Product churning

From Academic Kids

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.

It has been claimed that "dollar cost averaging" is a form of product churn. In this strategy, an investor repeatedly buys or sells small lots of a security as the price changes. 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.

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.

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 prints).

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