Wednesday, 6 November 2013

Trade Log: Depreciation

No, I don't mean I don't like my customers!

Depreciation is when the value of an item decreases over time. Take an obvious example: the humble Gallente potato.

The Galpo is worth s most when it's freshly dug from the soil. Obviously there are price differences between planet side and station vat grown samples, but nevertheless, it's the freshest and most expensive as soon as you get it out of the ground.

Then, it starts to get older. Day by day it gets less fresh. It goes wrinkly. It develops buds. The flavour goes, it starts to dry out. It can take a while, but eventually, your potato will rot. Have you ever tried to sell a rotten potato? It's value plummets.

The same is true of any item you buy in New Eden.

When you buy an item, with the intent of selling it, it's value to you is the profit you can make from it. Generally speaking, it's at it's peak value the moment you buy it... then the clock starts ticking.

Let's start with what I call Market Depreciation.

As any trader can tell you, the markets of New Eden are fiercely competitive. Prices are undercut, buy orders over bid. Once you set an item to sale, it will inevitably fall in price. I can't think of a logical time when prices will increase, except for a sudden and drastic surge in demand, or a catastrophic drop in supply.

This is your items depreciation. Most traders hedge their bets, taking a 20% hit n their projected profits to represent this. I'm one of them, introducing as many worst case scenarios into my calculations as I can.

You should to. My own calculations (since I have occasional obsessions with arithmetic), take into account standings, taxation, travel time etc. However, it's not really necessary. Just do as most others do: 20% off projected profit. It'll keep you smiling when your wallet balance is better than expected.

But that's not the only other form of depreciation. Let's look at Profit Depreciation.

If you're a serious trader, or looking to supply a soldier whose skills aren't stellar with a frigate every day, then you should really start calculating in terms of Profit/day.

The calculation is easy enough:

Profit per day= Profit ÷ days to sale

Calculating this way actually gives you a much better idea of what an item is worth... or at least, worth to you as a trader.

Say you have a very expensive implant. You got it cheaply, and you can make 100,000,000 ISK from flipping it to someone else. Sounds great right? But it takes 10 days to sale.

Profit/day = 10,000,000 ISK

Not too shabby. But, say you have a cheaper implant, that you can only sell for 50,000,000 profit. No brainer right? Go for the better profit margin. But lets check Profit/day. How long does it take to sell. 2 days.

Profit/day = 25,000,000ISK

Better than double! And you get your money back quicker, which means you aren't subject to Market Depreciation for so long!

The point is this: Big wide profit margins look good, but can be misleading. Estimate how many items you can sell in 10 days, and see if that super-shiny implant is worth the trouble of buying, when you could get two cheaper ones for better Profit/day.

Happily, every Region in New Eden keeps a record of market fluctuations. It's that funny graph on the market window. Very handy.

So why is this on my mind right now?

Well, to do with my experiment. Profit margins in Hek are very wide, but volume of items sold is pretty poor. Right now I can expect to have an item sitting on the shelf for a week, if not longer. And yes, the profit off each will pay for a fully fitted frigate, but I think the same items can do better.

Just to be clear, I'm not manipulating the market. I'm working with market forces... whether it's sustainable or not is up those same market forces. 

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