In an era when the industry is embracing the slogan, “cash conserved is cash earned” on its sleeve, barter is the strategy many think of
Having evolved from a most ancient system, barter today has acquired immense significance among the business community, from the perspective of saving costs and minimizing
unutilized assets.
In an era when the industry is embracing the slogan - “cash conserved is cash earned” on its sleeve, barter is the strategy many think of. Ask Ashok Gupta of Dynasty Resorts. Gupta who engages in bartering
resort rooms with his trade partners and has dealt with many barter companies, says, "We barter for approx Rs.10 lakh in a year wherein we receive goods like linen, gift items, toiletries, furniture, mattresses and even media ads to save costs which are not trivial and to avoid cash outgo."
However, it is not trivial to land a barter deal. Most SMEs find it difficult to initiate the process. To such people help is at hand. A mini industry of intermediaries is thriving in India which helps companies identify and match their barter requirements. Some of them even help the companies to complete the barter transaction either online or offline using time-tested processes.
In India, barter industry has bloomed in niches and corners. Companies such as Net4barter, Oneuptrade, Tradex, BarterBiz, Benefit Barter offer intermediary services to enterprises, each with a differentiated offering. While profitable, their scale is not comparable with the companies in the international market, especially the US where there are about 800 barter exchanges, and approx 400,000 businesses engage in formalized non-cash transactions. Meanwhile India boasts of about ten sizeable barter exchanges.
Competition is hotting up a bit in this sector. International barter companies like Ormita Commerce Network and BBX are making their entry into India. Ormita Commerce Network commenced its operations in April 2010. They are trying to gain ground using their brand name, reputation and international network. It has already acquired close to 500 clients, including some big names, in their three to four months of Indian existence.
With barter becoming a mainstream strategy for companies across the board, this is generally seen as an opportunity by industry insiders. Puneesh Mehra, CEO, Oneuptrade, expects the bartering industry to reach a size of Rs.5000 crore in the next five years.
Barter scene in India
Currently, the barter companies in India charge five to ten percent fee on the transactions and the biggest ones are doing a business of maximum Rs.10-15 crore in terms of annual barter transactions. In the next five years it is estimated that media barter alone will account for Rs.200 crore, retail barter industry is likely to log in a whopping Rs.3,000 crore and corporate barter will account for Rs.500 crore. The biggest barter exchanges are expected to do a business of about Rs.50-100 crore in a year.
Where should you begin with bartering?
Well, as a starter, ask your clients/suppliers if they can barter (partially) a part of their requirements/supplies with you, with cash forming only a part of the deal or zero if possible. However, you should already know to what use you will put the items acquired. For instance, you can trade air conditioners for advertising with your client.
A number of organisations already barter directly with their clients. However, its not always possible to barter directly. In such cases, barter exchanges come handy. Barter exchanges do what is difficult or impossible to do in direct barter. They market your products or services, eliminate the need for one to one barter, get new customers, act as escrow agent and source new suppliers for your business. They even record the value of barter transactions for you online and the really good ones provide you with multiple medium to transact – Online fund transfer, manual transactions, debit card online, fax transactions, phone banking and features like multiple currency dealings.
Rajesh Kukreja, Optima Watches who has dealt with a number of barter exchanges bartering watches for gifts and for advertising says, “Getting the help of a bartering exchange is a good idea for companies to garner extra business.”
However, you need not confine yourself to just one form of barter. You can opt for media Barter wherein you offer your goods for media space for your organization which could be print, online, radio, TV, out-of-home (hoarding, etc) or B2B barter is another option which essentially means bartering with a corporate
client/supplier, exchanging goods or services mutually. You can also barter through a barter exchange. Here you could get a whole lot of services/ goods with more diverse variety, with clients ranging from corporate to retail. See the benefits in the Q&A. You should choose an exchange which lets you meet and negotiate with other barter members. If you are doing retail barter, you are bartering with your multiple retail clients which is probably the model followed by media companies.
Sushant, Group Head, Resonance Media, who has been bartering media space for ACs, tyres, and cosmetics very frequently, expects more diverse products to be available with the new upcoming barter exchanges and says exchanges are better as clients tend to give inflated prices while dealing directly.
So, while barter exchanges are making sure clients get real prices, help save cost along with acquiring new customers, offer interest-free finance with no cash repayments and promote local business; the barter often comes at a cost. You may feel the pinch of the membership fee which some exchanges charge, if you don't utilise the services fully. As some exchanges buy on barter, and sell on cash and vice-versa, you may feel cheated as your product is sold at inflated price which may dilute your brand equity. Additionally, if you are not negotiating enough, you may
end up paying a fee on both selling as well as buying, which will increase your cost.
| BARTER (bar¦ter) (verb)
exchange (goods or services) for other goods or services e.g., I. he often bartered a meal for drawings II. they were able to buy or barter for most of what they needed |
However inspite of all these cons, Barter Exchanges, especially the upcoming ones, with proven track record are giving fair deal to their members as they have transparent policies.
