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Gadget buyback: What you need to know

Best Buy will let you pay to lock in a resale value. Why it's usually a bad deal.

By Karen Datko Feb 10, 2011 11:41AM

This Deal of the Daycomes fromKelli B. Grantat partner site SmartMoney.

 

It would be hard to miss the latest advertising blitz from Best Buy -- from a Super Bowl commercial featuring Ozzy Osbourne and Justin Bieber to full-page newspaper ads to e-mail blasts to customers. The all-out marketing effort focuses on the retailer's newest venture: buying back the gadgets you're about to purchase from them.

Once the provenance of online start-ups, bigger electronics outlets have now set their sights on your used gadgets. Best Buy's new program adds a novel twist: It promises to buy back customers' latest cell phone, laptop, tablet and television purchases for a set rate, in exchange for an upfront fee.

 

SquareTrade, an online warranty provider consumers may know from its partnerships with Amazon.com and Buy.com, launched its own similar version of a buyback guarantee for iPhones and iPads. Post continues after video.

Michael Pachter, an equity analyst with Wedbush Securities, says it's a pitch aimed at early adopters or anyone else afraid that their newest gadget will be obsolete by the time they get it home: Pay a $70 fee when you buy a new $700 iPad and you'll get half the tablet's price back if you trade it in within six months -- a benefit if Apple soon comes out with the next generation iPad as expected. (To lure customers, Best Buy has waived its fees through Feb. 12; SquareTrade says its guarantee fees will be waived until late February.)

 

It's a good deal for stores

But for consumers, these big-name forays into the buyback business may not, in fact, be the best buy, for several reasons. The guarantees typically lock in a resale price that's way too low, says Manish Rathi, a co-founder of Retrevo.com, a consumer electronics shopping site. The upfront fees further eat into the money you'd otherwise recoup.

 

And the buyback usually comes in the form of a store gift card, not actual cash -- all of which makes these new buyback programs a better deal for stores than for shoppers, says Stephen Baker, vice president of industry analysis for NPD Group.

For starters, these programs often estimate faster and steeper depreciation than actually occurs. The most Best Buy or TechForward (another guaranteed buyback site and SquareTrade's partner) will promise is 50% back -- and then only on trade-ins within six months. Wait longer, and the rate drops further. But "almost no product loses 50% of its value in the first year," Rathi says. TVs, for example, generally lose 20% to 25% of their value over a year, while laptops drop 35% to 40%, he says.

 

The companies say they're slightly conservative in their estimates to account for technological leaps that do send prices plummeting. "Obviously there's a big unknown," says Mark Lebovitz, chief operating officer of TechForward, which has offered buyback plans since 2006. "We spend a lot of time trying to figure out how these devices depreciate."

 

What's more, Amy Adoniz, a general manager at Best Buy's Union Square location in New York City, says that because technology gets cheaper as it advances, the highest buyback price is likely to cover more than half of the price of a new item of comparable quality.

 

Still, someone with a 16GB iPhone 4 could get $472, on average, for a six-month-old handset, says research firm Terapeak -- 35% more than the $350 the guarantee programs promise. Spokespeople for the companies concede that consumers pay a price for the peace of mind of a guaranteed rate, but say their offers are fair.

 

"People's time is most often worth more than the money they might make selling it themselves," says Jade Van Doren, chief executive of TechForward. Van Doren also said  that in the case of smart phones, buyers are usually also getting more than the subsidized phone price from their wireless carrier that they originally paid.

 

Would you like a warranty with that?

Trade-ins for store credit also force you to stay with that retailer for a replacement purchase, and spending tends to exceed the gift card's balance. Trade-in site Gazelle's partners report that consumers typically spend 40% to 80% more than the value of their trade-in, says Israel Ganot, the site's chief executive. Gazelle itself pulled in $21 million last year from reselling the gadgets consumers trade in on eBay and to wholesalers, up from $8 million in 2008. Buyback programs boost profits further via upfront fees of $20 to $350 to lock in a resale price.

 

Retailers also assume that, as with warranties, not every buyer will actually use the program after they've paid, says Baker. Participation may even tie in to other lucrative services. Best Buy, for example, offers a 50% discount on program fees when you buy Geek Squad protection plans, while SquareTrade offers buyback only to people who buy a warranty. (Vince Tseng, the vice president of marketing for SquareTrade, says customers get a credit on their warranty when they trade in early.)

 

How to get a better deal

For the most part, consumers will be better off trading in their used gadgets at a site or store that makes an offer based on the item's condition and going rate, Rathi says. And that business is also growing: RadioShack has taken in-store and online trades since 2009, and last fall Target began offering an in-store extension of its online partnership with trade-in site NextWorth, with plans to have the program in most locations by March. Gazelle also expects to have brick-and-mortar locations this year.

 

It's less of a hassle than selling the item yourself on eBay, and not as much of a price cut as going the buyback route. "It's a smarter way to use your money," Rathi says.

 

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