Everything I Know About Business I Learned from World of Warcraft
16 April 2008
Well, not really… reading good books and personal experience has certainly taught me most of what I know about business, but it’s amazing what you can learn about the fine art of money-making from a game.
To me, one of the most fascinating aspects of massively-multiplayer online games like World of Warcraft, Eve Online, and Lord of the Rings Online is the in-game economy. These games have millions of players, and it’s amazing to watch the economy that emerges as they interact with each other.
As in real-world economies, MMORPG players buy, sell, and trade goods and services in ways that emulate real world economics. Crafters create items like weapons and armor; enchanters offer services to improve items; adventurers put their wares up for sale in the auction house. If you observe carefully, you can learn a lot about real-life business from watching virtual economies in action.
Here are 11 real-life business concepts you can learn from playing an MMORPG like World of Warcraft…
1. The Value Chain
The players who most actively participate in the in-game economy typically have at least two characters: (1) a primary character who goes out into the world and collects items, and (2) a lower-level character who resides in a city that converts raw materials into products or services, then sells them to other players. This setup saves time: instead of traveling back to town after every session, the primary character can simply mail items to the lower-level alternate character, who then sells them. You can view this inter-character cooperation as a simple business.
For example: one character may be skilled at finding wild herbs. These herbs can then be mailed to a second character, who is an Alchemist. The Alchemist would then make potions and elixirs from these herbs to sell to other players. Both characters “added value” to the process of making potions, and thus could be seen as creating a simple value chain.
2. Product Pricing
In the real world, there are three primary ways to value a good or service: (1) creation / replacement cost, (2) market value, and (3) cash flow generation. All three of these functions are at play in virtual economies.
For example, if you want to buy a Stormforged Axe, a good way to figure out how much to pay for it is how much it costs a Blacksmith to gather the raw materials, then include a bit of margin in compensation for their time and expertise.
For items that can’t be crafted, the value is oftentimes set by the market price of an item over time. If a Skullflame Shield typically sells on the Auction House for 200 gold, you’ll be lucky to find it for much less. As you might expect, the Auction House is the primary source of market pricing data in the game.
For items that give you the ability to create products or services that you can then sell, sometimes it’s worth it to pay a high price for that item in anticipation of the future income it will bring. For example, the recipe for Swiftness Potions typically sells for over 10 gold, a relatively high price to pay for a low-level recipe. However, stacks of Swiftness Potions usually sell for 4-5 gold, which can generate far more than 10 gold over time.
In real life, you can value products in the same way. Take a house, for instance. You can place a value on a house by (1) calculating how much it would cost to build another house just like it, (2) research what other similar houses in the area have sold for, or (3) figure out how much you could rent the house for, then discount that series of cash flows to the present.
3. The Law of Supply and Demand
Supply and demand is a basic economic concept that explains how real-world economies handle scarcity and fulfillment of wants and needs. In a virtual economy, you can actually watch supply and demand work in real time.
Some items, like Linen Cloth, are very common, and therefore worth only a few copper pieces. It’s not particularly difficult to acquire Linen Cloth, and it’s not uncommon to find 50-100 auctions for linen cloth at a time, so the price is cheap.
Other items, like Netherweave Cloth, are very rare and hard to find, and thus expensive. At any time, you’ll only find a few available, so be prepared to pay up.
Similarly, very rare enchantments like Mongoose and Potency can be extraordinarily time-consuming to acquire, and require rare and expensive raw materials. As a result, enchanters charge a premium to cast these spells.
Of course, if there’s a lot of Netherweave Cloth available in the Auction House for some reason, or five different players trying to sell Mongoose at the same time, the price will be temporarily reduced as players bid against each other. Supply and demand works exactly the same way in the real world.
4. Price vs. Value
In both real and virtual worlds, it makes sense to invest in the best tools you can afford. At first, items like high-capacity bags seem expensive, but they give you such huge benefits over time that they end up being very good purchases. The same goes for buying mounts: they’re pricey, but the 60-100% increase in your movement speed is worth every penny.
There are many examples of this principle in the real world, like the value of purchasing a newer computer and professional-grade software vs. using old technology. There’s also a substantial amount of research that indicates using large / multiple computer monitors substantially increases your productivity, making the increased price tag almost inconsequentially low over time.
In the immortal words of Warren Buffett: “Price is what you pay; value is what you get.” Don’t hesitate to spend money on the items that will make the biggest difference in your effectiveness, even if they cost a lot.
5. The Power of Wholesale
Instead of spending time and money traveling from one city to another to find the item they want, many players will simply search the Auction House. This presents an opportunity: if you can purchase an item from a local source at a low cost (wholesaler), you can then list it on the Auction House at a significant margin. (The only difference is that, in the virtual world, you’re not forced to buy in bulk to receive the discount.)
