Tuesday, February 17, 2009

The Value of an Item

(A shirt can be made for 10 dollars and sold for a million dollars, as long as people are willing to pay that much for it)

It took an online game to teach me what the value of an item was.

It's one of the most valuable lessons I have ever learned and that is both because of it's significance and because of the fact that I learned it on my own, it wasn't refined from a book or word of mouth.

People always say, "Something is worth what someone is willing to pay for it".

In essence, that is what I figured out. Even after having left that virtual world ages ago, these small treasures remain with me.



The game I was in was simple. You go out and kill animals and gain loot. You sell the loot for money and you buy items and upgrade your stats to kill more efficiently.

There was one problem though, everyone needed weapons but there were no dealers around.

Not only did that make things worse, the only people who could help us with a price were NPC's (Non playable Characters, essentially robots) who would offer to buy our weapons from us.

Everyone in the game agreed on one thing though, the price the robots paid for our weapons was significantly undervalued.

Weapons that were very hard to obtain would sell for next to nothing.
These highly sought after weapons also dealt much damage and anyone would be crazy to sell them to a robot.

So what were we to do?


Following new paths untraveled, The Rangers way

So like a lot of people in the game, I had a lot of weapons to sell and wanted to get rid of them to train my character faster.

What would I sell them at though, and where would I start?

Here is what I did:

1) I guessed: I literally one day went up to a person, gave the strength of a certain weapon, and asked him if he wanted to buy it, for 4,000 of the currency we had available.

I had very little information at the time and there were literally no other weapons dealers to consult with, so pricing the object was as simple as a guess.
The particular customer above was overjoyed with the offer and quickly purchased his new weapon.

2) The economy's response (Money Supply): At the time a lot of people had money but the exchanging of weapons was pretty rare. When I offered to sell that item, an above average loot, people could afford to lose a bit of money and invest it in a better weapon.

I noticed after time, as people had less money, the amount I could charge for a product fell.
After a while I changed the price a bit to correct for demand and total population wealth.
Those corrections kept my customers coming back, knowing I'd be a good deal.

3) What you expect to get: I didn't do what you might expect in a normal business scenario. 4000 of that particular currency was a very good amount for that weapon. I could also get the weapon back with an average amount of work. So I didn't raise my price much. As long as I was getting a pretty good pay off and unloading my supplies, I was happy.

Possibly a better entrepreneur might have grabbed that chance and increased prices, but like i mentioned above, I was more than satisfied with what I had received.

4) The Market: Other dealers soon started popping up and everyone had the same question I had. I was asked what they should price their items at and regularly gave them my store prices.

As new dealers entered the market and competition started looming pricing became more and more variable.

5) Demand and Math: I noticed something odd in the economy and basically it was that certain weapons would not be bought, regardless of price.

Certain weapons that were of average efficiency were not selling and I never even bothered pricing them because of this lack of demand.

You could probably graph the efficiency of my better weapons and their price then graph these weaker weapons and the math would give you a good average of what these weaker weapon's price should be around, but the problem is, if i offered this price, no one would buy it.

There were a few reasons for this:

Why pay 500-1000 for a weapon that is average and won't help you fight much, when you can easily afford 4000 for a nice and strong weapon that will eventually pay back it's cost?

So the money supply was high and the supply of good weapons was good, in essence destroying any need whatsoever for these average weapons.

Don't be fooled though these average weapons would still be good and useful, but everyone always said, "Why pay 500 or 1000 for them, when 4000 will do for a very good one".

Also our weapons didn't degrade, to buy a good weapon was to have it for life. (They degrade now though, and it would take a long time to explain this new factor in our economy)

I just found it odd that a whole range of decent weapons were essentially wiped out and any mathematical price you could put to them would not meet the test of the market. It was eye opening for me, a lesson I hold to this day. It proves that everything is worth what someone is willing to pay for it, not the mathematical figures of an Economics Professor. I think the best example of something being worth more than an Economist says it is, would be the concept of Book Value.

I can understand that concept a lot easier now thanks to my experiences in this virtual economy.

6) Maturity, the Middleman: After a bit of time I found that competition in the market was very fierce. It was harder to sell weapons with people under selling you and customers always questioning your price.

After a while most customers felt they knew the price better than you, even if they had never sold weapons in their whole life.

As time went on I found a new business, something I was sort of forced into and something that flourished within me because of my networks. By now I knew a lot of dealers and a lot of customers and one day my friend comes to me telling me he needs a very very high quality item sold.

This is an item that i had personally never looted. This item existed in very low quantities in the game and therefore was extremely hard to sell.

Price wise it was about 250,000 of the above currency I mentioned. Just to give you some perspective, most people carried about 10,000-20,000 and I personally stayed at about 40-50k. So 250k was A LOT of cash in that game.

With a bit of work, I found a buyer and I charged the seller a fee for my service. This was a totally new industry for me, one where I could make large amounts of cash for a minimal amount of work.

I started charging static percentages for items that I helped sell and I ONLY dealt in high price items. It was a great market because I found out that a good number of people could afford these very nice weapons but could not find anyone willing to sell them.

I also found a good number of sellers who just wanted cash quick. Together I helped initiate a number of transactions and I had started making more doing this than initially selling weapons to begin with.

The Real World

I learned to look at the real world differently. Everything seemed to look different, every object seemed t have it's own story, and brand new markets starting appearing before me.

This virtual game had in essence forced me to move with the market and understand it's workings.

That was something that would have been impossible in the real world.
I wasn't selling any products in the real world, and I had very small networking capabilities.
But in this virtual game I connected with scores of people and inquired into their needs.

Strong lessons

I found the Value of an Item truly is just whatever people will pay for it.
  • What they will pay for it is affected by how much cash they have.
  • What they will pay for it is affected by how badly they need it.
  • What they will pay for it is affected by how rare it is to find.
  • The most important lesson though was knowing that NO one could accurately price anything.
  • Everything is mispriced. Why?
  • Because everyone has a different price they are willing to pay for something.
  • Even with a small degree of difference, that means a huge shift in profits and returns, especially as you increase your volume of buys or sells.
Maybe that is why the stock market is so powerful in creating wealth.
Knowing how the price of an object will shift can create a millionaire overnight.
You have to remember though, even if you perceive a company as being strong, if the world continues to disagree with you, and even if you are right, their stock price will never go up.

That doesn't necessarily mean though that you should usually go with the market because the market has shifted in favor of companies that you knew were strong from the beginning.
The market is also infamously random.

But what it does mean is that you should stay open minded, so as not to build your pride to a hurtling and devastating collapse.

Things aren't worth what you think they are, they're worth what people are willing to buy them for. Something I didn't just read, but lived, and therefore appreciate more.


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