When you buy things, the seller may offer a discount if you choose to give back the old model you currently have. Often it even doesn’t matter if the item you currently own is from another manufacturer. Why do companies do that? What’s in it for the business? In this article, let’s look at 4 reasons why sellers offer trade-in programs.
To sell to a saturated market
A market where (most) buyers have already processed the product or its equivalent is said to be “saturated”. How do you know if a market for a type of product is getting saturated? See if the growth of the number of its users is slowing down. For example, this chart of the number of iPhone users in the United States appears concave, which may indicate a saturation of market.
People with an iPhone X probably won’t want an iPhone 12 immediately at its release. To them, an iPhone 12 has (ballpark) 80% overlap in functionality with their existing iPhone X. The purchase of an iPhone 12 would be 80% a waste.
If an iPhone X owner participates in the trade-in program, they would lose their current device, freeing up their desire and need for a new phone. That justifies the purchase of an iPhone 12.
To keep people in the ecosystem
No trade-in programs allow you to spend to credit on a competitor’s product. The seller isn’t a recycler, after all. A trade-in program is therefore an incentive to keep one inside of the ecosystem that the product line provides.
Companies need this boost of customer loyalty. This is because market shares drop without intervention. Releases of newer models is one of such strategies. Let’s take iPhones as an example again — Notice the spikes after releases and the following declines and how the releases keep the numbers stable:
It extends beyond the physical goods themselves. Services, too, needs customer loyalty. As CNN Business points out,
Trade-in programs give wireless carriers and manufacturers a way to entice new customers and prevent existing customers from switching away from their products — as we saw with AT&T’s free iPhone deal.
To extract value from the old items
The manufacturers usually know the best ways to repair and touch up their products. Even if they are not significantly more skilled than your street-corner repair guys, they are more trustworthy to be re-selling the devices. They therefore hold an advantage in extracting values from the traded-in items. Often times, they can profit from this reselling business.
To discriminate customers by price
Even if the items collected are of zero recycle value, there’s still reason to provide a discount to participating customers. The idea is formally known as price discrimination, which charges buyers at their maximal price that they are willing to pay.
Don’t be alarmed by the terminology here. According to Investopedia,
Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to.
In the book The Armchair Economist: Economics and Everyday Life, Steven Landsburg presented an example of trading in watches. The idea is that watchmakers expects most people to be trading in. It is the discounted price you get after trading in your old watch that the watchmakers really want to charge customers. Those who pay the full listing price are those who don’t own even a single timepiece.
On an unrelated topic, I assume that this is one of the ways that makes watches a symbol of wealth. The bar is high when you want to join the cool guys group of watch-owners — a premium price of the watch. Once you’re inside the club, trading watches are actually much easier. These are merely my speculations, though. I know little about how luxury accessories work.