Product churning

Product churning is the practice of selling more product than is beneficial to the consumer. An example is a stock broker who regularly buys and sells securities in a portfolio. It may or not be possible to gain, but the broker certainly receives commissions.

It has been claimed that dollar cost averaging is a form of product churn under certain conditions. In this strategy, an investor 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 strategy is open to debate, but one thing is certain: it is a sure way of increasing brokerage commissions. The final effect will depend on the balance between the money spent on commissions versus the savings in purchasing price of investment. However, if the sale and purchase of the investment is without fees, dollar cost averaging generates overall savings compared to a lump-sum purchase at a random interval.

Another form of product churning is practiced by maintenance and service providers. By replacing worn-out parts with inferior quality parts, they are assured of a greater frequency of service requests.

Another example is fizzy drinks and pop corn sold in theaters. Small servings are too small and proportionally more expensive than big servings. Customers end up getting the bigger size even if it is more than they would like to eat or drink because it seems like a better deal.

A more sophisticated version of product churning is used in the razor and blades business model. This involves selling a basic product at a loss (or low profit margin), but receiving very high profit margins on associated products that are necessary for the basic product's continued usage. Example 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).

"Churning" is also used to describe the betting habits of slot machine players. This "excessive" activity accounts for the high profits made by casinos - and accounts for the "one armed bandits" nickname given to slot machines.

Textbook 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.

ee also

* List of business ethics, political economy, and philosophy of business topics
* Low cost broker