Wednesday, September 19, 2012

The Concept of Overhead

The concept of overhead is an important one to grasp if you earn a significant portion of your ISK through PvE activities like ratting, missioning, or Sleeper sites. 

Just as in the real world, many players of EVE hold to a love of "bling" or "pimping your ride". This is a foolish and ultimately self-destructive attitude. There will be far more PvP types who are attracted to your expensive mission ship as a lucrative kill than there will be PvE types who will admire it and think you're something special because of it. 

There are many possible ways to measure success in EVE. Unlike a game like RIFT with character levels and raid progressions, any measure of success in EVE has a degree of subjectivity to it. One person's yard stick may be irrelevant to another player. Some measures of success in the game include killboards, wallet size, and ISK/hour. Some people gauge success in the game by how pimped of a ship they can fly. 

This article is not an attempt to place value judgments on these various measures of success in the game. One of the beauties of EVE is that there are so many different ways to play the game, which theoretically will appeal to different types of players.

This article is aimed at those of you who earn ISK through activities like ratting, mission running, or clearing Sleeper sites. It can be very tempting to "show off" by flying as pimped a ship as possible. There's also the perception that one can make more ISK/hour by flying a more powerful ship. There are many players in the game who get their enjoyment by hunting officer-fit fleet-issue PvE ships. If you gain a significant portion of your ISK in game through the above PvE activities, you should always keep this in mind. So before you undock in your officer, faction, or dead space fit Paladin, Tengu or Navy Issue Apocalypse, consider the concept of overhead.

An accounting term that refers to all ongoing business expenses not including or related to direct labor, direct materials or third-party expenses that are billed directly to customers. Overhead must be paid for on an ongoing basis, regardless of whether a company is doing a high or low volume of business. It is important not just for budgeting purposes, but for determining how much a company must charge for its products or services to make a profit.

In EVE, overhead consists of the following components:

  1. Initial Cost. This is the cost of your ship, fittings, insurance, initial ammunition, etc. This is the amount you must make before making PROFIT.
  2. Ongoing Expenses. This includes the continuing costs of things like ammunition, drones, and even taxes if you're selling loot and salvage. These costs must also be deducted from your income when determining profit.
  3. Replacement/Loss Cost. This is the cost of replacing your ship, fittings, etc. in the event your ship is lost, whether from NPCs or other players. This cost should be considered in any business analysis, as eventually you WILL lose your ship. The insurance payout can be deducted from this cost.  
Now let's get back to the perception that one can increase one's ISK/hour by flying an expensive ship and fit, like a tech III cruiser, fleet issue battleship, or marauder with faction, officer, and/or dead space fittings.

It is true that you will bring in more ISK/hour with these higher DPS, higher tanked ships. [Note: This point can actually be argued. Depending on your activity, the more difficult sites don't necessarily yield a higher ISK/hour. This, however, is beyond the scope of this article.]

However, such a thought process is ignoring half of the equation. A very simplified form of the equation is:
Income - Cost = Profit

This is where the concept of overhead comes into play. If you spend a billion ISK on your mission or ratting ship, then that means you must make a billion ISK before you begin to make any profit. It also means that you're risking a lot more. If you lose that ship, you have to spend another billion ISK to replace it. In a game of non-consensual PvP, this is something to really think about. You're not safe in high sec, you're not safe deep in your territory in null sec, and you're not safe in a wormhole. Even if you do everything right, you can STILL lose your ship to a situation that's beyond your control. In EVE, this reality must be considered in any business model and profit projections.

Humans have a tendency to oversimplify. Ignoring the cost side of the ISK/hour equation is an example of this that could end up costing you a lot of ISK, and more importantly, time. 

In the end, you must find a balance between income, cost and risk. There isn't one right answer for everyone. This isn't as much an issue for veteran players who may have billions of ISK in their wallets (but even so, do you want to needlessly waste it?). However, it is more of an issue for new players. Don't fall into the trap of blowing your wad on a shiny, expensive ship that you really can't afford to lose. Even if you can afford to risk it, consider whether it's really in your best interests to do so.

A good way to quantify this is to compare your ISK/hour income with your start-up cost and loss cost. How many hours of missioning will it take to pay off that initial investment of your ship? If you lose the ship, how many hours of ratting will it take to replace it? How much will it set you back? Having these figures in front of you will help you make an informed decision.

Fly smart.