Saturday, May 14, 2011

Trade On the Right Trade-In Payments

How much should you offer for the customer’s trade-in when the customer is purchasing a new product? Researchers at University of Toronto and University of Minnesota point out that the amount you propose for the trade-in influences whether the shopper makes the purchase from you.
     One challenge is that when selling durable products—such as computers, skis, golf clubs, or cars—you’re aiming to convince a consumer to buy a replacement for an item that still has useful life in it. You want to set a trade-in payment that is not higher than necessary, but you want to acknowledge the residual value.
     A related challenge is the “endowment effect.” People set a higher value on objects they own than on equivalent objects they do not. Among other consumer behaviors, it explains why people hesitate tossing foods with an expiration date from last week and why people resist selling used items at a price others would find attractive. In general, people place somewhat more importance on the relative amount of the trade-in credit than on the relative amount of the replacement item price.
     A third challenge is that you might be dealing with more than one moving part. In automobile dealerships, the retailer can set an amount both for the sale of the new item and the credit for the used item. In other settings, the merchant might offer a discount on the new item price in order to lower the out-of-pocket cost for the purchaser.
     After testing how all these work together in sample situations, the Toronto/Minnesota researchers recommend:
  • For items where the new item’s cost is many times the fair market value of the trade-in, charge a relatively lower price for the new model and offer a relatively low price for the trade-in. Automobile sales would be an example because the fair market value of a car generally decreases rapidly as each model year passes.
  • For items where depreciation is slower—such as with jewelry—pay amply for the trade-in contingent on the shopper paying a relatively higher price for the replacement item.
     Another University of Toronto study finds that there more to it than the nature of the product: Who the shopper is with at the time of negotiation counts. For example, if the shopper has their mate or children with them, the endowment effect is stronger. They’ll hold out for a higher trade-in price.

Click below for more:
Reconfigure Your Own Endowment Effect

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