get thrown about a lot. I won’t go far into microeconomic theory here, but a small intro is useful.

The essential point is that the price of some traded item is a function of supply and demand. Supply is the amount of some item that people are able and willing to sell. The demand is the quantity people are willing to buy. The central point is that neither supply nor demand is a fixed value. For the vast majority of all real world markets they vary depending on the price. And there is no structural reason for why this should not be true in WoW markets as well.

Price sensitivity

The economic term for this is price elasticity, but I will use sensitivity as it is more intuitive for non-economists. The point is that sales and prices are correlated. Let’s take a look at an example market to illustrate the point.

Price sensitivity is usually higher for items that does not give your character a power increase. People care more about the price for purely cosmetic items as they are more of a luxury good. Consumables and enchants can be tickets to play and thus price is less of an issue for more players.

Enchanting

The market for BiS enchants can be divided into several potential buyers with different price sensitivities.

  1. Hardcore raiders: Very low price sensitivity. They need the performance and they need it now if they get an upgrade
  2. Casual players and people gearing alts: Some price sensitivity. Willing to forgo the performance boost if the price is too high
  3. Crafters: Willing to buy if the price is substantially below crafting cost for resale

Obviously there are more groups than these and a continuum between the categories. The point remains the same though. Some people are more sensitive to pricing than others. And generally speaking lowering the price will increase sales.

Maximizing gold earned

Now that I have established that lower prices usually lead to more sales it is easy to shows that this supports us maximizing our gold earned. I have written before on the subject that you should care more about how fast your items sell than how large the profit margin is. The point is to maximize the product of your profit margin and your sales. If you cut your profit margin by 40% and your sales double, you are coming out ahead.

The benefits and disadvantages of large undercuts

The disadvantage of large undercuts is incredibly obvious. You reduce your profit per sale as you get less gold per sale.

The benefits of lowering the price is generally based on increasing the likelihood that your auction is the one that sells.

  1. Less chance you get undercut (might hit someone’s minimum price setting)
  2. Higher chance that your item sells even if you are undercut as total sales will increase
  3. Decreased attractiveness leads to less competition
  4. You annoy your competition

When should you NOT use large undercuts

Obviously there are a lot of markets where large undercuts are a bad idea. The following characteristics usually mean that large undercuts are not a good idea.

  1. It is easy to craft (e.g. Obliterum)
  2. It is cheap to re-post (e.g. Glyphs)
  3. Profit margins are thin (e.g. Enchants)
  4. Demand is not sensitive to price (e.g. enchants, consumables and gems on raid nights)
  5. The sell rate is high (e.g. Legion crafting materials)

Now that being said large undercuts can be a legitimate strategy in these cases as well. Especially if you know your crafting cost is lower than your competition and you can force them out. This might be the case if you have a supplier for materials that is way below market.

Based on this I do not use large undercuts for any of my legion crafted items (including consumables) or for legion materials

When large undercuts make sense

Large undercuts generally make sense when one or more of these conditions are met:

  1. The item is very expensive (e.g. Legion 101 BoEs)
  2. The item only has cosmetic value (e.g. transmog/mounts)
  3. Profit margin is very high (to increase your volume of sales)
  4. You can source materials cheaper than your competition

This is not an exhaustive list, but it shows some of the conditions that make large undercuts a good idea.

Where I use large undercuts

Based on this I personally use large undercuts for all of the following markets with the conditions from the list above that apply in paranthesis:

For all of these markets I use dynamic undercuts. I do not undercut by a fixed gold value but usually by a percentage of either crafting cost or dbmarket. For the BoEs I use 0.5% dbmarket and for the mounts I use 0.2%-1.0%crafting.

Case study: Vial of the Sands

My undercutting settings for Vials of The Sands is one of the very few things I have gotten hate mail about. I purposefully drive the price down as I find that sales are much faster when the profit is in the 10-20k range per vial. Whenever someone resets it to 120k per vial and profit margins of 50k sales slow down horribly. I source my materials very cheaply as I get all my Pyrium from my own transmutes.

The vial only has cosmetic value so people will be very willing to wait a week if the price is too high and this is very easy to tell by being in the market. My experience is generally that price and sales are very closely correlated here.

Closing remarks

I expect some people will disagree with this post quite vehemently, but all of my experience in WoW gold making shows that this works. Players will be more likely to buy your stuff it is cheaper. It really is that simple.

Let me know in the comments if you disagree vehemently. (or if you agree)

 

 

 

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3 thoughts on “Goblin Mindset: The Logic of Large Undercuts

  1. large undercuting is how i made my initial small fortune to expand into other markets, I was originally a hardcore quester and would just accumulate a ton of mats from grinding. I didn’t want to learn how to manage markets so i just undercut drastically in order to make my money. I knew that snipers existed so at the very least I would be selling consistently if I undercut enough to fall under their radar.

    1. This is one way to ensure sales. There are degrees to large undercuts though, you dont needt to force the price down into sniper range.

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