Early on, I found an item I could purchase for 10 silver pieces that I could easily sell on the Auction House for 2 gold. (A markup of 2000%.) Starting from nothing, wholesaling gave me enough money to purchase high-capacity bags and a full set of high-powered gear by the time I reached level 20. All it took was a little research and a few minutes each day to purchase from my wholesaler, then post the items on the Auction House.
Real-life wholesaling works the same way: find and purchase from a low cost source, then sell your inventory to others with an appropriate markup to lock in a profit.
Information is power. If you know the market price of a particular item, it becomes easy to watch prices on the Auction House and buy popular items when they’re temporarily selling at a massive discount. You can then take the item and sell it for what it’s really worth, locking in a substantial risk-free profit. This strategy is called arbitrage, and it happens in the real world as well, particularly with commodities like precious metals.
Just as in real life, market information is not evenly distributed in a virtual world. A casual player who finds an Axe of the Legion may decide to sell it for 40 gold, when the market price is closer to 100 gold. The same goes for raw materials: a stack of Netherweave Cloth may regularly sell for 5 gold, but if you buy it for 1 gold, you’ve made ~4 gold in profit.
It’s easy to use add-ons like Auctioneer to collect market information over time, making it apparent when an item is selling at a substantial discount. This strategy paid for my mount and a full bank of rare items by the time I hit level 40.
Arbitrage is comparatively rare in the real world, since financial market pricing information spreads very quickly, but it does occur. The main asset necessary for effective arbitrage is reliable market information that’s either not yet known or fully appreciated by the majority of other market participants.
7. Marketing & Sales
Both virtual and real-world economies feature promotional activity. The trade chat channel is typically full of players who are looking to buy or sell items or services directly, instead of through the Auction House. The players who are most successful in creating demand for their items use two primary tactics: (1) creating urgency, typically via reduced pricing for a limited time; (2) publicizing that they sell rare or hard-to-find items or enchantments.
Just as in real life, the benefits of a product are sometimes non-material. Enchanters often sell weapon enchantments because they make the enchanted weapons glow, not because the enchantment is particularly advantageous.
Reputation is also a significant factor when it comes to repeat sales. When you find a personable high-level Enchanter with low prices, they’re quickly added to your “friends” list. I’ve never seen a reputation develop into a full-blown brand, but the concept of lifetime value is certainly applicable.
Every so often, events will alter the demand for specific products and services in both real and virtual worlds. For example, on weekends that Warsong Gulch battlegrounds get double honor, demand for Swiftness Potions and the raw materials used to create them usually doubles vs. normal days.
By understanding this seasonality and the reasons behind it, it’s possible to save your Swiftness Potions until you can demand the highest prices for them, increasing your profit.
In the same way, seasonality affects the sale of products in the real world. Think jelly bean sales around Easter, or pumpkin sales before Halloween.
9. Frictional Costs
Just as in real life, space in virtual worlds isn’t free: you can only fit so many items in your bags and at the bank, and purchasing larger bags and additional storage at the bank costs a lot of money. This inventory cost is a drag on your overall profits.
Similarly, the Auction House will charge you a listing price every time you place an item for sale, and take a percentage commission when the item is sold, reducing your profits.
If you don’t account for frictional costs, your estimates of how much profit you’re making will be wildly off the mark. Real-life frictional costs include shipping, storage, and taxes.
10. Specialization Pays
If you’re able to increase your skills in a crafting profession like Blacksmithing, Leatherworking, or Alchemy, you can specialize in specific techniques, which allows you to create very rare and complex items to sell or trade. Some of the wealthiest players in the game are specialized Master-level Alchemists and Enchanters.
Just as in the real world, the value of your work is determined by the demand for what you provide, your level of skill, and how difficult it is to replace you. The more specialized you become, the more you’ll be able to demand for your services.
11. Achieving Goals
In all virtual worlds, goals are a big part of the game: the point is to reach the next level, find a particular Epic item, or defeat the evil overlord. Completing quests and developing your skills are what make the game satisfying.
Unfortunately, unlike the real world, the goals are always clearly defined, and you always know where you stand in terms of achieving them. This instant feedback cycle is addicting: it’s easy to get sucked into doing “just one more thing.”
It’s also easy to get an artificial sense of accomplishment from achieving goals in the game world instead of in the real world. When things get tough, it’s all too easy to retreat into the game world when it would be far more rewarding to face the ambiguity and difficulty in your real life. In these situations, the opportunity cost of your time and energy is just too high.
Ultimately, a few months ago I decided to sell or give away all of my items, donated the funds to my guild, deleted my characters, and permanently canceled my account. I don’t need a game to supply me with a sense of artificial accomplishment… I have real-world goals I want to achieve.
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