Welcome Merchant Display

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Snoots Dwagon
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Re: Welcome Merchant Display

Post by Snoots Dwagon »

Ilan wrote: so PayPal fees do in fact cost us as much as 40% of our earnings from Kitely Market sales.
Ahhh... I misunderstood. Agreed there is a significant difference between 40% of a sale and 40% of your earnings. I also didn't understand that you didn't have a US-based part of your company to reduce PayPal fees.

I still don't understand why Kitely Market wouldn't be profitable, and to be honest I don't agree with the points made about KC balance methods (I wrote a full-package accounting software system that ran an airport... so I understand accounting method). But I don't have to understand or agree with how Kitely does things... and as you say you are based in another country. What I appreciate is that you take the time and effort to respond to these forum discussions and try to explain how Kitely works behind the scenes, which is refreshing. : )

So thanks for your answers and explanations. That is always appreciated. We just saw Kitely implement always-on megaworlds. Whether the Welcome Merchant Display idea ever sees light or not is as you say, TBA depending on its overall merit once considered and studied. In the meantime, your straight-forward answers and discussion with all of us is appreciated. :)
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Re: Welcome Merchant Display

Post by Ilan Tochner »

Hi Snoots,

I'll explain both points using an example:

Let's say you pay us using KC for a Standard World subscription payment. When you do so we take the KC equivelant of $19.95 from your KC balance but no real money is added to our PayPal or bank balance at that point. When did we get real money for that transaction? That happened when whomever bought the KC paid us for them. In other words the KC that person bought were, from an accounting perspective, like a form of prepayment for the service you just paid us for using those KC.

Now let's consider costs. Amazon charges $0.09 per gigabyte sent from our servers to the internet (we get a slight discount due to our higher usage but it's not segnificant for the purpose of this calculation). That means that sending slightly more than 100 MB costs us about $0.01. why is that segnificant? Because when we are dealing with virtual goods sold in Kitely Market we're dealing with items with an average sales cost of only a few USD. That means that each 1% of the item price is only worth a few cents, so our 6% to 16% can come to less than $0.10 in revenue from that sale. Now you see how the transfer costs can easily consume more than 10% of or revenue from Kitely Market sales to the Hypergrid. So, for example, from a $1 order we might end up getting less than $0.05 net of PayPal and transfer fees we pay Amazon.

Now let's assume we spent 5 minutes on customer support for the buyer because they sent the order to a different grid and didn't click the link in the IM our system sends them to complete the delivery process or they didn't know where to find the delivery box. Let's assume that we had to hire someone to do that customer support, how much could we pay them without losing money? As we only got $0.05 from the sale net of PayPal and transfer costs we could pay them no more than $0.05 for those 5 minutes. Which comes to $0.60 per hour, which is way less than the minimum wage anywhere in the western world, and definitely a LOT less than what Oren and I can earn working in the high tech field. In other words that sale didn't cover our amortized expenses. It would only be worth it if the value we got from it as an addition to our other income (such as world hosting fees) was sufficient to compensate for the loss of that alternative income.

To be clear, not all sales consume that much bandwidth and the great majority of sales do not involve customer support, but even then we only net around $100 for every $1000 of Kitely Market sales, which is hardly worth our time given the transaction volume in the entire OpenSim ecosystem. In other words, there are Kitely Market merchants that earn more money from their Kitely Market stores than Kitely does from running the entire Kitely Market. The only way this makes financial sense to run is as a form of marketing to attract paying users for our world and organization hosting services.
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Re: Welcome Merchant Display

Post by Snoots Dwagon »

I understand what you're saying Ilan, and everything you say sounds about right on a factual basis. But just to keep the conversation going for the fun of it :mrgreen: ...

If anyone isn't interested in the fascinating world of accounting and profit and loss statements in relation to Kitely daily operations... you can give this entire post a skip. ; )

Realistically speaking: there is a difference between theoretical "can happen" transactions, and daily business reality. Specifically: sales of individual items do not directly correlate to overall P&L. Every grocer understands this: some items sell at a loss, some items sell at a significant profit, and it all comes out to overall positive profit for the business at the end of the month.

