Making/Money: My value chains are broken

There's a person out there who claims that all they need to know about business can be learned from World of Warcraft. A fine sentiment, to be sure, but I take issue with its accuracy. Today we are discussing the first of their eleven business topics: value chains – and why they don't work.

In brief, value chain analysis states that for any good requiring multiple stages of production (meaning you don't just rip it out of your backyard and eat it), value is added at each level of refinement. Therefore the price should increase along its path to becoming a finalized product.

Let's take a simple example such as apples at the grocery store. In order to get an apple in a grocery store we could break down the process into the planting of the tree, the tending of the tree, the picking of the apples, the cleaning of the apples, the storage of the apples, the shipping of the apples, and finally the unpacking and displaying of the apples for you to purchase. There are potentially different people involved in all of these stages of production and each one adds value. So what may have been a $0.05 apple seed to plant becomes an apple (one of thousands to come from this tree over its production lifetime) that costs $0.50.

Yet one of the most established money-making strategies in WoW is to take two gathering professions and sell the raw materials on the auction house, therefore netting more gold than you could get by refining the materials and selling crafted products. So we can easily see that this theory does not translate well to games. It applies while dealing with NPCs, but the auction house is another story altogether.

Say I am skilling up blacksmithing in World of Warcraft and I am trying to make a Phantom Blade (because the grind from 250 to 300 is t3h suxxor!). This requires a minimum blacksmithing level of 245, 28 Mithril bars, 6 Breath of Wind, 8 Truesilver bars, 2 Lesser Invisibility Potions, 6 Aquamarines, 4 Solid Grinding Stone, and 2 Thick Leather. On my server, at the time of writing this, the Mithril bars required for this item are selling for 29gp, Breath of Wind 35gp, Truesilver 26gp, Lesser Invisibility Potions 1gp, Aquamarines 12gp, Solid Grinding Stones 2gp, and Thick Leather 1 gp. The sword itself is estimated to be 80gp at auction - yet, according to my calculations, the materials alone are 106gp! This would yield a net loss of 26gp per sword made and sold at the market prices.

Do value chains work? It seems, based on the above example at least, that they do not. Now presenting both sides of the debate (a.k.a. arguing with myself for your amusement):

Pro: Value chains represent the perceived value of the item and that includes the convenience of getting it. After all, the apple example at the start of this article builds in shipping and display fees within the valuation. Someone had to go mine the ore and collect the gems and cloth, spend time (even if it's just the hearthing animation and loading screen) to bring the items to the market, and then there's a posting fee to actually list them on the auction house. So the cost of raw materials for these crafted goods is going to be higher than what it would cost to get them for yourself. The value of the finished product is meant to reflect the assumption that the smith has gone and mined for the materials themselves rather than purchased them from the auction house. Therefore the cost of production when measured only in gold is lower to the smith.

Con: Even when time and convenience are factored in, the price of the finalized product should be reflective of the market conditions surrounding it. Irrespective of how a particular smith goes about getting their materials, the value of raw materials should be lower than that of the completed sword to reflect the time spent by the smith skilling up to be able to make that item, gathering the materials, and crafting the final product. Yet when the time and the raw materials, and the listing cost are figured in, the sword's price does not justify making and selling it unless all you intend to get out of it is the one point of skill. And what is that worth if, in general, crafted items will not net you a profit even when making merchandise requiring 375 smithing? Certainly not 26gp per point. The ends simply do not justify the cost of the means.

Why is it that these two sides, both seemingly valid, exist? Because crafted items, at least in WoW, are inferior goods. The more money you have at a given level, the less likely you are to purchase a crafted item over a looted rare item, with the possible exception of potions. Let's face it, at about the same level that you could start using the Phantom Blade, you could just as soon go questing for something like the Thrash Blade instead. And if it doesn't cost you any gold and it gets some dungeon quests out of the way, thereby yielding more loot and experience, why not? So the demand for this crafted product is low. Ultima Online used to get around this by having the best armor and weapons available only by Grand Mastering blacksmithing (anyone remember crafting up to valorite plate back in the way-back days?). Once higher-level items were introduced, such as dragon scale and dungeon-only pieces, the incentive to craft was gone because the demand for the crafted goods was obliterated.

Since I was able to argue both sides, I pose the questions to you. Do you think value chains can be applied to in-game crafts? Are crafted items inferior goods?

Alexis Kassan is a numbers nerd. She spends her days with statistical programs and her nights with spreadsheets and textbooks. She's also a MMORPG addict, having gotten sucked into Ultima Online at a formative age. In her time away from work, books and games, she can usually be found drowning in pools of sprinkles. If you have a question about in-game economics or how crafting fits in with them, hit her up at alexis DOT kassan at weblogsinc DOT com.