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It's been three days since Tim Cook unveiled the new iPad, but you're still stuck with your trusty old iPad 2. You're keen to get rid of it so you can buy the new one, but you forgot to log in to one of those buy-back sites before Wednesday's launch. Predictably, the announcement sent trade-in values plummeting"”before the launch, some of these sites were offering close to $300 for your entry-level iPad 2 (the 16GB Wi-Fi model), provided it was in "good" condition. Now they're willing to part with far less: As of Saturday morning, if you've got a well-cared-for iPad 2, NextWorth will give you $241 for it. BuyBackMac is offering $224. eBay's Instant Sale will net you $200. And Gazelle, the most popular of the buy-back sites, will only part with $185.
Sure, if you're hurting for cash to subsidize your early adopter lifestyle, $200 is nothing to scoff at. But if I were you, I'd skip by all of these sites and instead log in to Amazon. As of right now, its trade-in service is offering $288 for a 16GB Wi-Fi iPad 2 that has "normal wear," and up to $320 for one in "like new" condition. Indeed, Amazon Trade-In's lowest offer for an iPad 2 is $236, about what others are offering for “good” models. If your tablet isn't water-damaged and is at least in working condition, you'll get that baseline amount. (Correction: I originally, boneheadedly, quoted higher prices for the 3G model; I’ve changed all the prices and math in this piece to reflect the actual prices for the Wi-Fi model.)
What's going on here? Considering that Apple is selling new iPad 2s for $399, how can Amazon afford to shell out up to $320 for your old one? What's it doing with all the iPads it's buying? Is Jeff Bezos running a charity?
Nope. There's one catch to Amazon's trade-in program, and it's brilliant. While other sites will give you cash for your old goods, Amazon will only give you store credit. Thus, the "extra" money you get from Amazon compared to other trade-in services isn't a total loss for Bezos. All that cash will be plowed back into Amazon's own business. Depending on what you buy with your newfound wealth, the company may be making a nice profit on the deal.
To see why Amazon's trade-in service is so clever, let's try to think through the economics of an iPad trade. Say Amazon gives you $320 for your iPad 2. A company spokeswoman says that when people send in their gadgets, the company farms out the devices to a variety of third-party merchants, who then inspect, erase, and package device for reselling. (The company says it does not harvest your devices for parts.) Where do these merchants resell your iPad? On Amazon, of course!
At the moment, good-quality used iPad 2s are selling for about $360 on Amazon. (That's higher than the $335-or-so that used iPad 2s are selling for on eBay, but Amazon's customers may be OK paying extra for the convenience of skipping the auction process.) Amazon doesn't get to keep that full resale amount; it's got to split it with the third-party seller, and the company doesn't disclose the terms by which it distributes trade-in revenue to its merchants.
We can assume, though, that the split will be highly in Amazon's favor, since it has done most of the work to get the deal: It procured your iPad, it paid for shipping, and it's handling all the resales on its own site. Let's assume that Amazon gets to keep 85 percent of the resale price"”so let's say it gets $306 on an iPad it sells for $360. This means that after giving you $320 for your iPad 2 and then reselling it, the company is out $14.
Remember, though, that Amazon didn't pay you cash. It only loses $14 if you spend all the store-credit in your account. If you don't spend it"”which sounds unlikely, except that Americans leave billions of dollars of gift card money unused every year"” Amazon doesn't lose anything on your old iPad.
And if you do spend it, you'll spend it buying stuff from Amazon, which means that it keeps some of the money for itself. How much Amazon keeps depends on what you buy with your trade-in money. The company's margins are notoriously low, so it's not a whole lot: If you spend your $320 on a wide range of goods, Amazon will likely net 1 to 5 percent in profit, so somewhere between $3.20 and $16. So now the $14 it's "lost" on your trade-in shrinks to $10 — and, perhaps, a profit of $2.
There's a chance, though, that Amazon could get even luckier on you. If you use your trade-in money to buy a device or service that keeps you locked to the company for a long time, Amazon might end up making more money on you over time.
What kind of purchase would yield that sunny scenario? There are a couple obvious ones"”purchases that might be especially appealing to the sort of early adopters who trade in their old iPads to buy new ones: If you use your trade-in cash to buy a Kindle or subscribe to Amazon Prime, Amazon wins. Each of these services are long-term revenue generators for the firm. After people get Kindles, they start buying ebooks at a ferocious rate"”and, of course, they can only get them through Amazon.