So for the sake of discussion, let's for a moment separate PayPal sales from KC sales and focus solely on KC sales. A customer buys say, US$100 worth of KCs. Those can only be sold by Kitely, and provides Kitely a real book asset of $100 cash. KCs are intangible value. Since they cannot be sold (by decree of TOS) they do not have tangible value like L$ or Bitcoin. They can only be used to buy two things: Kitely-sponsored virtual goods and Kitely land. Both of these things are intangible goods, requiring neither purchase of inventory, stocking, storage or maintenance. (For example, you're not selling groceries, which you have to buy from distributors and keep refrigerated in a high-overhead store with numerous employees.) Intangible goods. What you are in fact selling is a service. There are costs involved, but these are relatively minor compared to a brick-and-mortar store. (Thus the wondrous age of online business.) These virtual items don't even have the overhead of selling an item on Amazon, since Kitely doesn't have to purchase the inventory to begin with, doesn't have to store it, box it or ship it. Kitely product is virtual goods with comparatively very low cost of doing business.



There is of course expense involved in providing virtual services. There is Ilan's and Oren's wages (both of which are fully justified and essential), the cost of the servers (and we all know Amazon charges through the nose for their services), and sundry other expenses (an office to work out of even if it's your home, electricity, ISP fees, local equipment fees, software, etc). All businesses have such sundry expenses. Presumably the majority of those expenses are paid entirely from your lead product: land sales. Kitely Market doesn't factor in at this point.

When KCs are used to pay for land, it's not a "virtual" payment. In such case the KCs convert instantly from virtual "Monopoly money" and take on real value, because they represent real money that has already been paid to Kitely... a kind of promissory note. Kitely accepts those KCs, the value they represent then becomes fully Kitely's property (income), those KCs are "removed" from the grid, and Kitely is now free to use the money paid for those KCs to pay whatever expenses need paid. If the business is run well and properly, at the end of the month there is money left over after expenses, due to the initial real-dollar sale of KCs at a profit. The idea of course, it to take in more in payments than the company's expenses (including wages), and then some. Basic accounting concepts applied to every business-- including virtual economies.

Of course, not all land is paid in KCs. A lot of land is paid for via PayPal. Even at Israel rates, the PayPal fee is less than 5%,leaving 95%+ of all cash land payments for business expenses and profits.

So let's apply these concepts to Kitely Market. We'll ignore the concept of SL Market (which has been publicly announced to be highly profitable), or Markets on other grids, which are fueled by other currencies (which are profitable... or those currencies wouldn't exist). We'll look at KCs exclusively. Whether spent on land or Market, KCs are initially purchased by customers. This adds to Kitely's cash assets. The company has sold intangible KCs for real money. That money is an asset: income. When someone spends those KCs on Kitely Market, the merchant gets 90%, Kitely gets 10%. There are no real goods involved, no expense in physical production. The only expense is server space, net fees and market maintenance. Yes, if an employee managed Kitely Market, that wage would be added to the expense list. But "If an employee were hired" is irrelevant, because Kitely doesn't involve an employee in this process. One of the bosses does the work.

It is a long-standing business principle that "the owner cannot count his time as an expense". That concept is legally recognized by the U.S. Internal Revenue Service. It is taken for granted that a business owner's time is an "essential part of conducting business" and has literally zero monetary value.

So there is zero employee expense in running Kitely Market. Such is a non-factor.

Since KCs are intangible, cannot be "spent" by the merchant (except for land and virtual products from KM), and the real-cash value of those KCs are held by Kitely perpetually, any KC purchase on Kitely Market is also intangible and does not affect the existing profit levels. Realistically speaking, a KC-based sale has near-zero overhead cost. (Servers may be expensive, but when averaged out over tens of thousands of sales, the cost-per-sale is negligible.)

