Why Does Apple Offer Free Engraving?

This Black Friday, I had the occasion to ponder why it is that Apple offers free engraving on iPods and iPads (hereafter, iP*ds). A small part of the reason is surely that it adds value for some of its customers. But assuming that the cost of engraving is not zero, this is not much of a reason to offer it for free. At best, it is a justification for offering the service at marginal cost. Indeed, Apple used to charge for iPod engraving.

If the kind of people who value engraving are also likely to place lower value on iP*ds, then it could be a method of statistical price discrimination. But this does not really seem plausible, does it?

The real reason Apple offers free engraving is to weaken the secondary market. iP*ds are durable goods. Apple has a monopoly on iP*ds, but it still has to compete with the products of its former self. If people get tired of their iP*ds or decide they want to upgrade to a newer model, they can sell their devices to other consumers, who in turn are not giving their money to Apple. By offering free engraving, Apple makes these used devices less valuable to other consumers. Who wants a weird engraving chosen by the previous owner on his iP*d? The more iP*ds are engraved, the smaller (or at least less valuable) the secondary market is, and the more profitable it is to be the durable-goods monopolist, Apple.

Jeremy Bulow wrote the classic article on how the secondary market affects durable goods monopolists, but as I recall he doesn’t consider personalization as a strategy. Instead, he focuses on how firms can rent instead of selling their products (effectively taking durability out of the equation), credibly promise not to lower prices in the future, or simply make their product less durable. Has anyone considered product personalization as a way to mitigate the durable goods problem? Are there other examples of firms doing this?

For those brand new to the durable goods problem, be sure to read Coase’s short 1972 paper before you tackle Bulow.

Update 11/29: I reply to a few objections here.

47 replies to “Why Does Apple Offer Free Engraving?

  1. Eli Post author

    Yes, it would, which makes the final equilibrium very complicated. For my story to make sense you have to believe that the profits lost to postponed upgrade decisions are lower than those gained by higher demand for new units from people formerly in the used market. I think this is plausible, but ultimately it’s a question of elasticities. If there were some other explanation that seemed plausible for the practice of free engraving, then I would wonder more about the elasticities, but since I can’t think of one, I’m pretty confident that this is what is in fact going on.

  2. Eli Post author

    Josh, that seems superficially plausible, but remember that Apple chooses its own return policy. Apple wants its customers to be able in general to return products.

  3. Derek

    You are over-thinking it. Apple does engraving because it costs them nothing, increases the value of their products, and makes them more gift-friendly. Anything else is just icing on the cake.

  4. Eli Post author

    Derek, it can’t cost them nothing. Even if the engraving itself is very cheap, there are costs associated with managing inventory in a way that facilitates engraving. It requires additional personnel and systems. As I said in the post, the fact that it adds value is at best a justification for doing the engraving essentially for marginal cost.

  5. Wayne

    Seems very tin foil hat to me. Even plausible sounding ideas are only speculation until more evidence is put forth.

  6. Ellery

    I agree with Josh. The simpler explanation of “non-returnability” makes the most sense as to why offer it for free.

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  8. commenter

    Eli, engraved products are non returnable. It’s a fact. ‘Plausibility’ don’t enter into it. Without a doubt Apple and the Benevolent Leader wants its customers to live long, prosper, and win a fluffy bunny in a raffle, but nonetheless…

  9. corprew

    Offering things for free like that, and not nickel-and-diming people, is also one of the things that distinguishes the sale of luxury goods. I think that is in line with apple’s brand strategy and not particularly a desire to make it harder for people to return things.

  10. Economist

    The reason Apple offers free engraving is very simple: It causes people to buy the products thru the Apple store, which is more economical for Apple than when people buy products thru third party retailers. It is that simple. Apple gets the retail price of the product when it sells rather than the wholesale price. This more than pays for the extra cost of engraving, which is really not very expensive because it is done by the same laser that engraves the Apple logo and the “designed in california” and other notices on the back.

    Further, it is incorrect and inappropriate to use the word “monopolist” with regard to Apple, because Apple does not have exclusive control over any market. I first noticed people using this word incorrectly with regard to Microsoft- much as they may have done wrong, they have never been a monopolist either. BMW is the only manufacturer of Beemers, but that does not mean they are a monopolist because they do not control the entire car market.

