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ONLINE BUSINESS

Three Scary Words: "Buy It Used"
 

With more people buying stuff used, companies have to rethink everything from a product's durability to the terms of their warranties.
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Here's a disturbing thought: Your customers may be perfectly happy to buy your products used.

You probably already knew that, though you may not have articulated it in quite that way. Today more people are buying stuff used than ever before, either out of economic necessity or for environmental reasons. Forty-four billion dollars worth of merchandise, much of it used, was sold via eBay in 2005, marking a 30 percent increase in volume. Dozens of product-specific auction sites are also booming, and Google and Microsoft recently started services to compete with Craigslist. These massive e-garage sales have galvanized thousands of self-styled entrepreneurs and spawned a new genre of get-rich-quick books.

But auctions aren't just introducing new mechanisms for supply; they are also changing the nature of demand. With the "secondhand" stigma largely gone and consumers able to choose among multiple used products as easily as among new ones, the public is getting comfortable buying used. Daniel Nissanoff, co-founder of luxury auction site Portero and author of FutureShop (Penguin Press, 2006), goes further. Nissanoff believes that, as secondary markets become liquid--meaning that buyers and sellers dependably get fair prices for almost anything--consumers will routinely factor a product's resale value into their buying decisions. (The shift chiefly involves consumers: Businesses have been buying everything from desks to cash registers secondhand for years.)

Of course, the auto and real estate industries have long operated on that model. But now makers of smaller ticket items must also start to redefine "end user" for a pass-along society. Sales of used books increased by 11 percent between 2003 and 2004, according to a recent study, at a time when the industry is stagnating. Music fans on the Internet urge one another to eschew iTunes and instead buy used CDs that they can sell yet again. Even the software industry has not escaped the shift: A British start-up, Discount-Licensing.com, trades in late-model versions of Microsoft Office, offering discounts of up to 60 percent. Co-founder Noel Unwin says the company has sold several thousand licenses since launching last November. Meanwhile, NEW, a Sterling, Virginia, company that runs the extended service plans for retailers such as Lowe's and Best Buy, now offers transferable warranties for resale-minded customers.

"EBay has created markets that never existed before," says Austan Goolsbee, a University of Chicago economist. For most kinds of used durable goods, he says, eBay "changes the game completely." Nissanoff is even more provocative. The universal presumption of resale, he argues, will end the concept of ownership.

Secondhand Smoke

For companies, the troubling aspects of this scenario are clear: primary markets cannibalized, sales depressed, prices driven down. "Sixty million dollars in Rolex watches traded on eBay last year, and Rolex didn't get a dime for that," says Nissanoff.

Nor are sales of new products the only potential casualty. Companies spend a fortune identifying customers. But if people buy your products on eBay, how can you know who they are or what else they might want from you? Moreover, how can you be sure that resellers won't squander your brand's goodwill through shoddy service? The erosion of customer relationships may be the most disturbing part of secondary markets migration.

For manufacturers, one traditional solution is planned obsolescence, of which there are two schools. The first (call it the '70s Detroit approach) is to make products with very short life spans. That will likely keep goods out of secondary markets, but it will also push customers toward products with greater longevity.

The second (call it the Steve Jobs approach) is to constantly update products with more and better features. Of course, many companies don't have the R&D, production, and marketing resources to keep the pump as primed as all that. Industries less structured around upgrades require a different approach.

Stop Worrying and Love the Bomb

The silver lining of secondary markets is the chance to attract new customers, drive up prices, and increase profits, Goolsbee says. For example, consumers who expect to recoup money by selling their castoffs are more likely to shop at the higher end. Secondary markets also allow customers to indulge in previously unaffordable luxuries (those Rolexes, for example). For this reason, customer relationship management at the secondary market level is especially important for upscale manufacturers, which have the chance to mint loyalists who later in life can afford to buy their goods brand new.

The simplest way to exploit secondary markets is to sell used goods alongside new ones. Daddy's Junky Music, a $30 million chain based in Manchester, New Hampshire, encourages customers to start by buying used musical instruments and then trade up. The company also offers customers who return new or used merchandise within one year 75 percent of their money back in store credit (65 percent for high-tech purchases). "We hope that we break even on the stuff they bring back," says founder Fred Bramante. But "it'll get them to consider buying new gear more than they would have."

The buy-it-used strategy is particularly effective online, where secondhand merchandise doesn't eat up floor space. Dell routinely buys back some products and sells refurbished equipment at discounts on its website, while Sears operates a liquidation center on eBay where it sells used and refurbished items ranging from MP3 players to home appliances.

Some companies are trying more inventive ways to tap into secondary markets. For example, a few high-end manufacturers, such as the watchmaker Tourneau, have partnered with Portero, which helps the very wealthy sell their luxury goods on eBay. The manufacturers vouch for the authenticity of products offered in Portero's auctions in exchange for a cut, allowing both to make a little money and the manufacturer to have a presence at the point of sale. According to Nissanoff, the arrangement is akin to Mercedes-Benz's landmark certified preowned program, which beginning in 1989 allowed the automaker to profit from dealers' sales of off-lease vehicles and to woo entry-level customers to the brand. The program now accounts for 16 percent of Mercedes' total unit sales in the U.S. Nissanoff says that official secondary marketplaces--whether for cars or for watches--undermine gray-market sellers because they establish a continuity between new products and certified preowned ones. "Your brand is represented in a way you want it to be perceived," he says.

A very different model--this one benefiting retailers--will soon be rolled out by iSold It, a "drop shop" franchise that sells consumers' stuff for them on eBay and is based in Monrovia, California. CEO Kenneth Sully says the company is negotiating with several big-box retailers eager to exploit the replace-and-upgrade opportunity that occurs when consumers unload old belongings. In this arrangement, a consumer consigning her old cell phone for auction to iSold It would receive a gift card giving her a discount on a new phone from one of the big-box stores. "Retailers are all clamoring for these trade-in, trade-up programs," says Sully.

New Thoughts About Old Products

To date, the most visible beneficiaries of what Nissanoff calls "auction culture" have been eBay, which typically collects an 8 percent cut of sales, and eBay drop shops like iSold It, which take significantly more. These businesses have profited handsomely from their early insights into changing consumer behavior.

The next insights should come not from companies creating the infrastructure of auction culture, but from those forced to operate within it. How do you manufacture products that retain maximum resale value? Can you market something based on its attractiveness to future owners? How do you create meaningful relationships with customers who bypass your regular distributors in favor of someone who goes by the handle "standupguy"?

Your customers are perfectly happy to buy your products used. Be thankful you have them, and figure it out from there.

Last updated: Sep 1, 2006




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