Prime, meanwhile, changes how people think about shopping; after joining Prime, people look to Amazon as the first place to buy everything. One analysis says that after joining prime, the amount of money that a customer spends at Amazon jumps from $400 per year to $900 per year. Thus if Amazon loses a small amount on a trade-in now but gets you addicted for the next decade, you're the chump, not Bezos.
It's true that not all trade-ins will turn out so well for Amazon. If the price of old iPads drop significantly between your trade-in and the eventual resale"”or if Amazon pays slightly more to third-party resellers than I'm assuming"”then it could be losing a lot more on the deal. But Amazon has always been willing to risk a lot in the short term for long-term value. Or, as Bezos once put it, "We are willing to be misunderstood for long periods of time."
That's its plan here. At first, Amazon's high-dollar trade-in prices look like generosity. But by using the release of a new iPad to lock in new customers for itself, Amazon may be riding its rivals’ coattails to a long-term victory. Clever, clever Bezos.
Farhad, as usual you kick butt!
can we use those credit for AWS bills?
I just looked, and it says up to $320 for 16gb wifi, up to $385 for 16gb 3G. if you were quoting amazon’s price for the 3G model that is pretty misleading, since I’m pretty sure the other companies were for the wifi model. given – amazon’s $320 is still higher. but would nearly void this entire article. am I missing something?
Damn! You’re totally right. I just added a correction above. Thanks for pointing that out; I hadn’t noticed I was looking at the 3G model. Very boneheaded of me.
One snag for people using Amazon to trade up for a new iPad: Amazon is a terrible place to actually buy a new iPad. High prices, confusing listings, and clogged with price-gaming third party resellers. And no preorders.
since when does giving in-store credit….”genius”? it’s smart business, but it’s no different than JCPenney only giving in-store credit to returns post-Xmas. Just because they are overpaying doesn’t mean much. Best customer service is still Nordstroms.
Giving store credit to return goods you bought elsewhere — who else does that?
Verizon and AT&T have been doing it for awhile. GameStop also does it, to my knowledge.
If you go to a store without a receipt, they’ll also give you store credit. This hedges against the possibility that you are returning something you bought elsewhere.
In fact, while I’m at it: http://www.gamestop.com/gs/landing/itrade/ ($340 for 64GB wifi iPad 2)
Those are “returns,” not goods that are obviously used.
Amazon will give you $400 for that model in “good” condition, and 445 in “like new” condition.
Totally right.
In fact, “overpaying” is wrong. To Amazon, “Amazon dollars” are less expensive to give out than $USD. They’re also less liquid, which means they’re less valuable to the people receiving them.
A better way to put it: “paying differently.” Not worth a long article about it.
Okay, this is quite clever – for a low margin online retailer. Obviously Bezos wants your trade, and more of it. But he also wants some of the skim off the top of Apple’s iPad sales.
He’s worked out that Apple is the company shipping the largest quantity of tablet devices. Doh! Actually, they’re also the company shipping the largest quantity of computer devices – period. Furthermore Apple is making the most profit from shipping all these devices.
So, what Bezos is actually hoping to do here is position himself between Apple and Apple’s customers (as sales of the new model peaks), thus sucking some of Apple’s profits for himself, and in the process rob Apple of the extra they make via direct sales. That’s the REALLY clever bit.
But it’s not a long term strategy, it’s a very short term strategy. Over the next 3-5 years, Amazon is going to face a revolution in online sales, headed by Facebook. That threat must scare the bejeezus out of Bezos, and rightly so.
Of all the social media, Facebook has the edge by far, benefiting most from the stupefied user-base responsible for the almost total lack of friction between users and a super efficient retail experience. It’s an online retailer’s wet dream. All the intelligence gathering that’s going on now with all those pesky little apps, is paving the way for this revolution. THAT, my friends, is the REAL long term strategy, and the one that will work, justifying Facebook’s valuation many times over.