    The misuse of monopoly like this serves the socialist political agenda of giving government more control over the economy by attempting to rationalize this control with the claim that the market cannot resist the magical powers of these monopolists. But not only are they not monopolists, if someone were to manage to get a monopoly– so long as the monopoly wasn’t government granted- they wouldn’t be able to abuse it. (Any abuse would open the door to competition, thus the monopolist would have to keep prices below the best price one could achieve with competition, which means all of the benefit of economics of scale would go to the consumer.)

    The real monopolies in the US are all government created. The USPS has a monopoly on first class mail because government made it a crime to offer first class mail service for anyone else. The local cable company is a monopoly because your local government gave them that monopoly. Cell phone companies have great pricing flexibility because the federal government only allows three networks to operate in a given area, creating a triopoly.

  11. Steve

    +1 @Economist. Engraving done only by online Apple Store. Helps manage inventory and encourages people to order direct from Apple.

  12. Alex

    How does an econ grad student — at GMU of all places! — repeatedly misuse “monopoly”? By now you should have grasped how little utility the term holds, much less erroneously apply it to every manufacturer of non-commodity goods.

    I find it sadly humorous that “Apple has a monopoly over iP*ds” is similar to an example Russ Roberts used to show how little objective utility the term “monopoly” holds, that the more narrowly one defines the market, the more one is likely to “discover” monopolies.

  13. Eli Post author

    Alex, the misuse of the term monopoly is to scare people into thinking something sinister is afoot. That’s not how I’m using it. Apple is the only producer of iPods and iPads. It is a monopoly. That said, I attach to the word none of the emotional content that it seems to evoke in so many people. So it’s the only producer. Big deal. Furthermore, the whole point of the post is that durable goods monopolists still face competition from their former selves.

  14. Stewart

    The problem with the use of the word “monopoly” comes from conflating dynamic and static systems. Monopoly is commonly used to describe static systems and it is mainly used as a foil to the model of perfect competition where all the (MU/P) are equalized. In a dynamic world we see new entrants and they erode the price that can be charged for the good.

    The point of the Apple example is the following question: “How would a firm act if its closest competitor was itself?”

    Even though I agree that the term monopolist is often misused, at its core is the idea of economic profits and profits are essential to a dynamic understanding of the economy.

  15. Rich

    Surely the main reason is simply that other retailers can’t do it – if I want my iPod engraved, I have to buy it from Apple.

  16. Eli Post author

    Rich, retailing is a competitive industry. Apple does not make significantly more money when you buy from them than when you buy from Amazon or BestBuy.

  17. kayoone

    Apple has high margins on all of their products, thats why they can easily afford making engraving for free to see if that increases sales for their own store. Simple as that.

  18. Emmanuel

    This makes a lot of sense. I can think of another example of this. Louis Vuitton also offer free embossing of your leather goods with one or two letters. You can get this done at any time , even years after you’ve purchased an item.

    Their stuff lasts forever, however – as opposed to iP*ds – do not become obsolete (unless you are very fashion conscious and wouldn’t be seen dead with last year’s handbag).

  19. mr marco

    i think you are spot on. quite surprised at the “they do it because it is free” mindset. it obviously doesnt have zero cost.

  20. Max Sindell

    Apple is a marketing company, and by offering their customers a chance to engrave their products for free, it tremendously increases the value and the personal connection of that object with the person who engraved it. An engraved iP*d goes from being a disposable piece of technology to a memory.

  21. Chris Jones

    I don’t want to comment on why they offer engraving – the resale argument is entirely rational from an economic perspective, but their true motives are internal to the company and not available for inspection.

    One thing I would say though is that their devices have increased in sophistication significantly with the advent of content stores. It’s certainly not the case that they make all their profit from iTunes music store, the iPhone App Store, or the iBooks store, but they are profitable departments and it’s likely that a secondhand device will feed into those.
    I can’t help but wonder if it’s better for them now if you keep buying the new iPad and iPhone every year and then pass on your old one either by resale or hand-me-down through a family, because then they have someone new to sell content to and pull into other products due to their legendarily powerful halo effect.

