How used products can unlock new markets: Lessons from Apple's refurbished iphones

 This “circular economy” model has helped Apple use refurbished iPhones to reach customers in markets that tend to be dominated by lower-priced competitors Image: Shutterstock

Some of Apple’s most loyal customers think nothing of upgrading to the latest iPhone every time one comes out. But what about consumers who can’t splurge on a $1,000 iPhone 15 Pro? And what about the electronic waste that would accrue if people threw away functional phones?

Long before there were titanium phones with bionic chips, Marcelo Claure, then head of the telecom firm Brightstar, saw an opportunity. A few years after the iPhone’s launch, he reached out to Steve Jobs to convince him to take a big strategic risk: Build a system for refurbishing and reselling Apple’s own smartphones, and salvage recyclable materials to cut costs for commodities and parts for those that don’t make the cut.

Claure argued that building a secondhand market for iPhones would enable Apple to not only tap a new market—people who can’t afford the latest iPhone model—but also lower its manufacturing costs. Claure, who’s also the former CEO of Sprint and Softbank, reflected on that conversation to an audience at a Harvard Business School event last year.

“I found that story fascinating. We tend to think about very large companies as having a lot of inertia,” says Professor George Serafeim, who co-led the event. “But here, a very large company that everybody respects for innovation and design and its ability to bring real solutions to the needs of consumers found a way to create a circular economy with its products over time. And not only to expand this market as a cost center, but also make it a profit center.”

Serafeim recently authored a case study that explores how Apple created its own replacement market with the start of its trade-in program in 2013, and bested rivals in the secondary market it expanded. While new phone shipments still outstrip used phones, used shipments across the mobile phone industry rose 12 percent in 2022, according to International Data Corp., as new phones shipments dropped by 11 percent. And the market is forecast to grow by 10 percent a year through 2026.

The benefits of a ‘circular economy’

Many executives might have balked at the idea of creating a used alternative that might cannibalize a flagship product. After all, iPhones account for more than half of Apple’s sales.

However, this “circular economy” model has done the opposite by helping Apple use refurbished iPhones to reach customers in markets that tend to be dominated by lower-priced competitors, the case says. With each customer, Apple gains an opportunity to add subscribers to its music, news, and gaming services.

“Refurbished iPhones are increasingly going to lower-GDP per-capita regions that might not be able to afford a $1,200 iPhone, but they would be willing to buy a $600 iPhone,” says Serafeim, the Charles M. Williams Professor of Business Administration. “Then you also have a software-as-a-service, revenue-generating model because of Apple services, where many of those people are becoming subscribers. And as a result, you have another monetization strategy.”

Also read: Sustainable growth and customer engagement in a circular economy

You don’t need Apple’s unique advantages—but they help

To be clear, Apple’s distinctive innovations helped lay the groundwork for its circular economy success. Specifically:

•     A well-known brand that holds value. The Apple name gives its products higher “residual value,” making them easier to resell, Serafeim says.
•     An actively managed operating system. Apple updates the system its devices rely on often, helping the products stay relevant. “That’s really, really critical,” he says. “If Apple didn’t provide software updates for their older phones, then the phones lose value over time.”
•     Durable hardware. An iPhone is hard to break. The company has spent years making iPhone cases tougher, more water resistant, and easier to repair.
•     High-end recyclable components. iPhones are made with expensive “rare earth” metals that can be expensive to acquire the first time around.

Designing for environmental impact

Any circular economy relies on products designed with recycling and reusability in mind. That means that the product can be easily disassembled, and the recycled material must cost less than newly made components, Serafeim says.

“In the case of Apple, they have these robots named Dave and Daisy that disassemble phones,” Serafeim says. “That allows them to decrease the costs.”

Apple also worked closely with partner companies. From one metric ton of iPhone logic boards and flexible electronic and camera modules, Apple’s partners extracted gold and copper equal to raw material mined from more than 2,000 metric tons of rock, the case study notes.

Ideally, the company should be able to trace where the materials came from and how they were processed, so they can be transparent to consumers, who will see the environmental impact of their purchase.

“Customers want recycled materials to go into the product, but they need some kind of answer to, ‘How do I know that is recycled material?’” Serafeim says.

Apple isn’t the only company trying to create more circular economy models. Serafeim points to Nike’s efforts designing new shoes that can be disassembled and recycled easily. IKEA is taking a similar approach to furniture. And batteries for electric vehicles have similar potential because of components such as lithium and rare-earth materials that can be expensive to mine, Serafeim says.

“What footwear companies such as Nike are trying to do, they're trying to design products through ‘first principles’ to be fit for the purpose for disassembly and recycling,” Serafeim says. “That makes a big difference. Because, if you don't do that, then it just becomes so hard. And it means cost. And once you have a high cost to recycle, then you're just not going to do it.”

What it takes to build a circular economy

Serafeim advises companies to think of the circular economy through different models: reuse/resell, recycle, and repair/maintenance. Then leaders can evaluate models based on what makes sense for the product, industry, and business strategy.

“Even if you're a small company, there might be some really significant opportunities either on the revenue-generating side or on the cost-mitigation side or risk-mitigation side that you could explore,” Serafeim says.

To guide their decision-making, leaders might consider asking themselves:

Will this model improve the customer experience?

“What are the basic service or product characteristics that you're providing that might make certain products better? What are the options for a circular model?” Serafeim says.

Are your raw material costs likely to change?

“Just take the example of plastic. If oil prices are really high, virgin plastic is really expensive. But if oil prices are really low, virgin plastic can be very cheap,” Serafeim says. “So, in an environment where oil prices are high, like the one that we have been living in the last few years, recycled materials may make a lot of sense.”

Could generative AI help identify opportunities?

Artificial intelligence tools, like ChatGPT and Google’s Gemini, can serve as a “co-pilot for designing a different solution or identifying opportunities by better understanding and breaking down the needs that your customers might have,” Serafeim says. “In many ways, generative AI can be really transformational because it helps you break down status-quo thinking.”

Which products stand to benefit most?

“You might have some products with higher residual value and some production with lower residual value,” Serafeim says. “You might have some products where use of recycled materials might be more cost competitive, and others that might be less cost competitive.”

In some cases, none of these models will apply. Some products don’t recycle or refurbish well—yet. Those include low-quality textiles, Serafeim notes.

“Especially for low-cost and fast-fashion types of textiles,” Serafeim says. “There's very low residual value to the product. You find enormous amounts of textiles that are basically in landfills because there's no residual value. So, it’s not worth it for reuse and you cannot cover the cost of recycling.”

Transparency is key for circular shifts

Ultimately, companies and policymakers can help expand the circular economy faster by setting disclosure rules and practices, Serafeim says. For example, in China, regulations require manufacturers to take back electric-vehicle batteries.

A uniform set of rules serves customers, companies, and ultimately the planet, Serafeim says. Allowing regulators, companies, and consumers to trace material sources with ease can create trust, an invaluable competitive edge for any firm.

“Transparency creates accountability,” Serafeim says. “And you cannot have accountability without transparency.”

[This article was provided with permission from Harvard Business School Working Knowledge.]