How to track costs and calculate price? I run a large Massively Multiplayer Online (MMO) gaming community and one of the services we’ve try to provide to our members is crafting. One of the challenges of this has been determining the price of crafted items when we sell to our membership.

While a lot of the time the materials that we use to craft items is donated to us; there a plenty of occasions were we run short or need rare materials that make up a bulk of the cost of an item. When this happens, we have to buy them from other players at the market rate in-game.

In a lot of MMOs, the price of the crafting materials can be higher than the crafted item on the market. This happens for several different reasons. Crafting material is necessary to “level” a character’s crafting ability meaning the materials are more valuable than the end result.  Crafting is chance based and some outcomes are less desirable so the non-desirable results are sold to recoup as much cost as possible to fund another chance.

On top of all this, we want to offer our crafted items at a discounted rate than what our membership can get on the open market. Determining a price that keeps our profit margins at least breaking even with our losses have been difficult. In the past, we’ve tried basing the price on the material price with a base discount, but a lot of times this doesn’t adequately cover our costs or beat the prices on the market.

How can we determine a price for an item that takes into account our supply of donated materials and materials we have to purchase? Is there a standard method of tracking costs in this situation?

I'm a gamer and a web developer, not a economist so some help here would be appreciated. Thanks!
The concept which you should be looking it is called prime costs. Businesses use prime cost as a way of measuring the total cost of the production inputs needed to create a given output. Usually this would be e.g. material, working hours, machine time and so on; since in your case there are only materials they are the only components you should consider when calculating the price.

So in your example the prime costs would be cost of purchased material + cost of donated material at market price. After this you would have to add a profit margin which you feel comfortable offering to your members.

As you mentioned their might be cases when the prime costs are higher then prices on the open market. In this case the only thing you can do is sell your material and buy the product directly on the market this is classical make or buy decision. If you still want to offer these product at a discount to the market price your only option is to take a loss on every sold item.