To put this into context, Google, the current online ad king, actually punishes you if you engage too much in the social aspect of YouTube. Try commenting more than a couple of times in response to one other commenter, and you’ll have to fill in a hard to read CAPTCHA! That’s right, they add friction to a social network – not to keep you on the page, but to discourage you from participating!
So, as Google once again demonstrates they don’t understand the business they are in (see: Android, Nexus one, Google + etc.), and as much as it pains me to say it, Facebook is the future of online retailing.
But in the meantime, if you think Apple is already making enough money, want to help Bezos cover the development, launch and service costs of his loss making Kindle Fire… buy your new iPad from Amazon!
All your opinions are wrong. Facebook is not going to be able to do retail in any way. Apple is not the top PC seller. Apple is not the top Tablet seller. Apple is not the top Smartphone seller. Apple may be top at screwing its customers out of unreasonably huge profit margins, but given Android choices are as good and for as little as 6x cheaper, that is a very unstable foundation for a “worlds most valuable company”. Facebook is top at screwing its investors to make them think its worth a lot when it’s actually quite worthless. Google on the other hand is the only company that is dominating all market share and Amazon is the worlds biggest online retail store and growing.
Wow! I sincerely hope you’re still in high school, with at least five years of education ahead of you, before you have to go out into the real world.
Every smart mind in the business recognises the huge possibilities of SOLOMO, but as with all matters business and war, the real power lies in the advantage derived from intelligence. Facebook is all about intelligence gathering. Have you been pitched to by Facebook’s business team? No, of course you haven’t. I have. Furthermore, having worked in this game for twice as many years as you’ve apparently been alive, I recognized and understood the strategy immediately.
Apple actually currently holds upwards of 40% of the tablet market. Indeed Apple captured a full “19 percent of all sales dollars” of consumer electronics sales in the US during the holiday quarter of 2011 according to NPD. But that’s just revenue. Profit places them at number one. No-one makes more profit per unit sale, nor indeed per square foot of retail space.
At the same time, as Apple increased its sales, HP, Samsung, Sony, and Dell all saw declines in sales from 2010 to 2011, according to NPD’s report, with Sony and Dell taking the biggest hits – in a market that is generally declining. HP suffered its decline despite [or possibly as a result of] having a fire sale for its failed tablet device. These are just simple facts.
So, it’s your opinions that are in fact all wrong. I’d give you links to Apple’s sales figures, but I feel some homework would do you a lot of good. But if you want to prove me wrong, you can begin by naming the OEM that sold more tablets than Apple last quarter, and the PC manufacturer that made more profit than Apple last quarter.
The majority of smart market annalists judge Apple to be considerably undervalued – based on current market penetration, with much more growth based on projected sales and revenue from existing and new markets over the next 4 quarters. Again, do some research and learn.
The Android Handset Agreement is on the verge of total collapse. Google made a huge error when they licensed it to so many OEMs. The result is a fragmented nightmare of different levels of spec, and even different versions of OS!
Google’s motives were clearly to damage Apple, not to do good business. When they then tried to sell the horribly named Nexus one via direct sale – in direct competition with their new Android partners, unsurprisingly they fell on their asses.
So, what you laughably celebrate as “Android choices are as good and for as little as 6x cheaper” [not even close to true by the way], what you’re actually looking at is the Windows PC ‘race-to-the-bottom’ pricing model [which history records took 30 years to kill PC profits], compressed into just 5 years in the Android handset market. Any fool can see where this story is going.
So grab your [not so cheap] Android handset while you can. The company that sold it to you didn’t pay for the OS, yet still isn’t making any real money from sales – because there are just too many other players in the game. So they soon won’t be able to afford to support it, or develop its replacement.
And bear in mind, all this is happening at a time when Microsoft is on a virtual cell phone OS sabbatical [as it gets Nokia up to speed], and while RIM is too busy trying to work out what to do with the two-headed clown act that has let their market fall through their fingers since 2007.
So to Google’s domination of search and online advertising. Is that what you mean by: “all market share”? Like most people, I used to love Google. When I discovered them back in 1999 I was extremely hopeful for what they could achieve. But something went wrong around the time they decided they wanted to become the new Microsoft. And by that I mean they decided they wanted to beat Apple. Eric Schmidt’s departure from Apple’s board told a tale of very high level treachery, wrapped in very high level ambition – and a massive conflict of interest.
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