Gold Capped: Why deep undercutting on the auction house works

Every week, WoW Insider brings you Gold Capped, in which Basil "Euripides" Berntsen aims to show you how to make money on the auction house, and Insider Trader, which is all about professions. For Gold Capped's inside line on crafting for disenchanting, transmutation, cross-faction arbitrage and more, check in here every Thursday, and email Basil with your comments, questions or hate mail! This week's gold blogosphere post is Cold's post on Cataclysm profitable commodities.

In a thread in the comments on my last article in which I had advised a reader to undercut his glyph competition heavily instead of camping the auction house, I got another comment that got me thinking about pricing. It basically stated that every time the commenter undercut heavily on glyphs, he would immediately get re-undercut by a few copper unless his price was down to the point of no profit.

I've written a little about the topic of pricing and undercutting before, but I felt it was time for a refresher. I'm going to start off by quoting what I wrote last March: "If everyone is knocking a copper off the next highest auction, they only way to undercut successfully is to try camp the AH and make sure you're always the competitor who has visited most recently. Needless to say, this is a colossal waste of your time." This is as true now as it was then.

A colossal waste of time

It takes me 15 minutes to list my whole inventory of glyphs. If my biggest competitor and I sat there for a day and did nothing but cancel and relist with a 1 copper undercut, we'd basically split the market as evenly as if we posted everything at the same price, assuming it took us the same amount of time to complete a posting cycle. Since few people have the ability to camp the AH, the variable everyone tries to control is how long it's been since they last posted, reasoning that the more often they post, the more sales they'll make.

This is completely accurate; however, it's a pretty terrible return on your investment of time. Every single person who thinks this way (and there are a lot of them) splits the market according to who relists most frequently. Aside from getting clever about adding your competition to your friends list, the only way to get outside of this dynamic is to increase the size of the pie that everyone is splitting.

The answer is 42

The best way to increase the size of the market for those of us who can only relist every day or two is quite simply to undercut more heavily. There's a universal truth about any market that we can take advantage of in this situation: The lower a price gets, the more units will sell. The more units that sell, the more likely you are to sell your stock. Sure, you'll still get undercut (especially in the glyphs world), but since the price is lower, more buyers will actually buy the glyphs they're searching for. Eventually, everyone willing to undercut you at your price will run out of stock, and your auction will sell.

Also, competitors will be less likely to craft the glyph, because it's less profitable. These days, glyphs cost three times as many inks as they used to, and the only way to get the inks taken by a large number of the glyphs is to mill old-world herbs, many of which go for as much as 60g a stack.

I can hear the complaints in the comments already about my logic. Surely, glyphs are like toilet paper and deodorant: People will pay the fallback price for glyphs because they need them, and they just buy the lowest price auction on the auction house, regardless of how high this price is. Alas, this inflexible demand is a myth. Just because you have the lowest price auction when someone searches for a glyph they want doesn't mean they'll automatically buy it. They may scoff at the idea of paying 230 for something that takes three inks to create and go talk to a scribe friend instead, or they may simply decide they'll be able to hold off a while or use an alternate glyph. The lower the price is, the less likely these things are to happen and the more likely auction house searchers are to buy the glyph.

There's a certain price level at which the increase in the number of glyphs sold doesn't make up for the lower unit price. That point is impossible to pinpoint without access to sales data from your competitors and would probably vary wildly based on the desirability of a glyph, as well as how common the ability to craft it is. You can generalize the principle and refuse to undercut heavily below a certain threshold (mine is 30g), reasoning that even if this glyph stays in your inventory until we're all raiding level 105 bosses, at least nobody else made any money off it.

The best part of undercutting heavily

I've noticed that there's prevalent theme among people who sell glyphs: They believe that raising the average price of glyphs will always net them more profits even if it reduces the sales volume, and they like flexing their economic muscles. This leads them to do things like buying all stock below a certain price and relisting it at their fallback. This is a huge contributor to the profits of the deep undercutter, as every so often (assuming your threshold is set high enough), you'll sell a large portion of your stock at a profit in one night.

Your threshold is key for this: Nothing is more frustrating than seeing your hard-crafted glyphs selling to a competitor for less than it cost you to make them. If someone gets so excited by the logic in the first half of this article that they neglect to read this part, take full advantage and take as much of their stock below your manufacturing cost as you can get your hands on. That said, assuming they don't keep posting below cost, the market will settle into a cycle in which prices start off high and gradually reduce overall as you undercut the most profitable glyphs heavily -- at which point either the demand will pick up and empty the AH, allowing people to restart the cycle at the fallback price of whoever posts first, or some strong-like-bull, smart-like-tractor scribe will reset the market by buying everything you have for sale.

Maximize your profits with more advice from Gold Capped, plus the author's Call to Auction podcast. Do you have questions about selling, reselling and building your financial empire on the auction house? Basil is now taking questions for a special series, "Ask an auctioneer," at basil@wow.com.