Monday, June 24, 2013

Figuring Out My Profit

As I start moving into semi-serious production in EVE Online, I thought I'd look at something relevant to all crafting in MMORPGs: figuring out what to charge for the items players make.  Some players figure they are only making items to level their crafting skills, so they go out, gather up some raw materials, and then price the items under everyone else.  These are the players who think that anything they harvest is free.  Others use extensive spreadsheets to keep track of everything to get the maximum amount of profit.  From my experience all the serious crafters/market players in all games do this.

So how do I do approach this?  I kind of combine the two approaches.  First, I look at the prices in Heimatar (Rens) and Metropolis (Hek) for some idea of what items are selling for.  I then look at the prices in Molden Heath and try to price accordingly.  I do some quick calculations to figure out that I will make a profit and then start manufacturing and selling.  So I see my wallet slowly go up, but I didn't really know why until I started doing the research for this post.  I then was pleasantly surprised when I could actually trace the money back to the individual activites I do.

For my example I chose a relatively simple item to produce, 25,000 rounds of Republic Fusion M.


Mining - First, I need to acquire all of the minerals to make the Fusion M rounds.  So I go out to the asteroid belts in low sec and mine them.  Of course, I could easily do so in high sec, but I'm stubborn.  Here is a breakdown of the minerals required and the average price in the closest trade hub (Hek) when I made my last batch:

Mexallon - 250 units @ 35.77 ISK
Pyerite - 78,750 units @ 12.23 ISK
Tritanium - 59,520 units @ 4.98 ISK

Total - 1,293,947.50 ISK
Mineral price per round - 51.76 ISK

A couple of things to note.  I'm using a BPO that is not researched so I could reduce the amount of minerals needed.  Also, I think the prices dropped.  If I had paid on the market for the minerals, the amount in my wallet would decrease.  But because I mine and refine my own ore, I am just moving too much ISK from one pocket to another.

Manufacturing - Just manufacturing the regular Fusion M rounds is cheap at 5,864.94 ISK.  This raises the final production cost of one round of Fusion M for this example to 51.99 ISK.

The big cost that explains why faction ammunition is so expensive is the loyalty point store.  Once the rounds are made I transport the inexpensive rounds to the station and purchase the good stuff.  For 25,000 rounds I spend 8 million ISK and 8,000 loyalty points.  So how much is a loyalty point worth?  I'm not sure, but for all the faction ammunition sales I've made so far I figure 1 LP = 1,000 ISK.

Where do I get my LP?  From doing distribution missions.  Some may think that's silly, but I found a pair of level 4 agents that like to give out destinations an average of 2 jumps away.  With the average LP and rewards, a conversion rate of 1 to 1,000 means I'm making over 400,000 ISK per jump when doing a distribution mission.  And I don't have to pay for ammunition either.

But what does that mean for the price of my product?  I have to pay 8 million ISK to an NPC corporation and then I calculate 8 million ISK in the LP to ISK conversion when purchasing the faction ammo from the store.  The cost of producing one round is:

Minerals: 51.76 ISK
Manufacturing: 0.23 ISK
Purchase of ammo (ISK): 320 ISK
Purchase of ammo (LP): 320 ISK

So the total cost of producing one round is 691.99 ISK.  But that is not the break even point.  I have to add in transaction taxes and broker's fees.  The transaction tax is straightforward.  I've trained Accounting to V and pay a 0.75% tax on every sale.  The broker's fee depends on 3 factors within my control: my Broker Relations level (5), the standing with the faction (8.98) and the standings with the NPC corp that owns the station (8.22).  If I've done the math correctly, that comes out to 0.22%.  So in order to break even, I need to charge 698.77 ISK.  Anything over that means I'm making a profit.

At this point, the people who believe that minerals (and loyalty points) are free are telling me I don't know how to do math because I'm receiving money for those items, not paying them.  They would argue that at my "break even" point I make 371.76 ISK per round.   Fair enough.  But I'd explain that those are the labor costs of producing that type of ammunition.  Or, in other words, "My time ain't free."

Of course, I'm pretty sure the spreadsheet warriors sitting on their mountains of ISK would tell me my time is a lot more valuable than that.  That's probably true as well and perhaps as I learn the business I'll make more ISK.  But I'm also having fun making things.  I'm back to my EQ2 days when I was one of the biggest suppliers of arrows on my server.  That was interesting.  EVE is even more interesting because I'm doing all of these activities in low sec, where I have to interact with people and figure out who wants to peacefully co-exist and who wants to blow me up into a cloud of pixels.

So that's the cost of producing a fairly simple item in EVE Online.  I think the same principles apply accross all MMORPGs.  Some games have bad economies where crafting is a pure money sink and not worth the time.  Fortunately EVE is different and I can turn a profit for some modest effort.  I just need to figure out what the profit is.

