Business advice


Can we benefit from the subsitution effect?
December 27, 2008, 3:31 am
Filed under: Blogroll, Business Advice | Tags: ,

There has been a lot of substitution going on during the Christmas holidays. I have never seen the discount stores so crowded.

The substitution effect comes into play by consumers when their previous favorite good is now priced so high that continued purchases hurt their budget. Some go along with the increase for awhile and cut back in other areas.

Finally, the Southern California gas guzzlers cut down on their driving and we finally saw the results. Public transportation numbers reached record highs.

So, ok, how does this benefit individuals? Well, there are two issues, if you are running a business or thinking about starting one. Can you introduce a product line that could be thought of as ‘generic’ compared to what customers are used to. Generic drugs are probably one of the biggest expanding product markets internationally. There are more people retiring than there are in the workforce. This translates to millions on Medicare who can’t afford to pay for brand names. The expansion of the $4 dollar drug plan in local pharmacies is every where in Southern California. (For those are unaware, these programs are only viable if your prescriptions have a generic equivalent.) This is an international trend, as generic drugs also sold in Canada.

Nobody has labeled this trend generic, but it amount to the same thing. Television stars are big on their wardrobe for special events. Up popped consultants promising to provide the same thing for other consumers at an ‘everyday price.”

Certain dress designers decided to take their talents to a ready-to-wear market niche. This can’t be labeled generic, but has the same effect. Those who would love designer duds can shop at the discount department stores to get the same label.

Business owners, find a way to incorporate some of these tactics in to your product line. If there isn’t an available addition, then package your services and label it “discounted.”

Give discounts for: early payments, referrals who purchase, payment by a deadline, and those who order more. Customers now are used to hearing: 0% interest for a year, no money down, no interest payments for a year and mail-in rebates. Customers want to shop where they are told they are getting a break.

Look at similar market mixes and see how you can apply these premises to how you run your business. Customers have been cued to these triggers and as long as they are looking to deal with their wants when they can’t afford such goods, there is money to be made when understanding this valuable economic lesson.

Investors also have an opportunity to use this same guideline for stocks they pick. I would not advise anyone on a specific stock pick. But, if I did, I would choose a company selling generic drugs. The next would be a retail clothing store that offers designer labels at every day price. The next on my list would be any form of public transportation. Despite the fact that gas prices have gone down, people are still going to be using their cars less as the hard times continue.

Use this new understanding of what the substitution effect is to increase your bottom line in your own business as well as your investments.

For more of my work: http://www.bellbusinessreport.com

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