Kitely does use PayPal, and that incurs fees. In this case those fees are under 5% of the total sale. (Let's use 5% just as a nice round figure.) Some items on Kitely have a low price. But since (to my understanding) the customer pays the .30 transaction fee, that fee is covered regardless of the size of the sale. (If the customer purchases several items at once that fee is spread out among those items.) This leaves us with the total item selling price, PayPal's fees, and Kitely's server expense in producing (delivering) that item.

So someone pays $5 for a Market item. Kitely's cut for that purchase is $1 (20%). The PayPal fee for that purchase is 5% of $5... or 25 cents. This leaves Kitely with 75 cents profit. Since there is zero production fee (no raw goods, no inventory purchased), the amount that Kitely retains is pure profit... to be used to pay for essential things such as server fees and misc overhead (which as mentioned, is minimal on a per-sale basis).

If someone only purchased a $1 item, Kitely's take is 20 cents. PayPal's fees are .05, leaving Kitely .15 profit. So no matter what the price of the item, items sold on Kitely Market earn profit. There is no such thing as a "loss item" that incurs negative profit. (A possible exception is perhaps a very low cost KC item that has high-data size and is delivered to another grid-- an uncommon thing). Both PayPal and KC sales should almost always be profitable.

So with all Kitely sales added together at the end of the month... how can Kitely Market be a loss-factor? It is near pure-profit with no other expense than server costs, bandwidth and PayPal fees. The PayPal figure is stable and predictable, and can thus be extrapolated. If Kitely sells $1000 in PayPal-payment items, company cut after PayPal fees should be US$150. If Kitely sells $1000 in KCs... the immediate sales profit should be $100 (10% of the sale, made via pre-purchased KCs, less a ~5% PayPal fee, so about $95+ profit). But since Kitely charges more in KC value than PayPal price, their overall profit on KC sales would be fairly equal to PayPal sales. Those KC sales are not "no profit" sales; people paid for those KCs to start with.

So 80% of KC sales go to merchants. That is a non-value transaction. The KCs started out as "Monopoly money" and remain so after the transfer. Those KCs can be used to purchase Market items over and over and no value is gained or lost. But each time a new Market transaction occurs, Kitely gets 10% of that sale... so those KCs are whittled down 10% per sale and become real-profit for Kitely. Eventually Kitely gets almost ALL the KCs... which it sold in the first place. Left-over KCs take on final full value if they are used to pay for land... at which time their real-purchase value is fully converted on the books to Kitely profit, and the KCs themselves "sunk" to virtual no-existence. These things take place on a daily basis, many times a day.

So when one puts the numbers to it, if anything it would seem Kitely Market would supplement land sale income, not the other way around. Of additional benefit, Kitely Market draws customers to Kitely itself, which is a primary function of Kitely Market.

If Kitely Market is viewed as a loss-item needing to be supported by the grid... I would humbly suggest that this is a result of not viewing Kitely Market according to universally standardized accounting methods. KCs are sold, they are converted to virtual (non-real) goods at zero production cost (thus 100% profit less PayPal fees of less than 5%), with the sales of the KCs being real cash profit purchased exclusively from Kitely. Business conducted properly, there is no way PayPal fees would suck down any more than 5% of KC sales. If they did, PayPal could not stay in business because nobody would use them. Similarly, if server fees suck down all Market profits... I'd say one is using the wrong server company.

No offense, not arguing... just discussing basic accounting and business operation principles. If Kitely Market isn't profitable (to the average of 15% of each sale, which imo is quite good ROI), I would have to ask out of sheer curiosity "why and what's going wrong?".

Am I off at all in the above observations? Evidently not:
ilan wrote:... we only net around $100 for every $1000 of Kitely Market sales, which is hardly worth our time..."
$100 per $1000 is 10% net, on every sale, every day. Are Kitely Market sales so low that doesn't come to a sizeable figure? There are corporations that would give an eye tooth from each executive to have that kind of ROI. There are stockholders of corporations who hope to net 10% per year on their investments. Honestly, I think what's going on here is an issue of perspective and perception, not of real life profit and loss issues. Unless Kitely Market sales are so low it's not even worth running the Market... 10% daily net is excellent. I'll bet Etsy and Amazon wishes they could pull that kind of daily net.

