Product Churning
It has been claimed that dollar cost averaging
is a form of product churning. In this strategy, an investor repeatedly
buys or sells small lots of a security as the price changes. 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 your portfolio. You may or may not gain, but the
broker certainly piles up commissions.
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 Product churning is open
to debate, but one thing is certain: it is a sure way of increasing
brokerage commissions.
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 of Product
churning 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).
Product 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.
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