True value of a 100% tradeup policy (geeks welcome!)

[echelon6]

I was thinking about the tradeup policies some vendors offer, and one major thing consumers probably do not account for are the effects of inflation.

I did some math and basically came up with this formula:

T(t) = P(1-r(1+i)^t) where: T(t) is the value of the tradeup policy if exercised at time t, P is original purchase price, r is the % of true market value you''d receive if you tried selling the stone yourself, t is time in years, i is inflation rate.

Basically if we let r = 75% (i.e. you''d probably get 75% of what your stone is worth if you sold it yourself), i = 3% (a good estimate of long term US inflation), your trade-up policy is worthless after 9.73 years (i.e. you''d be better off selling the stone yourself after this time)

If we pump up the inflation to 4%, the same tradeup policy is worthless after 7.33 years. (and worth VERY little as time approaches 7.33 yrs)

Seeing as how most people tend to tradeup during milestone anniversary years, such as 10 yrs, 15 yrs, etc, I think if you do the math, you can conclude that the tradeup policy is pretty much worthless in the long term.

Its funny to see people asking "will so-and-so vendor still be around in 10-15 yrs?", when in fact even if they''re dead by then, you''re better off selling the stone yourself even at the huge loss, getting the cash, and putting it into the upgrade.

I guess the tradeup policy really only appeals to consumers who don''t yet understand these effects, or plan on exercising the policy in the short term (in which case you''re probably better off just saving up for the bigger stone in the first place)

I think vendors who actually do want to provide a practical tradeup policy should make it inflation indexed, so the policy amount goes up with inflation.

 

[iwannaprettyone]

You have too much time on your hands

Heck around here trade up time is about 8 months....hahah

 

[cinnamon013]

I purchased end of April and sent my stone in for an upgrade this week. Not larger, almost exact size - just higher color and clarity because I found a set of specs I wanted. An tradeup policy works for a lot of people in different situations that you''ve described.

 

[Fly Girl]

echelon6 - Right. Unless you plan on trading up within a year or two of purchase, a trade up policy won''t be worth much. That is why I got my diamond studs at Blue Nile, and saved paying the trade up premium. And yes folks, there is a premium charged by the vendor to pay for the trade up policy. For my small stones, it simply wasn''t worth it. But, if I was buying a really big diamond and wasn''t completely sure I liked the specs, the trade up policy can give peace of mind. Then, it could be worth the premium charged.

 

[bacid]

You have to keep in mind that selling your own stone privately can be very difficult.

The trade-up policy is really just for convenience.. knowing that you can give your stone back and get the purchase value back right away without having to deal with the hassle of trying to sell privately.

 

[belle]

Date: 8/7/2007 11:03:29 AM
Author: bacid
You have to keep in mind that selling your own stone privately can be very difficult.

The trade-up policy is really just for convenience.. knowing that you can give your stone back and get the purchase value back right away without having to deal with the hassle of trying to sell privately.

exactly.

 

[angeline]

I think you''d be very lucky to get 75% of your stone''s original value. I think usual estimates run at 50%. There''s info here on some FAQ about what to expect.

I agree though that upgrades happen real quick around here. I''m on my 3rd, and it wasn''t always about size but also other characteristics I wanted to improve.

Good thinking though, I like your analysis. My dh asked me if I was losing money each upgrade but I said I started this process only last October, so no real loss yet.

a

 

[denverappraiser]

I agree that your resale estimate of 75% is probably a bit high but your general logic is valid in any case. Dealers offer this sort of program because they think it will make them money and they realize that most customers will never take them up on it. Buying stones at 30 year old retail prices is usually a terrific deal for the jeweler whether they’ve got a trade in program or not so the question is one of deciding where the line is and how much tolerance you have for the resale process.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[WinkHPD]

I have yet to see a private get 75% of retail on a sale to another private, 50% is often high and many times I have seen people take as little as 25% of market in a private sale. Usually those sales are under duress of some kind or another, or the item would not be for sale. Lower values are ESPECIALLY low for privates trying to sell to vendors rather than doing a trade.

Some of us offer current value for current value so long as the trade is for at least x% more than what the trade is. This completely negates your Time Value of Money construct, and also prevents us from being trapped in the rare but possible down market. (Ask all the bankrupt Japanese vendors how they liked those "your money back at any time" warrantees that they made when diamonds were appreciating every year.)

I am amazed that anyone can charge for a trade up priveledge, just shows I don''t know how to milk every last dollar from a transaction. I personally find the idea a LOT offensive, so I guess I will keep offering current value for current value...

