The Implications of Retail Trade-ins on Sales,Returns,and Profitability: An Empirical Analysis of a Jewelry Trade-in Program

Abstract

Most retailers offer trade-in programs that allow customers not only to trade-in a used product in part payment for the purchase of a new one, but also to return the new product purchased via a trade-in. In this context, we study how a jewelry trade-in program affects sales and returns of trade-in eligible versus ineligible new products, and how such programs can be better designed to improve profitability. We conduct an empirical analysis using data from a national jewelry retailer that increased the number of stores offering the trade-in program. Leveraging this expansion, we show that the trade-in program impacts sales and return rates, and find that this impact substantially differs across trade-in eligible versus ineligible products. For trade-in eligible products, sales increase by 11.4%, and so do return rates—by 4.3 percentage points. For trade-in ineligible products, sales increase by 2.7% and there is no impact on return rates. The provision of a trade-in option reveals a novel trade-off for retailers: It leads to higher sales, but also results in greater returns, which can be detrimental to profitability. Retailers therefore need to carefully assess this trade-off to manage trade-in eligibility of different products. A counterfactual analysis suggests that a selective trade-in program accounting for this trade-off can enhance program profitability by 19%.