Product churning is the business practice whereby more of the

product Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Produ ...

is sold than is beneficial to the

consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...

. An example is a

stockbroker A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks an ...

who buys and sells

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

in a

portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a ...

more frequently than is necessary, in order to generate commission fees.

Dollar cost averaging Dollar cost averaging (DCA) is an investment strategy that aims to apply value investing principles to regular investment. The term was first coined by Benjamin Graham in his book ''The Intelligent Investor''. Graham writes that dollar cost averag ...

is a form of product churn under certain conditions. In this strategy, an

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...

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. Frequent trading in fee-based accounts is not an example of churning, since no commissions are generated in those transactions. However, the practice of putting clients who trade infrequently into a fee-based brokerage account is known as "reverse churning", since clients are charged fees in accounts with few if any transactions.FINRA Fines Brokerage Firm For Reverse Churning
/ref> 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, in what is known as

planned obsolescence In economics and industrial design, planned obsolescence (also called built-in obsolescence or premature obsolescence) is a policy of planning or designing a product with an artificially limited useful life or a purposely frail design, so that ...

. 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 A textbook is a book containing a comprehensive compilation of content in a branch of study with the intention of explaining it. Textbooks are produced to meet the needs of educators, usually at educational institutions. Schoolbooks are textboo ...

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 The razor and blades business model is a business model in which one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as consumable supplies. It is different from loss leader marketing ...

. This involves selling a basic product at a loss (or low

profit margin Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Prof ...

), but receiving very high profit margins on associated products that are necessary for the basic product's continued usage. Examples 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).

References

{{Reflist Brand management Ethically disputed business practices Product management Personal selling Business terms

See also

References