Wink

 

[JohnQuixote]

Date: 8/7/2007 11:39:24 AM
Author: denverappraiser

Dealers offer this sort of program because they think it will make them money and they realize that most customers will never take them up on it.

I think this market may be pushing that envelope, Neil. 'Research' has suggested that PS works like a trade-up enabling drug.

We've had clients start small, get engaged, and move up to double the size by the wedding.Others wind up trading in two diamonds for a single larger pendant or ring stone.Trade-up is also active in the fight against DSS...Some very serious enthusiasts out there are on their 5th and 6th upgrades (you know who you are).

Another aspect is consumer confidence: Quality assurance is important in the sight-unseen internet market. A trade-up program says "we'll gladly accept the diamond back into our inventory again." Having such a policy costs the client nothing and may provide some peace of mind.

Having a trade-up option doesn't mean you're forced to use it.If you can get more on the street - today or 10 years from now - you can always go for it. If that does happen, login to PS asap and let us know the street corner!

 

[denverappraiser]

Wink,

Most dealers don’t separately charge for their trade up programs but rather offer a bundle of benefits that include things like financing, convenient display and helpful sales people, prepaid repairs, warranties and many other things. Not everyone is looking for the same things and not every dealer offers the same package but it’s not fair to say that their bundle is a bad deal over one particular item, even if it’s one that they’re inclined to talk about a lot during the sales presentation. For some people it’s a big deal.

John,

What percentage of your clients take you up on the trade in offer?

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[oldminer]

Convenience and a feeling of security in the purchase decision come with a trade-up plan. There is no financial benefit for the most part, but you can make it work for you if you are serious about using the up-trade several times over a shorter period than one time a decade.

Don''t buy a diamond for a trade up deal, but don''t refuse one if its there. It can be a lot better than selling your diamond privately in order to purchase a next one.

 

[FireGoddess]

Imagine the problem you''d have if the original vendor only lets you trade up with 75% of your PURCHASE price...which means not only are you not getting the inflation, but you''re not even getting back your full purchase price. Many places do this.

 

[elmo]

You know, one benefit of this sort of program is the case where someone says 'no' or the engagement doesn't work out. Either a buy-back plan or trade-in for a different stone for a different person works well in this case. I have no idea what the statistics are but low double digits wouldn't surprise me.

 

[aljdewey]

Well, a different perspective......

Assume my dream stone is a 2 ct., and it''s gonna take me five years to afford that stone. Without a trade-up policy, I''d have to save during those five years and have *no stone* to wear/enjoy during that time. Oh, and during those five years I''m saving, the market price of goods increases with inflation anyway. The price of that stone five years from now will reflect the then-current market price whether or not I have a trade-up stone to apply against it.

Instead, I get to wear a stone ''rent-free'' for those five years. While doing that, I also learn what I like about that stone and what I''d like to see more/less of, and that helps me make a better purchase when it''s time to buy the 2ct.

I think you''re missing the point of trade-ups. The purpose isn''t to ''beat inflation''.

A trade-up policy gives me more choices and makes me ultimately happier with my purchase because I''m not limited/restricted to just the stock available right now. I won''t experience buyer''s remorse because the stone of my dreams came onto the market three weeks after I purchased something else.

A trade-up policy removes the ''fear of making a mistake'' element from buying because I can always change it to something else without suffering financially. I can''t think of many other products that afford me this luxury. I can''t buy a car without heated seats and then decide 3 weeks into winter that I really should have gotten them, and then trade my car back for every penny toward another new car with heated seats.

A trade-up policy allows me to get better value from my purchase dollars. Last year, I bought a .56 solitaire pendant. When I found I didn''t wear it much (because I love my halo), I was able to trade that stone toward a pair of leverback earrings that I wear all the time. Instead of the $1k sitting unused in my jewelry box, I now wear my new earrings several times weekly. Without a trade-up policy, I''d only have been able to make .56-each earrings instead of the .75-each earrings I had in mind. Trade-up made it possible.

 

[Ellen]

What Alj said. I was just too lazy to type it all out.

 

[aljdewey]

Date: 8/7/2007 12:41:22 PM
Author: denverappraiser


What percentage of your clients take you up on the trade in offer?

I can''t answer for them, but I can tell you how I''ve used this as a WF customer.

I''ve upgraded my earrings. First I bought two .39 H stones...it was all I could allot at the time. I subsequently traded them for a .57 J stone and bought another .55 J stone to make a larger pair of studs.

I bought a .56 J stone for a solitaire pendant. Eight months later, I upgraded that to a .74 J stone, still in a pendant. Then I upgraded that stone to a .75 H, SI2 stone, which became one of my dangle earrings---I bought another .75 H, SI2 to go with it.

