Gold from garbage: The hidden calculations of trade-in programs

A few weeks ago, a seemingly innocuous email arrived in my inbox with an offer I couldn’t refuse: For the low cost of literallynothing, I could ship in any unwanted clothing item, which an eco-conscious clothing company would recycle, and then I’d receive $5 in store credit for every recycled item.

The consumer in me saw dollar signs: This was freemoney, with a presumed environmental benefit. The CFO Brew reporter in me was perplexed, though: How were the numbers possibly working out for this company? Was its CFO asleep at the wheel?

Resale and trade-in programs are big money: The secondhand market in the US could reach $70 billion by 2027, according to a 2023 report from resale platform ThredUp. By that same time, the global resale market could reach $350 billion. Increasingly, companies, like the one that emailed me a too-good-to-be-true offer, are looking to grab their own piece of the pie.

Managed poorly, though, a trade-in program can become an expensive “financial disaster,” Tony Sciarrotta, executive director of the Reverse Logistics Association, told CFO Brew. But we have ample evidence for the benefits of a trade-in program gone right.

“The granddaddy of them all is the auto industry. They learned about trade-ins a long time ago,” he explained. “Dealers learned that they make more money on trade-ins than they do selling new cars. Why? Because the value is hidden. They can bury it in the new car sale…They can call it certified pre-owned, which is ingenious marketing, and collect more money.”

The trick, of course, is making the numbers actually work for you.

“The moniker that’s often used in this space is finding gold in the garbage,” Tom Goldsby, co-executive director of the Global Supply Chain Institute at the University of Tennessee Knoxville, told CFO Brew. “As it turns out, there’s lots of gold—and you probably shouldn’t use the term ‘garbage.’”

The hidden gold. “There’s no doubt about it: The economics of that are very challenging,” Goldsby continued, in reference to the garment trade-in program that first piqued my interest. “From a CFO standpoint, it becomes a [return on investment] consideration,” he explained.

A trade-in gamble like the $5 credit program is best understood in the context of larger marketing and brand relevancy benefits, Anthony Dukes, professor of marketing at the University of Southern California, told CFO Brew.

“These big brands, the bull’s eye is on them in terms of why we may have this waste problem,” Dukes explained. “Consumers will look to them to solve the problem or they’ll go find someone else who will.” Many retailers will have to “be willing to even suffer a margin on that refurbished product in order to communicate to consumers that they’re doing something about it,” he added.

That kind of loyalty and engagement is “clearly the big bet that everyone’s making,” Goldsby said. “On this individual transaction, [the company] might take a hit. But by virtue of you having a good experience in this transaction, [they] hope you come back and, frankly, probably buy more than you give to make it truly worthwhile…It can’t be a cinder block on the business.”

Baby steps. There’s no guarantee that a trade-in program will make back what it costs, or even become profitable, but some of the most crucial ROI considerations will happen before you even implement such a program, Scot Case, VP of corporate social responsibility and sustainability at the National Retail Federation, explained.

Dukes, Goldsby, and Case all stress the importance of understanding your customer: What’s motivating them? “It can be the environmental play, it can be a personal economic play, it can be a pure convenience play,” Goldsby explained, but you need to know what might drive interest in a trade-in program before crunching the numbers.

“Step One is to figure out why you want a resale program,” Case said. “If a resale program is not directly connected to broader corporate strategy, it’s just a bolt-on [program], it’s going to fail. And that failure will be a significant risk to the brand.”

But if it’s clear that a trade-in program has a clear connection with your company’s broader ethos, and there’s a significant share of customers that would resonate with the program, that’s when “you can start running probabilistic mathematical models,” Goldsby said.

You’d need to determine when you’d break even, and how long it would take to get there, he added. And consider: “Is it something where it has to make money in its own right, and it becomes a revenue stream? Or is it something that even if it pays for itself or comes close to paying for itself, that’s sufficient?”

From there, it’s likely you’ll need to enroll in some backup. “Any retailer that wants to start a trading program today probably needs to find a good partner to help. It’s unlikely that they’ve got the core competencies within their own organization to do that,” Sciarrotta said. If you are a big enough org, though, you could “turn it into a career path for somebody in the organization that you want to lead down that road,” he added.

After all, it’s been done before. And as the companies behind successful automobile and electronic trade-in programs have learned, “if you negotiate well, financially, to be protected on those goods, you can make more money on the trade-ins than you can on the new goods,” Sciarrotta continued. “It’s not rocket science. It’s simply imitating what’s already been down the road.”