  22. Joe

    Great post, I think Josh, Chris and Emmanuel. Here’s a breakdown so far
    1) To make buying online more attractive to consumers, I’m assuming COGS is lower for online sales
    2) Helps self-classify iP*ds as luxury products
    3) Perhaps make the products less likely to be retuned
    4) And to Eli’s original point, I would agree that it would be in Apple’s best interest to reduce friction involved in the 2nd hand market of their products. It shows that Apple products are durable to the buyer, and draws a new pair of eyes into iTunes. So I think you might have actually spotted a potential unwanted side effect.

  23. Raman

    Hmm I did not get my NexusOne from Google engraved. For the very reason that I wont be able to sell it off later.
    But this thought never crossed my mind that free engraving “could be” linked to this! :)

    Nice thought.

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  25. Shoan

    The engraving creates sentimental value. An owner would not part with it for just that reason and hence reduces the number of devices available in the second market.

  26. iPod theft victim

    Isn’t device security a reason? With iPods being so valuable, they’re a target for thieves, engraving reduces the resale value, if everyone had an engraved iPod, there would be no point in stealing them. Plug any iPod etc into a new
    Pc with iTunes, a new sync and the device is ‘yours’. There’s no locking mechanism. Engraving would be the only trace of previous ownership.

    It would be a great idea if your could report thefts to apple by serial number, which iTunes will check at sync time, preventing syncs and wiping the device. Making stolen devices unusable.

  27. Nelson

    Being as how you’re an economist, can you back that up with any data?

    What seems plausible is Apple doesn’t charge because they’ve improved their manufacturing processes such that it doesn’t cost them.

    It also creates a differentiator between an iPod sold at Walmart and one sold by Apple. Apple weakens the secondary market with new products, who buys an iPod generation 1? The newer products are aggressively priced and more featureful.

  28. JS

    In the end no one is forcing anyone to get an engraving. So any point made here is moot. It’s a personal choice.

  29. iGlen

    I don’t disagree with your post; well said.
    I had my iPod engraved with my email address so, in case it was lost, a small chance someone might contact me.
    When I sold it, I etched it out to a perfect rectangle – the buyer then didn’t get a used iPod with another’s engraving on it and it really didn’t lessen the resale value. Used is used.

    The secondary market will always buy secondary product – engraved, etched-out, or none. Nothing but comparable “secondary pricing” will change this demographic to purchase new.

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  34. Clint Wilson

    Your statement “By offering free engraving, Apple makes these used devices less valuable to other consumers.” is of course true and then on the opposite side of that coin is my wife’s take, who I gave an iPad to for our recent Wedding Anniversary, and she will keep it like a picture forever:)


  35. tallpoppygroup

    Clever insight. Apple have been trying to devalue the second hand market for ages – That part of their problem, their products seem to depreciate a lot slower than their non-Apple analogs

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  37. Harry

    There’s something I don’t understand about this explanation. If decreasing the value of the product on the secondary goods market leads consumers on the margin to purchase new versions of the product, it also decreases the present value of the product on the primary market, for the same reason, i.e., consumers on the margin drop out of the primary market because they expect that they won’t be able to re-sell it.

    This might be irrelevant, though, in that, engraving does add some positive value, and yet, Apple charges zero price, so, the puzzle remains as it was in your initial formulation.

  38. Eli Post author

    Harry, the gains from more market power (less competing with oneself) outweigh the losses in present value to the consumer. Check out the articles I cited above.

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  40. branden

    ok…. listen up economists, though i’m just an engineer lol. First of all, YOU ARE ALL CORRECT!!!! Engravings are free because Apple only benefits from it. There are absolutely no negative effects to Apple. 1)The device is sold and cannot be returned, and they convinced you that’s the way you wanted it! 2)The item now has an emotional attachment, effectively causing an emotional attachment with Apple itself and motivating the purchase of other Apple products. 3)Customers are appreciative of the “luxury” service of custom engraving. 4)The secondary market is under-stocked because these engraved items are not being resold, due to the emotional attachment previously mentioned. so there it is, 4 wins for apple while increasing customer satisfaction. DERRRRRR……..

  41. Roman

    “If there were some other explanation that seemed plausible for the practice of free engraving…. but since I can’t think of one, I’m pretty confident that this is what is in fact going on.”

    A pretty foolish inference. I can’t think of anything else so I must be right!

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