Product churning
Encyclopedia
Product churning is the business practice whereby more of the product
is sold than is beneficial to the consumer
. An example is a stock broker
who buys and sells securities
in a portfolio
more frequently than is necessary in order to generate commission fees.
It has been claimed that dollar cost averaging
is a form of product churn under certain conditions. In this strategy, an investor
is advised to repeatedly buy or sell small lots of a security as the price changes. Each transaction carries a commission fee. In this way the overall cost is averaged down as prices fall, and the investor is protected from market fluctuations which can be very difficult to accurately predict. The effectiveness of this as an investing strategy is open to debate, but it involves many transactions, creating brokerage commissions for the brokerage firm.
Another form of product churning is sometimes practiced by maintenance service providers. By replacing worn-out parts with inferior quality parts, they are assured of a greater frequency of service requests.
Companies sometimes intentionally deliver products which are not durable or reliable, so that the customer will have to replace them. Similarly, new models might be made incompatible with accessories used with old models to force consumers to purchase replacements.
Another example is refreshments and snacks sold in theaters, fairs, and other venues. Small servings are proportionally more expensive than large servings. Customers choose the bigger size even if it is more than they would like to eat or drink because it seems like a better deal.
Textbook publishers are often accused of product churning for their practice of frequently publishing new editions of their texts (thus rendering previous editions obsolete, forcing students to purchase the new editions as required texts and minimizing or eliminating the prices paid for the old editions by bookstore buyback programs), often while making insignificant changes to the information presented in the text.
Product Churning is similar to the razor and blades business model. This involves selling a basic product at a loss (or low profit
margin), but receiving very high profit margins on associated products that are necessary for the basic product's continued usage. Example of this strategy include razors (and their blades), computer printers (and their ink cartridge refills), cell phones (and their usage time), and cameras (and film).
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
is sold than is beneficial to the consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
. An example is a stock broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
who buys and sells securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
in a portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
more frequently than is necessary in order to generate commission fees.
It has been claimed that dollar cost averaging
Dollar cost averaging
Dollar cost averaging is an investment strategy that may be used with any currency. It takes the form of investing equal monetary amounts regularly and periodically over specific time periods in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and...
is a form of product churn under certain conditions. In this strategy, an investor
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
is advised to repeatedly buy or sell small lots of a security as the price changes. Each transaction carries a commission fee. In this way the overall cost is averaged down as prices fall, and the investor is protected from market fluctuations which can be very difficult to accurately predict. The effectiveness of this as an investing strategy is open to debate, but it involves many transactions, creating brokerage commissions for the brokerage firm.
Another form of product churning is sometimes practiced by maintenance service providers. By replacing worn-out parts with inferior quality parts, they are assured of a greater frequency of service requests.
Companies sometimes intentionally deliver products which are not durable or reliable, so that the customer will have to replace them. Similarly, new models might be made incompatible with accessories used with old models to force consumers to purchase replacements.
Another example is refreshments and snacks sold in theaters, fairs, and other venues. Small servings are proportionally more expensive than large servings. Customers choose the bigger size even if it is more than they would like to eat or drink because it seems like a better deal.
Textbook publishers are often accused of product churning for their practice of frequently publishing new editions of their texts (thus rendering previous editions obsolete, forcing students to purchase the new editions as required texts and minimizing or eliminating the prices paid for the old editions by bookstore buyback programs), often while making insignificant changes to the information presented in the text.
Product Churning is similar to the razor and blades business model. This involves selling a basic product at a loss (or low profit
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
margin), but receiving very high profit margins on associated products that are necessary for the basic product's continued usage. Example of this strategy include razors (and their blades), computer printers (and their ink cartridge refills), cell phones (and their usage time), and cameras (and film).
See also
- List of business ethics, political economy, and philosophy of business topics
- Low cost broker
- Planned obsolescencePlanned obsolescencePlanned obsolescence or built-in obsolescence in industrial design is a policy of deliberately planning or designing a product with a limited useful life, so it will become obsolete or nonfunctional after a certain period of time...