Why do mobile phone makers offer trade-in credits?

December 5, 2019 9:13 AM

I just bought a Pixel 4 XL and I'm trading in my Pixel 3 XL for a $250 credit from Google. Combined with the Black Friday sale ($200 off) this is probably wiping out any profit they might make from the phone. It looks like Samsung and Apple offer trade-in credits too, possibly more generous than Google's. Why would they offer these credits?

I suppose you could argue that Google makes money by siphoning up your personal data so even if they don't make money on the sale of the device they are making money by getting you to use their device, but that doesn't explain Samsung or Apple whose credits can be as much as $600.

Are they using these devices as warranty replacements? Are they reselling them? Are they using them to study wear and tear? Are they recycling them and the materials they get out of them make it a worthwhile investment? Are they forced to do this because they are competitors are doing it and even if it makes the sale unprofitable it's better than losing the sale?

posted by Tehhund to Shopping (10 answers total)

Are they using these devices as warranty replacements?

Yes.

Are they reselling them?

Yes - that's where devices like these often come from.

Are they forced to do this because they are competitors are doing it and even if it makes the sale unprofitable it's better than losing the sale?

The build cost of these phones is a very tightly guided secret. I have worked in similar manufacturing environments and have not even had access to my own products' manufacturing costs. However, it's pretty common for market analysts to make bill of materials (raw components) cost estimates, and most cell phones turn out to be fairly inexpensive to manufacture. Cell phone manufacturers are very good at segmenting their market between bleeding edge adopters who will pay as much as possible for a new device (with exceptional profits), enthusiasts who are willing to pay for new devices, but are willing to wait a while to get them (like you), and further segments that are not able to afford current devices (and hence, need either old stock or renewed/refurbished old stock). I have no idea what this promotion cost Google, but I would strongly suspect it is either profitable, or not nearly as unprofitable as you'd think.
posted by saeculorum at 9:24 AM on December 5, 2019 [4 favorites]

Response by poster: Interesting. I would be shocked if cell phone makers are making $450 profit on a $1,000 phone but maybe that's the case.
posted by Tehhund at 9:38 AM on December 5, 2019

Did Google give you the rebate or a carrier? I just swtiched to t-mobile. My son wanted a new phone. He traded in his iPhone 7 for a new iPhone 11 (XL?)for essentially free. I still get billed for his phone, but I am getting an offsetting credit (less $1). If I am paying $40/mo for his unlimited 50gb line that is $480/year. I get the credit and the debit on the phone for 2 years. So the total revenue on that line is $960. If the phone retails for that approximately, then the carrier is losing money somewhere.

I happen to think the cost of manufacture is pretty darn low. My guess would be less than $200 or even $150. Apple makes A LOT of money selling hardware. They are just getting into the subscription business. I would assume they sell the phones to the carriers for a much lower mark up than they do direct to the consumer. Yet, they still make money.

All this is to say that Google is making money on the deal. Maybe a breakeven. I am a Pixel 3 owner. I looked at a similiar deal where if I trade mine in I essentially would have the same remaining payments but a Pixel 4. I got my Pixel 3 in January, brand new from Google Fi for $400. Google was still making money on the deal.
posted by AugustWest at 10:15 AM on December 5, 2019 [2 favorites]

I would be shocked if cell phone makers are making $450 profit on a $1,000 phone but maybe that's the case.

Keep in mind the $250 trade-in credit is not fully paid by Google - they will resell the device to recoup some/all of those costs. Phones last a surprisingly long amount of time if you're willing to replace the battery and possibly the display/glass assembly - putting $100 into repairs for a cell phone makes it very easily sellable. So, Google trades $350 for the resell, but then returns $250-$300 on the sale - not a bad deal.

The $1,000 price is also a bit of a misnomer. I can fairly confidently say that the manufacturing cost of the phone does not go up by $100 to either go from 64 GB to 128 GB or from a 5.7" display to a 6.3". Off-hand, I would expect $10-$20 for each of those upgrades - and if that's the case, you just provided $160 to account for some other purchase.

In fact, there is almost nothing about the phone that intrinsically makes it a "$1,000 phone". Very few people will ever actually pay that price - by design. It's roughly why Macy's stores always have sales. People will either get a carrier subsidy, a discount from the phone manufacturer, a sale, etc.

Roughly, the phone is $1,000 to the very few people who buy it directly after release, $800 to the people who buy it a couple months after release, $600 to the people who buy it on Black Friday after release, and $400 to the people who buy it renewed a year or two after release. Google wants to ensure that the people who are willing to pay a bit more money up-front so that people who are not able to pay full price still buy Google products. Otherwise, those people buy lower-end phones from other companies, which isn't to Google's advantage. If Google can take the same phone and sell it to a bunch of people the highest price point each person is willing to pay, they tend to do better than if they insist on the same price for everyone.
posted by saeculorum at 10:19 AM on December 5, 2019 [5 favorites]

The list price compared to parts cost has a pretty wide spread.
posted by Candleman at 10:22 AM on December 5, 2019 [1 favorite]

Response by poster: > Did Google give you the rebate or a carrier?

Google directly on store.google.com
posted by Tehhund at 11:29 AM on December 5, 2019

In my case, Samsung charged me $175 four months after receiving the trade-in, citing unspecified cosmetic issues. So they can make their money that way, too.
posted by alexei at 11:33 AM on December 5, 2019

Also people who a have working phone may think, "Why should I throw this thing away for a new one if it still works?" By giving a trade-in, the company helps the buyer "rationalize" the purchase. In the old days, stores would sometimes do that with men's suits. Back when men's suit styles changed little year-to-year, men might be reluctant to buy a new suit when they had closets full of perfectly good suits. A trade-in, even if the old suits went to charity, rationalized the purchase.
posted by tmdonahue at 12:00 PM on December 5, 2019 [8 favorites]

I would be shocked if cell phone makers are making $450 profit on a $1,000 phone but maybe that's the case.

The profitability calculation needs to account for a slew of other factors besides bare manufacturing costs for getting a phone to market. The design and software of the phone doesn't magically appear out of thin air, and there are costs with getting regulatory certification, among others. This is also why early adopters get hit with the highest costs; they need to recoup a bunch of money already spent before profits happen.
posted by Aleyn at 12:57 PM on December 5, 2019 [2 favorites]

I found an article saying the approximate build cost for a pixel xl is $285.75, if that answers your question about profit.
posted by ananci at 3:46 PM on December 5, 2019 [1 favorite]