If you are an entrepreneur or SME just out of the brunt of the recession, bartering may be the way out for you to save on cash costs and expanding to new markets. This is one industry, which if you know how to utilize well to your benefit can lead to significant growth and more importantly higher efficiency in your business!
| Barter Industry Internationally Vital stats |
| Unproductive/Unsold assets/Dead capital globally USD 9.3 trillion |
| Barter Trade’s pie of world’s total business 30% |
| Share of Fortune 500 companies in barter 70% |
| Share of media corporations using barter (Acc to AAA) 80% |
| Share of NYSE listed companies doing barter 65% |
| Number of businesses engaging in formalized 400,000 non-cash transactions in US |
| Number of barter exchanges in US ~ 800 |
| Share of business transactions as 30% = USD 6 billion barter in Switzerland |
The tipping point in getting on to barter system is in considering the barter system as equivalent to cash system and giving it the same importance. Only then, you'll be able to leverage its benefits.
Why should a business barter?
As a business, you have several goals for yourself. Bartering helps you achieve them with little more ease as you have the support of a barter eco-system. Business can benefit in the following ways as bartering:
• Reduces existing cash costs and saves cash as you make purchases out of revenue generated from new sales-–not existing cash reserves
• Creates value from under-performing assets/unsold time or capacity. Time-sensitive products, space, tickets or services are unrecoverable if not sold. Receive more value than discounting
• Lets participants buy goods and services at a discount. Use your spare time, excess capacity, depreciating inventory, etc to make purchases
• Offers interest-free finance with no cash repayments. Repay borrowings out of new sales-–not from existing cash income but by giving goods and services
• Promotes local business
At Ormita Commerce Network we facilitate our members to transfer their existing ongoing cash expenses to non-cash basis and offset these expenses incurred on a non-cash basis through incremental (new) sales. Once those expenses are covered, however, by existing cash business, then every additional customer through Ormita is new revenue, with a higher margin of profit.
All this is done by arranging local networking meetings, online trading platform, producing an electronic and printed membership directory, sending email and SMS broadcasts of latest deals and distributing regular newsletters to participants.
What best practices should a barter exchange observe so that the barter industry takes over a good part of Indian business?
Trade can be a valuable tool for any business, however the value of any trade credit is only as good as the company managing it. Be sure to ask questions, do your research and never hand over money until you know that you have a way (and a plan) to spend as well as earn.
1. Ask to see their corporate profile, including directors, business structure, vision and mission
2. Do an Internet search on the company, its management and its owners
3. Ask to see their marketing material / sales literature to inquire about the different aspects of its business
4. Find out about the financial management skills and qualifications of the owners to ensure safeguarding of your assets
5. Assess the integrity of other members
6. Find out if there is anything to buy. Make a list of all the products and services you purchase regularly and make sure that the exchange offers at least some of these on an ongoing basis.
7. Ask if they charge a fee when you buy, sell, or both. Your total fees (buy plus sell) should be less than 10 percent
8. Ask the exchange to explain their credit management policies and accounting procedures for its own financial viability
9. Request a copy of their policy on ‘deficit accounts'. Have from them in writing.
that they do not, and will not, operate a deficit account.
10. Make sure you can sell, but also that your income won’t exceed your ability to purchase
11. Find out how to perform transactions.
Do they offer multi-channel support for the trading?
12. Investigate their accessibility and office hours which should be atleast ten hours owing to varying work hours
13. Find out if you are allowed to sell in part cash to cover your Sales Taxes and non-fixed overheads.
How can the small players be a part of this barter industry as facilitator? Or is it a reserved domain?
client/supplier, exchanging goods or services mutually. You can also barter through a barter exchange. Here you could get a whole lot of services/ goods with more diverse variety, with clients ranging from corporate to retail. See the benefits in the Q&A. You should choose an exchange which lets you meet and negotiate with other barter members. If you are doing retail barter, you are bartering with your multiple retail clients which is probably the model followed by media companies.
Sushant, Group Head, Resonance Media, who has been bartering media space for ACs, tyres, and cosmetics very frequently, expects more diverse products to be available with the new upcoming barter exchanges and says exchanges are better as clients tend to give inflated prices while dealing directly.
So, while barter exchanges are making sure clients get real prices, help save cost along with acquiring new customers, offer interest-free finance with no cash repayments and promote local business; the barter often comes at a cost. You may feel the pinch of the membership fee which some exchanges charge, if you don't utilise the services fully. As some exchanges buy on barter, and sell on cash and vice-versa, you may feel cheated as your product is sold at inflated price which may dilute your brand equity. Additionally, if you are not negotiating enough, you may
end up paying a fee on both selling as well as buying, which will increase your cost.
However inspite of all these cons, Barter Exchanges, especially the upcoming ones, with proven track record are giving fair deal to their members as they have transparent policies.
If you are an entrepreneur or SME just out of the brunt of the recession, bartering may be the way out for you to save on cash costs and expanding to new markets. This is one industry, which if you know how to utilize well to your benefit can lead to significant growth and more importantly higher efficiency in your business!
The tipping point in getting on to barter system is in considering the barter system as equivalent to cash system and giving it the same importance. Only then, you'll be able to leverage its benefits.
Rohit Mahajan
Co-founder of Ormita India, and a veteran investment banker, on the barter industry in India
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