OH.....and what became of my original studs, the .35/each studs from Zales that I bought two years before I found WF? I couldn''t do anything with them, and was out the $1500 I paid for them. I ended up giving those to my mom, and we had them reset in martini stud settings.

 

[kcoursolle]

I think many people who are interested in trade up policies, are interested in trading up much more frequently than 10-15 years. Many here trade up after 1-2 years or shorter and then it still definitely pays off to have the upgrade policy since the resale value of the stone would be much lower than what a person would get with trade up.

 

[strmrdr]

The greatest value of trade up and return policies is for example:
You get a round and a week later she says I really love it but I had my heart set on a princess cut.
Without a policy your stuck but with one its no problem.
I bought from GOG which has a trade up policy knowing I will never use it because my Wifey2b would shoot me for even sugesting it.
Her original e-ring is a RHR now and her first question was I get too keep this one right? While pointing too her original.
Dont bug me that it was offered and may have added a tiny amount too the cost.

 

[JohnQuixote]

Neil - it's not something we've tracked. It's not vast but it's not sparse either. Some who exercise the option do it once, others multiple times.

 

[Kaleigh]

For me it''s peace of mind. Knowing if I want to trade up I can. That''s all. Selling privately is a PITA. And you take a huge loss doing so. Most here trade up before a milestone annivesary, etc.. So the inflation part doesn''t really apply to them. But you make an interesting point!!

 

[echelon6]

Date: 8/7/2007 3:05:29 PM
Author: aljdewey
Well, a different perspective......

Assume my dream stone is a 2 ct., and it''s gonna take me five years to afford that stone. Without a trade-up policy, I''d have to save during those five years and have *no stone* to wear/enjoy during that time. Oh, and during those five years I''m saving, the market price of goods increases with inflation anyway. The price of that stone five years from now will reflect the then-current market price whether or not I have a trade-up stone to apply against it.

Instead, I get to wear a stone ''rent-free'' for those five years. While doing that, I also learn what I like about that stone and what I''d like to see more/less of, and that helps me make a better purchase when it''s time to buy the 2ct.

I think you''re missing the point of trade-ups. The purpose isn''t to ''beat inflation''.

A trade-up policy gives me more choices and makes me ultimately happier with my purchase because I''m not limited/restricted to just the stock available right now. I won''t experience buyer''s remorse because the stone of my dreams came onto the market three weeks after I purchased something else.

A trade-up policy removes the ''fear of making a mistake'' element from buying because I can always change it to something else without suffering financially. I can''t think of many other products that afford me this luxury. I can''t buy a car without heated seats and then decide 3 weeks into winter that I really should have gotten them, and then trade my car back for every penny toward another new car with heated seats.

A trade-up policy allows me to get better value from my purchase dollars. Last year, I bought a .56 solitaire pendant. When I found I didn''t wear it much (because I love my halo), I was able to trade that stone toward a pair of leverback earrings that I wear all the time. Instead of the $1k sitting unused in my jewelry box, I now wear my new earrings several times weekly. Without a trade-up policy, I''d only have been able to make .56-each earrings instead of the .75-each earrings I had in mind. Trade-up made it possible.

It''s hardly rent-free possession of your first diamond since appreciation at the rate of inflation is generally half the risk free rate of return. (i.e. put your money in the bank and you''d be better off) I did the sums, basically you end up paying around a dollar a day if you bought your 1ct, then trade-up to 2ct in 5 yrs time - that''s your rent (not to mention the risk of chipping/damage/loss during that period, which should be factored in, but wasn''t)

But I guess that''s the premium you pay for the flexibility and ability to "find what you''re truly after" before committing.

I do understand that the point of the tradeup policy is for short term use only. That''s the point I''m trying to get across. I notice some people ask silly questions like "will the vendor still be alive in 10-15 years" and makes me wonder whether they realistically expect to derive real value from their tradeup policy in that sort of timeframe.

When Wink says he offers current value for current value, does he truly mean his tradeup policy is indexed to current market prices? E.g. indexed to inflation, indexed to rapaport, or something or other? If that''s what he truly meant, then that''s commendable, but from a business perspective, it might cost him in lost revenue from future repeat clients.

 

[marcy]

I''ve used the trade up policy about a dozen times and don''t feel anything but pleased that I am getting credit on my new purchase. If I trade in something it is already paid for and it''s something I am not enjoying wearing anymore. I do sell some of my more inexpensive jewelry at work but always take a loss on it so I find the offer to get full credit for my purchase very agreeable.

 

[Stone Hunter]

Timely thread. I like the idea of having the trade up policy. I''m not 100% sure I would use it unless I planned it out ahead of time. Like Alj seems to have done.

