Wednesday, January 5, 2011

Profit Margins: "Go Big or Go Home" or "Slow and Steady"

I have chosen this post for Kreaton's Best of the Month Blogging Carnival over at Not So Secret Society. Check it out!

This is an issue that troubled me quite a bit when I first started getting into serious jewel crafting for profit toward the end of LK. Since I was buying the uncut gems and not prospecting for them (I'm not sure it was profitable to prospect Titanium Ore for epics) I often ran into problems when the cut gem was selling for maybe 10-15g more than the uncut. I would usually just ignore that gem completely and focus on the ones that sold for a wider profit margin. However, it would sometimes be the case where none, or very few, of my cuts had good margins. So the conundrum was, do I buy and cut these, knowing I won't be making a whole lot from them, or just not bother with it and hope the market bounces back up soon?

The reason this dilemma plagued me was because by not cutting them, I wasn't making any money! 10g is still better than 0g. But there was also the fear that with such close margins, I might be undercut before I could sell, it wouldn't be profitable to list them, and I'd have to wait until the market went up anyway. I also worried that the market would go up quickly and I would have only made 30g from three cuts when I could have made 150 had I waited an extra day. This was also back when having 300-500g tied up was a big deal for me, so I was much less willing to take risks.

This problem has manifested for me again in the form of "big profit from less items" or "small profit from more items." Where it's most apparent to me is with cutting meta gems. I have 3 cuts right now, two which sell for ~400g but don't sell that often, and one which sells for a little under 300g, but sells much more frequently. And of course, I have the option of posting the raw meta itself for a little over 200g. So what to do? Every time I cut the 300g gem, I know that's 100g I won't be able to get, but every time the 400g ones don't sell, that's 400g I'm not getting! I basically have a "Tortoise and the Hare" type problem on my hands. Steady, but low, income v. sporadic, but high, income.

After wrestling with this concept for some time, I think the steady income is the better option. If I can sell two of my 300g cuts for every one 400g, then the 300g cut is clearly preferable. Of course, the problem can largely be bypassed if you have a steady stream of mats and multiple cuts, allowing you to always have some of each up. Where it becomes a problem again (especially in JC), is deciding which cut to get.  The cuts that are selling for the most might not actually be the best ones to get if you can't move them. A gem that sells for less but sells more frequently ought to be preferable to a gem that just sits there.

In summary, don't get caught up in the numbers like I did and ignore the small profits. When deciding between crafting something that sells for a lot, but not often, or something that sells frequently, but not for a lot, you're probably better off with the larger volume of sales at a smaller price. Selling ten things for 10g profit each is the same as selling one thing for 100g profit. But if you can sell twenty at 10g profit and only one at 100g profit, well, the answer is kind of obvious.

1 comment:

  1. Nice post.

    Things do get complicated when risk is added to the profit equation. Countless books and entire field of study has been devoted to risk, and one can drive him/herself crazy on the math if so inclined.

    A relatively simple solution, IMHO anyway, is one of mantras of investing - diversification. More specifically, diversification of time and market in this case.

    Instead of cutting all 400g metas or 300g metas, cut maybe three to four 400g ones and ten to tweleve 300g ones per week. You would then be covered in case one of the meta sale suddenly drops, or not miss out on extra profits if one meta suddenly become the new BiS for particular classes. The latter is highly likely w/ Blizzard still doing hoxfixes on a weekly/daily basis. Case in point - price of chaotic shadowspirit meta will likely skyrocket the day Blizzard corrects the gem requirements.