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Trading up and down and the Business Cycle

Trading up and down are product strategies and are closely related to the business cycle. It seems that firms trade up during periods they are doing well and then trade down during recession. Why do all business seem to follow the same?

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Interesting question! Please see my response attached, which is also presented below. Good luck with your continued studies and take care.

RESPONSE:

1. Trading up and down are product strategies and are closely related to the business cycle. It seems that firms trade up during periods they are doing well and then trade down during recession. Why do all business seem to follow the same?

This is because successful businesses pay attention to (and do their own) marketing research, which informs business decisions. Product strategies are proven marketing strategies that have worked over time and are, indeed, grounded in years of economic and marketing research. In fact, theories develop out of these research findings, which is a valid and reliable source of information (if the research is done in a scientific way) to make business decisions. For examples, studies that look at consumer buying behavior, like who's trading up in comparison to income and economic trends, have informed theory and product strategies in the marketing literature.

Who's trading up marketing research? In a Harris Interactive poll of 2,300 middle-market American consumers, for example, 96% of the respondents said they regularly buy premium goods in at least one category (i.e., trading up). In fact, there are 47 million households in the United States with incomes of more than $50,000. With an average household size of 2.6 people, that's nearly 122 million Americans with the means and the desire to trade up. Consumers with very high incomes, $150,000 (i.e., doing well) and above can afford to trade up in many categories. Those with lower incomes (i.e., recession) selectively trade up in some categories and trade down in others. Many consumers spend a disproportionate amount of their income in one or two categories of great importance to them, a practice known as rocketing. Thus, these consumer-buying trends are real and, indeed, inform marketing strategy, including the product strategy of trading up and down (http://www.bcg.com/publications/trading_up/whos_trading_up.jsp).

Thus, all effective businesses pay attention to marketing research and the strategies that have worked over time (i.e., reliable, valid, etc.) to inform business decisions (i.e., trading up and down strategies). Therefore, most businesses follow the same; basically they follow what marketing theory and research finds to be valid and reliable trends, which then informs business decisions and strategy formation. In fact, when business decisions are based on consumer buyer and economic trends, they are often proven to be most successful (i.e., KFC, etc.). and, as you mentioned, it is also linked to the life cycle of the product, a theory that is also grounded in marketing research.

However, this is really a common sense notion, which was then tested scientifically (i.e., marketing research). Case in point is "Kernel Sanders", who had limited education (and didn't' have or need a marketing degree), but yet figured out that his sales would increase if he talked to the people to find out what they wanted and what they were willing to pay or could pay for the product (which informed his business decisions of how he could meet the people's needs and still make a profit). And in a time of recession, for example, when there is limited cash flow, it is unlikely that sales persons (at least, not the successful ones who base decisions informed by research) would stock only specialty items or $200, 000.00 cars on their car lots. In fact, there probably would be more economical-based vehicles sitting on the lot (i.e., trade-down). On the other hand, in a well-to-do community (i.e., oil rig town), there would probably be a higher number of higher priced vehicles where people could afford to trade-up. Thus, these are product strategies grounded in both experience and research, and business people are, indeed, smart to make business decisions based on this valuable information, including trading up and trading down marketing strategies.

FINAL COMMENTS I HOPE THIS HELPS AND TAKE CARE.

BEST OF LUCK!

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