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Before You Offer That Generous Trade-In Incentive, Read This

Chadwick J. Miller, Michael A. Wiles and Sungho Park

Durable goods manufacturers of products such as cell phones, video games, mattresses, and automobiles often have product lines with an upgrading path for customers as they make replacement decisions. Marketing and sales teams’ goal is to motivate consumers to upgrade faster and, ideally, to purchase more expensive products.

Enter the trade-in incentive, a popular incentive especially prevalent in the automotive industry. Cars are an expensive purchase, and consumers are holding onto their cars longer than ever – up to 79.3 months on average in the U.S. Thus, the automotive industry is an ideal context to study in order to understand how trade-in incentives work.

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A new study in the Journal of Marketing analyzes the impact of trade-in incentives on consumer upgrade behavior. Our research team sought to understand how a consumer’s use of a previously owned durable good and trade-in incentives for that good impacted their next purchase. For example, does the owner of a Toyota Corolla upgrade incrementally to a Camry—or dramatically to a premium vehicle such as a Lexus—and what motivates upgrade decisions?

Our team analyzed more than 320,000 real automotive transactions from the U.S. Government’s Car Allowance Rebate System (CARS) program, commonly known as “Cash for Clunkers.” This program’s goal was to stimulate new car sales during the economic recession of 2009 and motivate consumers to purchase a more fuel-efficient vehicle when trading in a less fuel-efficient vehicle. It also provided valuable information not available from other sources, such as ownership time period. Additionally, since all participants were offered the same trade-in incentive by the US government, we were able to avoid the deleterious effect of studying data influenced by manufacturer- and product-specific incentives.

When consumers buy products, they engage in a process called mental accounting whereby they consider how much value they have received from a good compared to its cost. Any remaining balance (or difference between the value received the cost) becomes a proxy for the unused value of the good and can become a barrier to replacement—i.e. consumers continue to use the good until they get the full value from it. However, trade-in incentives can overcome these barriers by reducing the mental account balance to zero, thus motivating consumers to buy again.

We enrich researchers and practitioners understanding of replacement purchases by broadening the factors that impact those replacement purchases. Specifically, we show that trade-in windfalls, if not handled correctly, can negatively impact desired upgrading and harm manufacturer margins. We further show that ownership time can also impact mental accounts and positively impact the upgrade decision even after the consumer’s mental account balance has been fully depreciated—i.e. ownership can create a surplus. Finally, we also show how brand loyalty (positive impact) and advertising (positive impact for loyal consumers only) impact consumers’ upgrade decisions.

Key findings include:

  • By accelerating the purchase using trade-in incentives, manufacturers shorten the length of time consumers own automobiles, which has a negative impact on upgrading.
  • Consumers who own their trade-ins for a long time upgrade more than short-term owners. Long-time ownership allows consumers to justify a more premium new purchase. Thus, long-term owners are the best target for manufacturers when seeking to drive larger upgrades.
  • Brand-loyal consumers upgrade to a greater degree than non-loyal consumers. Thus, manufacturers should make use of premium product extensions to encourage this group to upgrade.
  • Advertising has a negative influence on the upgrading behavior of brand-new consumers. However, brand-loyal established consumers exposed to advertising upgrade to an even greater degree than brand-loyal consumers who are not exposed to advertising. As a result, targeted advertising is a great way to entice this group to upgrade.  
  • Consumers who receive large trade-in incentives upgrade less because they view the money as a savable asset and use it for other needs. Thus, manufacturers should focus on smaller trade-in incentives or discounts off the price of a new purchase to encourage upgrading.

Our research helps manufacturers understand the impact of their trade-in incentive strategies and targeting strategies to better accomplish critical business goals. Specifically, companies need to decide whether they are seeking to just accelerate the replacement purchase or motivate customers to buy premium products. If the latter, manufacturers may wish to rethink their trade-in incentive strategies to avoid unintended consequences. Offering smaller trade-in incentives can spur upgrading. Additionally, offering purchase-related incentives, such as free or discounted options, or ownership cost incentives, such as free maintenance, can entice premium purchases – not on cost savings. In addition, when manufacturers want to focus on encouraging upgrading behavior, they should shift their marketing and advertising efforts to target brand-loyal, long-term consumers—since those consumers are most likely to choose premium upgrades.

Read the full article.

From: Chadwick Miller, Michael Wiles, and Sungho Park, “Trading On Up: An Examination of Factors Influencing the Degree of Upgrade: Evidence from Cash for Clunkers,” Journal of Marketing, 83 (January).

Go to the Journal of Marketing

Chadwick J. Miller is Assistant Professor of Marketing, Carson College of Business, Washington State University.

Michael A. Wiles is Associate Professor of Marketing, W. P. Carey School of Business, Arizona State University.

Sungho Park is Associate Professor of Marketing, W. P. Carey School of Business, Arizona State University.