Well you normally replace them when they do not work for you anymore, and in this case it is kinda legit :P, but since there are many applications other then phones then it really depends on the application.
In an ideal world your battery should have 100% capacity until set cycles where it will suddenly drop hard and after few cycles it will just die, but this unfortunately will not be the case, also other lithium battery's have a longer life, like LiFe but i don't know if phone makers will ever use them....

But extending the life of a battery like for the N900 can be done in various ways:
Charge to 4.10V - 4.15V, you will loose a few % capacity but according to study's this will extend life.
A bigger battery will be charged less and will result in less cycles being used, here im thing about XL/Dual battery's, if by the end of the day you still have >=25% left vs. <=5% for a single battery this will also extend life + give more runtime