I hope no one minds this discussion. It's total curiosity as to how Kitely functions and how we as residents can help it function even better... which is a request Ilan regularly makes during weekly meetings and on these forums. There's no telling who might come up with a ground-breaking idea that can make Kitely even more stable and profitable. Such observations help improve Kitely all the time... even if initially they're a bit uncomfy. :)
Last edited by Snoots Dwagon on Sun Jan 17, 2021 9:05 pm, edited 2 times in total.
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Re: Welcome Merchant Display

Post by Ilan Tochner »

Hi Snoots,

There are a few mistakes in your analysis which I'd like to address.

First, I didn't say Kitely Market sales are a loss factor I said Kitely Market sales to third-party grids are a loss leader. That is, they cost us more than the revenue they bring in, once attributed costs are taken into consideration. Those losses are acceptable because they lead to sales of our profitable revenue streams, which are our hosting services, sales to Kitely users and advertising in Kitely Market.

Next, when Kitely Market sales are made in USD they are offset by the ~16% we got to keep from the USD sale net of PayPal fees. But when they are paid for in KC then they are offset only by (0.96 (net after PayPal fees) * 0.1 (10% Kitely sales commission for KC sales) = ~9.6% of the sale in which the KC were acquired.

Note that the price of KC depends on how it was acquired but many people buy KC in bulk so our average value for KCs used in Kitely Market is close to the max discounted rate for purchasing KC. In addition, the Real Money Processing Fee we add to Kitely Market sales that include USD are not applied to sales that are only done using KC, so the $0.30 PayPal fee they offset is only relevant for USD sales and that fee only covers the fixed $0.30 part of the PayPal fees (the ~4% is added to it). That means that Kitely Market payments made using KC net us even less than the 6% of USD attributed to those KC because nothing offsets that $0.30 PayPal fee which we absorbed when the KC where purchased (again when compared to purchases made in USD).

Our own cost of goods sold is indeed insubstantial so sales to Kitely users leave us with more than 10% of the ticket price on average, but our shipping and handling costs for storage, servers handling the transfer, database services, network transfer, etc. are substantial for sales that are delivered to the Hypergrid. Those do cost us real money and leave us with less than 10% per transaction on average. The weighted average between those two types of sales is about 10% net of customer support costs but only because the sales to Kitely users offset the sales to Hypergrid users.

When considering ROI for Kitely Market you need to look at past development costs (which are now sunk costs) and ongoing costs. Our share of Kitely Market revenue hardly covers the amount of work that was required to develop and maintain it (even without considering various additional features we've added along the way since it was launched). Those sunk costs are now irrelevant but the ongoing costs have a real affect on our business. Those costs include:

1) Development complexity costs, i.e. the extra time we need to spend to develop features outside Kitely Market because we need to test their effect on Kitely Market before we can roll them out. This means that keeping Kitely Market Hypergrid delivery going makes it more expensive for us to add other features not related to Kitely Market.

2) Customer support costs. Those result from needing to either hire someone to handle customer support or having me spend my time doing it for a very low margin service instead of spending it on customer support, sales or marketing for our higher margin services (mainly our world hosting services). Had our profit margin from Hypergrid sales been high enough we could have afforded to outsource customer support for it, but it's too low to cover those costs. As a result, I need to do it myself, which creates an alternative cost in the form of slower growth and lost potential revenue. In other words, the hours I spend per week on customer support for Kitely Market Hypergrid sales are hours I'm not spending on recurring-revenue-generating activities. That cost may not be reflected in our P&L, but it has a very tangible affect on our cashflow. The only reason to keep those sales to the Hypergrid going is if they provide enough marketing value to offset the amount of work I could be doing to increase our world hosting revenue if they were discontinued.

