"Trading down" is a term that is used to identify a strategy that involves trading or selling an asset in order to acquire an asset that offers fewer features or is available at a lower cost. The process is often used when there is a need to economize, or as part of a long-range strategy that is anticipated to ultimately produce desirable results. Both individuals and businesses engage in the task of trading down when and as the activity is deemed to be in their best interests.
One of the more common reasons that a consumer or a business may engage in trading down is in order to save money and be able to remain within the limitations of a budget. For example, a household may forego the purchase of specific name brand products in favor of similar products that are not considered to be quite as attractive in terms of quality, but cost sufficiently less. The idea is that the lesser product still provides the same basic benefit, although possibly not to the same extent, but does have the attraction of costing less.
A common example of trading down has to do with the purchase of 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 stereo system and GPS capability, concerns about the cost of insurance, fuel, and maintenance may prompt the consumer to select a vehicle with fewer amenities but with the benefit of lower insurance costs and a higher rate of fuel efficiency. In this scenario, the consumer chooses to forego the associated benefits related to the larger and more feature-rich vehicle in order to gain some advantages in terms of economy.
In like manner, a business may choose to relocate from a more prestigious address to an area of town that offers adequate space at a lower price, but lacks the amenities afforded at the former location. Again, the trading down takes place as a matter of economy. Lower leasing or rental costs makes it easier to turn a profit and a business that is barely getting by financially will experience less of a demand on its revenue stream, making it easier to continue operating.
While trading down carries the general perception of taking a step back or undergoing a degree of failure, the process can often be helpful in achieving long-term goals. By using this approach to position the household or the business so that money is saved, the chances of being able to achieve more important goals later in life are enhanced. For example, the household that chooses to drive a more economical vehicle can divert those savings into retirement accounts that help to provide an equitable standard of living later in life.