I have taken earrings i got at the mall and traded them in at another store. The money would have been a loss if I couldn''t do that. ''Cause I bought the earrings to wear and had them a number of years before even thinking about trading in. So I''m very happy I could trade in.

Now if I could earn more interest in the bank then it makes sense to wait on a purchase... maybe I need a banking lesson not a diamond trade in lesson!!!!

 

[echelon6]

I think I''m still being misunderstood here re the true value of a tradeup policy

In the most basic term: the tradeup policy is illusory for long term exercise (i.e. anything greater than 7-10 years) and is only valuable to those who plan on trading up in the short term.

 

[kcoursolle]

Date: 8/8/2007 12:37:27 AM
Author: echelon6
I think I''m still being misunderstood here re the true value of a tradeup policy

In the most basic term: the tradeup policy is illusory for long term exercise (i.e. anything greater than 7-10 years) and is only valuable to those who plan on trading up in the short term.

I agree with you if you are only talking about value in terms of money. There are other valuable things about an upgrade policy that can last the test of time that others have brought up such as security, ability to change one''s mind, ease of affording a large stone over time in steps (even if you do loose money), etc.

 

[echelon6]

Again, all those non-monetary values (e.g. ability to change your mind, etc) fades away to nothingness after 7-10 years.

 

[monarch64]

Well, echelon, that's a great formula you've come up with. However, you also state something along the lines of you think people upgrade at the 5, 10, 15, 20 year mark, which may or may not be true...my dh gave me a lovely .40 non-graded diamond set in a halo'd pendant for our 1st anniversary. ETA: we are not looking to upgrade this pendant, ever, as it has sentimental value! Obviously there are many more stories here which have already been recited...so as far as whether a 100% trade up policy is really worth it? According to YOUR numbers it isn't, but according to many other buyers' ideas of what makes monetary sense to them, (whether profitable or not) it does. Some have even posted that without knowing that there was a trade-up policy in place they might not have made a purchase.

This is all business sense 101. WTH is wrong with that? if you were running a business, especially one based on goods that really had only intrinsic value, wouldn't you market something like this? Or are you just a numbers guy? Jeez, I'm almost afraid to post this, but...

 

[denverappraiser]

Echelon,

A perfectly reasonable strategy for a dealer is to buy things that they think their customers will want at whatever the market price at the time is allowing for a reasonable profit margin in the deal. It doesn’t need to have anything to do with whether they sold it before or not. This is perfectly honest and straightforward and it serves everyone involved. It’s the way most things are traded but people have this illusion that diamonds are a form of bank account and that they should be traded somehow differently. Dealers like to foster this impression but we’ve now moved from an issue of investment into one of marketing.

The benefits to dealers of offering tradeups are first that it keeps people coming back to your store and they keep buying things, second that it gives them something else to talk about in the sales presentation that their competitors may not have and a distant third that it occasionally results in buying something for a bargain. As long as you only offer it on things that you’ve got a reasonably good chance of reselling later than the risks are fairly low but they’re not zero. Fashions change. Prices can drop. Inventory levels and cash flow can be problems. If the customer trades in quickly, before prices rise much, you lose the profit you made on the first deal and this can cause cash flow problems because some or all of that money has already been spent on the related expenses. The reason to offer this for ‘free’ is because the benefit of more sales offsets these downsides. Most dealers are pretty smart folks and they find that on balance this seems to be a pretty good deal. With careful planning they can minimize their risks and it’s the reason that these programs often have rules that seem a bit arbitrary for things like how much more you must spend the second time, how often you must show up for inspections, which products they sell are eligible, etc.

The benefit you seem to be missing for consumers is the desire to avoid the resale marketplace. Some folks are very good at this and count it as entertainment but many people, most in fact, simply don’t care for the whole process and they prefer to pay someone else to do it for them. It’s rather like trading in of used cars. Pretty much everyone knows that they’re not maximizing the deal by trading in at the dealership and that they could get a higher price if they just did it differently but they prefer to devote their time and emotional energy towards something other than turning themselves into a car dealer.

Neil Beaty
GG(GIA) ICGA(AGS) NAJA
Professional Appraisals in Denver

 

[strmrdr]

Date: 8/8/2007 2:39:34 AM
Author: echelon6
Again, all those non-monetary values (e.g. ability to change your mind, etc) fades away to nothingness after 7-10 years.

Well if someone really cared about investing the money they wouldnt put the money in diamonds in the first place.
I got a upgrade policy I wont use and saved a large chunk of money over buying local. Im happy :} oh not too forget most important a kicken diamong that wifey2b loves :}
I think I won on that deal :}