Recently in World of Warcraft, I found myself tackling the problem of declining ROI in my work in the Auction House. I had lots of inventory, I was selling lots of stuff every day, but my net profit margins were on the decline, going from thousands of gold per day down to hundreds.
What was the problem? Was I selling stuff that people weren’t interested in? Was my pricing set up incorrectly?
If we go back to the classical definition of ROI, it’s earned – spent / spent. Thus, ROI is defined by what you earn and what you spend. When I looked at my auctioneering data, it turned out I had an invisible creeping problem in ROI; it wasn’t the earned part, but the spent part that was the problem.
There are 4 broad categories of items you can sell in World of Warcraft: enhancements, consumables, gear, and novelties. Each category has its own costs for selling items in it. The problem was that the majority of the inventory I was carrying was gear, which is the most expensive category. As I loaded up more and more gear to sell (chasing ROI by increasing earnings), my costs went higher and higher, while the amount of gear I sold on a daily basis didn’t always increase proportionally.
The logical conclusion, then, was to prune away as much unprofitability as I could. Gear can be disenchanted into magical components that can be sold as well, at significantly lower cost. You can’t sell as much of it because there’s less product variety and demand, but look at the costs above and below.
The enchanting products for sale are almost 100 times cheaper to sell than the equivalent pieces of gear. If you could reduce your expenses by 100x, how much better would your business do?
Unfortunately, business in real life isn’t as clean or clear cut as World of Warcraft, but the lesson is just as powerful: containing costs can be as powerful a way to boost your ROI as driving more revenue. Ideally, you can do both, but many businesses from small to large, real or imaginary, can benefit from tackling costs.
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