How to judge when to retire old towels

I'm coming up on another milestone. I have noticed that some of the first batch of towels I bought at the very beginning are getting just a tiny bit frayed along the hems. Obviously I have retired towels with stains, but if I can see some wear along the hems does that mean the towels need to be replaced? They're still fluffy and there doesn't seem to be any other areas of wear.

If they have fluff, they should still be fine. Retire if they have holes, but fraying you can life with if they are still fluffy. (The fraying is caused usually by bleach that isn't fabric safe, but I haven't seen fabric safe bleach south of the border.)

When mine start to get "bite marks" or small strings hanging from the sides I replace them. I then use them for myself or they are turned into rags.

Milestone says it well. Like the toilet paper rolls under 50%, either make cleaning rags of them or otherwise use them yourself. Guests will notice sub par towels, and form overall opinions. Their remaining fluff is your reward for all your hard work.
And regarding retired due to stains, see my M30 post. Granted, I am young in an innkeeper sort of way, but it has never failed me. Still waiting for my first bride rolling around in rose petals, though. :-(

I try to trim those little frays so they are not so obvious. I get that alot on washcloths. Drives me nutz! But, then again, so does sitting there trimming frays on a stack of washcloths...

Personally if they still look fine and are fluffy I'd keep using them. If they're starting to look tatty they'd have to go.
We buy top quality towels and when they need changing we give them to a local charity shop. I have it on good authority that the people that usually buy them are B&B owners.

Like you, we toss stained towels. (Rag pile) When I start to see frayed edges I think that that's ok for 'home' but not when I'm paying $x to stay somewhere.
We recycle all the old, frayed edge but still very serviceable towels to the local halfway house. Another option is any kind of shelter, human or animal. Then the pain of buying all new stuff is lessened by the thought that someone else is getting the rest of the use out of the items.

Highlands John said:

Personally if they still look fine and are fluffy I'd keep using them. If they're starting to look tatty they'd have to go.
We buy top quality towels and when they need changing we give them to a local charity shop. I have it on good authority that the people that usually buy them are B&B owners.

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from the charity shop? good grief!

Thanks everybody. I just didn't want to be premature, the old but quite serviceable towels are going to get a new home