Amazon's brilliant plan to pay you crazy money for your iPad 2
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.