One for You and Two for Me
Bartering is a medium in which goods or services are directly exchanged for other goods and/or services without a medium of exchange, such as money. Wikipedia
Depending on your type of business this idea can be a simple and profitable way to get services at a huge discount while preserving the all important member of the royal family – CASH!
Because our economy has been a little off kilter, the business of bartering has dramatically increased. "Historically, when times get tough, you see a 50 percent-plus increase in bartering as a way for people to be able to buy things or get things and do it economically," said C. Britt Beemer, chairman of America's Research Group. CNN
Have you tried a Barter Exchange? What is it?
A Barter Exchange is an organized system of businesses set up to openly barter. The way exchanges work is a product or service is provided trading barter dollars instead of real currency. The member businesses get to provide the service at “cost” while charging “full retail” for the service. Barter Exchanges work very well in heavy labor oriented business where the cost of materials is very low.
The easiest way to show the function of a barter exchange is to provide the example below:
A restaurant needs plumbing services to unclog a blocked drain under the kitchen sink. The plumber charges $175 for the service. Here the plumber receives $175 in barter dollars into his account for services rendered.
The restaurant now must provide $175 of free food to customers to pay for the $175 given to the plumber plus 10% in cash. The 10% is a premium charged by the barter exchange to pay for the operational expenses of the barter exchange itself.
The restaurant’s real price for the $175 plumber service is about $52.50. This is calculated by adding the food costs of providing $175 in retail meals (usually a restaurant has about 20% in food costs) plus the 10% premium paid to the exchange for using the $175 in barter dollars. All in all this totals $52.50 for $175.
The end result to the restaurant is a 70% discount on the plumbing service to unclog the drain.
The more labor intensive a business is and the fewer materials are need to perform a service; the more of a value the exchange can become because there is little cost outlay for materials.
Some of the benefits of a Barter Exchange:
Conserve Cash – because of the use of barter dollars the member businesses only have to initially pay out of pocket 10% (the exchange premium) for services received plus materials to perform services.
Reduce Expenses – in many instances, depending on the type of industry, a business can realize a 60% to 80% discount on services received.
Exposure to new customers – business members tend to look for other businesses that are a part of the same exchange. This can be a legitimate market to acquire new customers.
Some of the pitfalls to be leery of using a Barter Exchange:
Inflation – if the member businesses are not checked or policed there is a tendency for services to artificially inflate because of the nature of barter dollars. Instead of $175 to unclog the sink drain the plumber could charge $275 for the service. If cash is not used then there is a tendency for purchasers not to be as concerned with the price.
Side note, some exchanges subtly encourage members to charge “full price” for their services. This “full price” is almost an open door to inflate prices. Remember, exchanges charge a premium (usually 10%) on all barter dollars used. Higher dollars for services performed equals more premiums charged.
Premium Too High – the exchange’s premium could be too high considering the type of marketing they do for the member’s businesses. Some exchanges have a full marketing team to promote member’s services to new members as well as email marketing, newsletters and a marketing staff. Some exchanges simply have a website listing.
In either instance, the marketing services provided have to justify the cost of the premium.
Quality of Services – the quality of services are only as good as the members of the exchange. Many times businesses that are a part of exchanges are new and in the building stages of their business. The quality of the service may not be up to par.
Taxes – yes you do have to pay taxes on items being bartered according to the tax code. IRS Keeping track of transactions can be tedious and difficult if you are not with a good exchange. Typically, a good exchange will keep track of the bartering transactions for you and prepare end of the year 1099’s accordingly.
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