Man climbing a rope
“Trading down” is a term used to identify a strategy that involves trading or selling an asset to acquire an asset that offers fewer resources or is available at a lower cost. The process is often used when there is a need to save money or as part of a long-term strategy that should produce the desired results. Both individuals and companies engage in the task of reducing the price when and how the activity is deemed to be in their best interest.
One of the most common reasons why a consumer or a business may engage in downward negotiations is to save money and be able to stay within the confines of a budget. For example, a family might forgo buying specific branded products in favor of similar products that are not considered as appealing in terms of quality but cost enough less. The idea is that the smaller product still offers the same basic benefit, although possibly not to the same extent, but has the appeal of costing less.
A common example of trading down has to do with buying a new car. The owner may determine that while the previous vehicle offered a wide range of benefits in terms of extra comfort, a superior sound system and GPS capability, concerns about the cost of insurance, fuel and maintenance may drive the consumer to select a vehicle. with fewer amenities, but with the benefit of lower insurance costs and a higher fuel efficiency rate. In this scenario, the consumer chooses to forgo the benefits associated with the larger, more feature-rich vehicle in order to gain some savings.
Likewise, a business may choose to move from a more prestigious address to an area of the city that offers adequate space at a lower price but lacks the amenities offered at the previous location. Again, trading down is for the sake of economics. Lower leasing costs make it easier to turn a profit, and a company that is barely doing financially will have less demand on its revenue stream, making it easier to continue operating.
While trading down carries the general perception of stepping back or experiencing a degree of failure, the process can often be helpful in achieving long-term goals. By using this approach to position the family or business so that money is saved, the chances of achieving more important goals later in life increase. For example, the family that chooses to drive a more economical vehicle can divert those savings into retirement accounts that help provide an equal standard of living later in life.