Please keep in mind that even with decent ARPPU, the number of paying customers on the Hypergrid is only in the low thousands. There simply aren't enough paying customers to sustain a low profit-margin line of business. Kitely Market deliveries to Kitely users are therefore almost a net gain on top of our world hosting revenue, but sales to the Hypergrid are very low ROI when alternative costs and marketing value are taken into consideration.

In other words, sales to the Hypergrid have both high shipping and handling costs and high customer support costs that don't exist in stores that only sell to closed grids. The revenue this generates for us is very low compared to the associated costs of providing this service. The only real worthwhile value is the marketing value it provides.
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Re: Welcome Merchant Display

Post by Snoots Dwagon »

I has to say Ilan, this is one of the most interesting discussions I've seen on these forums. A bit complex yes, but enlightening from several directions. This is also a good example of why economists are known for disagreeing as to the state of finances and future growth.

You make good points and I agree with you on several of them. One of the things that's always been of interest to me is that Kitely is operated by just two people. I've mentioned to friends, "I would not wish to be a grid owner." You must eat and sleep between support request messages. :D

I can definitely see a difference between in-world sales and hypergrid sales, if from nothing more than support aspects. I have difficulties with My Suitcase... much less selling and transporting virtual goods go another grid. I'm not sure I'd tackle that if given the choice, so kudos there.

That said, I still hold that an overall 10% net ROI is excellent. I also acknowledge that supporting the Market (in truth, all of Kitely) is a task beyond what I would wish to handle. Agreed your time is precious and you have to choose between projects and assign priorities. (What do you do with your spare time?) ;D

So a lot of this discussion from my end has been mainly to discern how Kitely works so I would better know how to serve the grid. I believe I've come to the conclusion that if I have an idea: make a suggestion, let it go at that, let you folks mull it over and see if it has merit. The original post here is a rather simple one, and I still hold it would be a neat thing. I definitely didn't mean to take so much of your time in this discussion but wow... as of this post this thread has had over 350 views. Would seem a lot of folks are interested in the subject. :mrgreen:
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Re: Welcome Merchant Display

Post by Constance Peregrine »

Hey folks, long time no see :roll:

This thread has been interesting to read.

I would add that as people grow (rather in age or life things) our priorities change. I know that this a given and obvious statement, but ok.

I gave plenty of my time to Kitely more during the early days, I think rather crucial help but that might be my ego speaking :shock:

Now I don't really. I have my little sounds place in the market and the occasional sale I get I always thank them and get good feedback. I rather think this is all positive for kitely.

And having good sound files (one even being a 60-second file which I don't think many people even know they can do that in opensim..I originally filed the jira that procreated into all viewers adopting it..pats my back). I tend to think that has some value even being in the market at all. My sound files don't require updating or anything like that either, which fits my current life well.

I do have a stored region from many years back. (which of course costs me nothing)

Anyway, any money I get, which is very little, I give to charities, usually Wikipedia.

Anyway, I have no problem if Gregg would like to use my spot at the welcome center, or anyone else for that matter... snoots, etc.

btw, raise your hand if you know about the secret caves there. (I assume it is still there)... adios, muchachas y muchachos back to burying my head in the sand...
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Re: Welcome Merchant Display

Post by Dot Matrix »

Thanks, Constance. Your sounds are among the first I buy for new alts -- the environmental ones are so very useful. :)

And yes, the caves are still there...
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Re: Welcome Merchant Display

Post by Constance Peregrine »

Dot Matrix wrote:
Mon Jan 18, 2021 6:57 pm
Thanks, Constance. Your sounds are among the first I buy for new alts -- the environmental ones are so very useful. :)

And yes, the caves are still there...
Why thank you Dot, that is awesome coming from you, someone I had grown to respect...
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Re: Welcome Merchant Display

Post by Snoots Dwagon »

WOT SECRET CAVES? !!! ??? :shock: :mrgreen:
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Re: Welcome Merchant Display

Post by Snoots Dwagon »

FOUND DEM! Mwahahahahaaa :lol:

I claims Kitely Welcome <21,41,24> as offishul Dwagon and Wee territory. Visitors is welcome. Please leave cookies and rums. ;)
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