8 comments:

  1. "Some players figure they are only making items to level their crafting skills, so they go out, gather up some raw materials, and then price the items under everyone else. These are the players who think that anything they harvest is free."

    Depending on the game this is entirely rational and isn't in fact an indication that they think anything they harvest is free. In a significant amount of games (not EvE) the only thing that allows you to advance crafting is investing materials into skill-points (think WoW crafting). As a consequence you must necessarily discount the materials you use to get the skill points since they are locked into a use and are therefore not able to be traded. In many cases the sale of the items produced below the market value is rational, in that it reflects the fact that the skill point itself gained in the creation of the item has value. After a skill point is no longer capable of being gained the value calculation should obviously be reconsidered to factor in the value of an item based on prevailing raw material / time costs.

    You have set a 1 LP = 1000 ISK conversion for your calculation. By looking for trading opportunities with sales of RF Fusion M you can do a rough calculation as to the what value the highest and lowest price sellers are setting their LP=ISK value at. The market trends will show how that value changes over time and you might be able to see price changes coming based on Faction Warfare levels ahead of time.

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  2. Research the BPO, for goodness sake. A short bit of research to get a ME of 25 will do wonders for your profitability. PE will up your ISK/hr calculations as your total manufacturing time drops.

    That said, the "value" of the LPs is going to dwarf the cost of manufacturing the ammo. I've got the same thing going making Scourge Heavy Missiles. I'll take 10 to 20K of the 200K I'm selling, convert them to Caldari Navy scourge and the margin I make on those CN HMs covers the cost of making the whole batch of 200K missiles. The regular missiles then sell as pure profit. Personally, this is driven by my desire to avoid running as many missions as you are.

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  3. For the "These are the players who think that anything they harvest is free. "

    They may be right. They can even think that these materials have a negative value, because they love harvesting and think this is not wok but pleasue - they are ready to pay Real Money to be able to do this. So for *them* the cost is null.

    In real life, Professional photograph have the same problem : they are competing with hobbyist that do photography for the fun of it, and are paying to be able to do this - as buying camera for example.

    The question is : are hobbyist able to compete in volume or quality with "professional" harvester. If yes, then the "correct" price is effectively 0. If no, enjoy !

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  4. Not sure if I agree with the idea of researching the blueprint. Nosy is a one man op mining his own materials. The ability to pump out a larger amount of ammo per hour isn't going to be the bottleneck (I'm guessing LP will be the bottleneck).

    Material waste works out to about 5 ISK per round that has material cost of 700ISK. It's certainly worth doing if you don't mind locking the blueprint up for a month (or buying a second copy to use while you wait for the PE/ME to get done) but I wouldn't (don't) spend a lot of time on PE research. I tend to focus on the bigger ticket items, especially given that the I don't plan on opening a POS or waiting a month for a high sec line to open.

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  5. http://www.fuzzwork.co.uk/lpstore/

    use the site above.
    earn 3000+ isk per LP instead.
    buy the ammo from the market.

    otherwise you are as bad as the ones who "farmed it for free"

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  6. Actually you mix up your income sources. You are doing several independend business steps in a row, each of which you could do solely:
    1) You gather minerals (which you could sell, and the values of which you correctly take from the market for the next step).
    2) You craft basic ammo.
    3) You convert LP into items for sale.

    You mix up the added value of 2) and 3) by assuming a fixed value for LP, instead of using the market price of basic ammo. That is in
    2) your added value is whatever basic ammo - materials - markets charges,
    3) your added value is faction ammo - basic ammo - market charges. Which tells you what your LP is worth.

    In other words, if there is another item, which gives a better LP conversion, to get most profit, you would sell the basic ammo and buy the other basic item for conversion in the LP store. Else you do a variant of "I farmed my mats".

    That said, of course, do whatever is fun to you. Just wanted to mention that you mixed steps which actually are independend.

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  7. As iterated by the previous Anonymous poster, do what is the most fun for you, and you'll end up making more isk due to it being interesting and fun.

    I would also suggest evaluating everything into it's component parts. Know how much you are making from each activity, and that will assist in where to improve margins for the greatest overall effect.

    For my limited time online, I have eliminating mining completely, and I shudder to think how much online time I would need to spend to mine the 4-5 freighters of minerals I use every week.

    If you do what you enjoy the most, then the profit will flow, as you'll end up optimizing what works the best for you.

    Don't discount the spreadsheet tool. Being able to track things is not to be under-estimated.

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  8. You didn't account for TIME. It's the base standard for manufacturing. That includes the time it took you to mine, time it took you get LP, and all production slot times. In essence, your entire article fails to convert everything into the same base unit of measure.

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