One of the many advantages Apple has versus its competitors in the smartphone market is the fact that its iPhones hold value longer than most other products in the market. As the overall market has matured, shipment growth has slowed, and prices of top-tier smartphones have increased, this advantage has become increasingly important. Apple even discussed it during its most recent quarterly earnings calls. Despite this attention, however, I believe competitors and investors still underestimate just how important the iPhone Trade-in Program is to Apple’s ability to drive new-phone purchases, secondary-market revenues, and continued installed base growth.
Driving Sales of New iPhones
During the recent earnings call, CEO Tim Cook answered a question about the effectiveness of the trade-in program in retail this way: “In retail, it was quite successful…And trade-in as a percentage of their total sales is significant, and financing is a key element of it.” A quick visit to Apple.com’s iPhone page or a carrier site such as Verizonwireless.com quickly demonstrates how crucial the trade-in programs have become: It’s the first item you’ll often see on the page.
On Apple.com if you click through to the trade-in-offer page, you’ll find that if you trade in an iPhone 8 you can get an iPhone XR for $479 (down from $749) or $20 per month with financing. Alternatively, you can get an iPhone XS for $729 (down from $999), or $31 per month. And it’s not just the latest iPhones that hold residual value. For example, the iPhone 6 will still net you $100 off those same phones. You can get similar deals at Verizon (the carrier also offers trade-ins for a handful of Samsung, Google, and LG phones). Of course, the other majors U.S. carriers are also offering comparable deals on their sites and in their stores.
These trade-in options, combined with financing, is how the industry moved to accommodate consumers when the subsidy model of mobile phone buying went away. Years ago, to capture the residual value of a phone, consumers had to resell the device themselves or trade-it-in to a third party such as Gazelle. Today, it’s pretty painless, and that removal of friction has helped make trade-ins a key element to most people’s phone-buying experience.
Driving Secondary-Market Revenues
Back in 2016, I talked about the fact that Apple was selling refurbished phones on Apple.com. At the time, the vast majority of phones Apple was selling itself were likely coming in via the iPhone Upgrade Plan that let customers turn in their iPhone for a new one every year. That program is still likely a source for refurbished phones on Apple’s site, but the dramatic increase in regular trade-ins is undoubtedly driving an increasing percentage of the volumes.
A quick spin through the refurbished phones available on Apple’s Web site is instructive. The company currently has a good selection of phones, including iPhone 7 Plus, 8, 8 Plus, and X in a range of colors. Alongside the refurbished price, Apple lists the new price, which makes it easy for buyers to see their savings. For example, a refurbished iPhone 7 Plus with 128GB of storage in Rose Gold sells for $569, or $100 less than the current new price. At the other end of the spectrum, a refurbished iPhone X with 256GB of storage in Space Gray sells for $899, or $150 off the new price.
Apple’s refurbished stock is collected, cleaned, and inspected, and each iPhone gets a new battery and shell, which makes Apple’s offerings notably better than some others out there. These expenses, combined with the acquisition cost (the trade-in value to the consumer), represent the cost to Apple to bring these refurbished products back to the market. The difference between these costs and Apple’s selling price is profit. Let’s use the iPhone X as an example. Apple offers $450 in trade-in value for this phone, pays the cost to refurbish the unit, and then resells it for $899. The company is making good money on its refurbished iPhone sales. And remember, this is the second time Apple has profited from the sale of this phone.
Positive Impact on Installed Base
The final positive aspect of Apple’s iPhone Trade-In Program and the sales of refurbished phones is that it helps to grow Apple installed base. As services become an increasingly large percentage of Apple’s revenue, I can’t overstate the importance of a strong and growing installed base for Apple. Tim Cook mentioned this on the earnings call, too.
“Installed base is a function of upgrades and the time between those,” Cook said. “It’s a function of the number of switchers coming into iOS, macOS—and so forth—tents. It’s a function of the robustness of the secondary market, which we think overwhelmingly hits an incremental customer.” He went on to note, “The secondary market is very key, and we’re doing programs et cetera to try to increase that because we think we wind up hitting a customer that we don’t hit in another way.”
In other words, every time Apple reclaims an iPhone from an existing customer who trades it in for a new one, the company not only retains that customer in the installed base, but it potentially adds a new one when it resells that refurbished phone. And because the refurbished phone costs less than a new phone, Apple is reaching more cost-constrained customers than in the past. This means there are more people in the iOS ecosystem to buy and use Apple’s current services such as iCloud Storage, Apple Pay, Apple Music, and News+, as well as upcoming services such as Apple TV Plus. These customers may not be as likely to spend freely as Apple’s traditional customers, but every new user is a potential source of additional revenue.
Bottom line, with the iPhone Trade-in Program Apple has rather masterfully addressed the inevitable challenge of a slowing smartphone market. It makes the high cost of acquiring a new iPhone more tenable, allows Apple to capture a good chunk of the residual value of selling an old iPhone, and it helps Apple to continue to build out the iOS installed base. That’s a win, win, win, and I expect to hear Apple talk even more about this going forward.