Everyone who gets into the auction house to make tons of gold immediately assumes that it's done by buying low and selling high. Seems simple enough, and it's one of those chestnuts that we've all heard Wall Street types talking about. Brokerage takes no trade skills, no addons, and it feels like making money from nothing.
A lot of what I've written about for this column has focused on how to use trade skills for profit, but the truth is that brokerage really can be a profitable use of your time. It's not as easy as it sounds, but assuming you have a solid understanding of what you're doing, you can use it to good effect.
Lesson 1: Know your product
I can't overstate how important it is to know what it is that you're buying and selling. If you don't have a sense for the demand of an item, don't touch it. If you don't know where it comes from, don't touch it. Back when 500g was a big deal for me, I bought a 500g pet because Auctioneer told me it was worth at least 1,000g. I tried to sell it for months before I gave in and used it. People kept posting new ones for less than I had bought mine, and even they were having to list it for days before selling it.
On the other hand, in Wrath of the Lich King, I was able to make consistent income buying and selling jewelcrafting leveling mats. I bought tons of those mats when I was leveling my JC, and I paid dearly for them. As soon as the price went below a certain level, I'd buy it all up and relist it for just a little less than I remembered paying for them.
Lesson 2: Understand demand
What precisely does a term like "heavy demand" mean? We all know that more demand means higher prices as more and more of the cheap stock gets bought out, but there are a few things that are hidden beneath the covers of this concept.
You can have an item that will sell a normal amount at its normal price, but if you were to post a bunch of stock at half the normal price, it would disappear immediately. Alternately, posting at double the normal price would normally not result in any regular sales but could yield occasional sales. The demand for an item depends on its price and can be measured in how long it takes to find a buyer at that price.
Something like the ultra-rare vanity items that drop off the Lich King the first time you have a Shadowmourne wielder in the group is going to have some very sporadic demand. More often then not, there's nobody with the hundreds of thousands of gold one of these cost who is searching for the item. Every time someone with the available cash does search for it, he's going to make a decision based on the price. I got my hands on one of these for what I felt was low enough to justify the risk and simply "stored it on the auction house" for a couple of weeks -- and lo and behold, it sold for a 30% profit. If I had listed it for more than I did, it may have taken longer to sell or never sold at all.
Your profit margin (or "spread") is going to depend mostly on how long you're willing to wait for your item to sell. If you list your items for more than they generally sell for, they will take a longer time to sell as people undercut you. Assuming you're willing to wait for that perfect storm when there are buyers for your stock and everyone else is out, you can sell high just by waiting.
In my above example of jewelcrafting leveling mats, the demand for them at 20% more than market value would spike every week or so when several people were pushing through the same JC skillups. I knew I could count on them buying a lot of mats each, so I wouldn't lower my prices between these spikes.
Buying low is also a profit
Of course, if Blizzard decides to change the drop rates for whatever you're brokering, you could very well lose your investment if the market price never gets back up to your target. One way to increase turnover (which would reduce your exposure to random acts of Blizzard) is to work as hard on buying low as you do on selling high. I'm going to "borrow" an expression from a good friend of mine: "Buy low, sell normal."
Having secured a good price on something means that you can sell it as quickly as someone who makes or farms the item and still get a profit. If you want a high turnover, that's precisely what you should do. This is commonly spoken of as looking for undervalued goods.
The more volume you find under market value, the more profits you can make. If the market value is going up over time (as many items are, in this inflation-happy Cataclysm market), you may have trouble securing stock below market, but that just means you need to reevaluate your market value.
Of course, the people who can best buy low are the ones who see a lot of auctions, and that takes a lot of time. Camping the AH is basically the only way to increase your volume or decrease your price, and this will remain the case until Blizzard lets us buy while offline, just like we can sell while offline.
The farmables market
What if the cheap stock overwhelms you? Market prices are tending up, but if something can be farmed, buying "underpriced" auctions might be doing nothing but convincing more people to spend more time farming (or crafting/disenchanting/milling). Farmers are as motivated by volume as they are by high prices, and for that reason, if something is really easy to farm, it generally makes a bad item to broker. Not all farmables are unusable, but you can't do it in any volume without attracting the attention of a farmer who might mistake your buying enthusiasm for real demand.
Never forget that even though you're matching all the buying you do with an equal amount of selling, you're still going to have an effect on the market when you buy.
Maximize your profits with more advice from Gold Capped as well as the author's Call to Auction podcast. Do you have questions about selling, reselling and building your financial empire on the auction house? Basil is taking your questions at firstname.lastname@example.org.