It means to sell the customer a better, more expensive item and take the old one as a partial credit or discount.

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Note added at 4 mins (2005-02-22 02:40:55 GMT)
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The old item is the \"trade in\", hence \"trade up\".

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Note added at 7 mins (2005-02-22 02:43:29 GMT)
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It most commonly refers to cars.

What should I know before I trade-in my used car?
The most important thing to know is what your used car is worth. You need to remember that you are, in effect, selling your car. And just like you would do if you were selling your car to someone outside of a dealership, learning the value of your used car is imperative. This way you have a general price and you won\'t accept a sometimes deliberately low offer from a dealer. Make sure you factor in features that may positively affect the price, such as air conditioning, sunroof, cd player/changer, power windows, etc. Also be sure to factor in conditions that may adversely affect the price such as high mileage, dull or chipped paint, rust, chipped or pitted glass, worn or stained upholstery and carpeting, worn suspension, poor alignment, etc. These are things that you may consider addressing before trading in the used car.

From:http://www.automotive.com/Buy_Used/Car_Selling_Tips/car-trad...