|
Evaluating the economics
of barter transactions:
Lets take a simple e.g. of a Computer
Mfg (X), which wishes to trade computers in lieu of media
space. For assumption we would take the MRP (sale price)
of computers at Rs 50,000 per unit and the Cost at Rs
25,000 per unit.
Co. X thus agrees to sell computers worth
Rs 5 lacs (10 computers) and take media space worth Rs
5 lacs and would ofcourse be required to pay Net 4 Barter
fees @ 10% (in cheque) on the purchase value at the time
of purchase.
Therefore to put things simply the transaction sheet
for X would compare as following:
|
NORMAL/CASH TRANSACTION |
BARTER TRANSACTION |
Sale of 10 computers :
Assuming normal trade/ customer
discount of 30% on MRP
Sale
– 10 x Rs 35,000 (net of discount) =
Rs 350,000
Less Expenses –
10 x Rs 25,000 =
Rs 250,000
Profit – Rs
100,000 |
Sale of 10 computers at MRP
(no trade margin or customer discounts assumed)
Sale - 10 x Rs 50,000) = Rs 500,000 (Earns
Barter Credits)
Less Expenses – 10 x Rs 25,000 = Rs
250,000
Profit – Rs 250,000
Co. X therefore earns barter credits worth Rs 500,000
(sale value) and purchases media space in lieu of
the value earned.
Purchases
– Ad space in newspapers on barter for Rs 500,000.
Pays 10% fee on Rs 500,000 to Net 4 Barter = Rs 50,000
(in cheque). |
How businesses evaluate the economics of the above transaction:
(The higher purchase rates on barter get covered by the
higher margins earned on barter sales)
Prices on barter are normally quoted
at MRP’s or are normally higher than the rock bottom
rates quoted for cash deals, but there are negotiated
rates on barter deals as well, especially where the difference
between the MRP and normal cash rates is significant (for
e.g. Hotel rooms during a lean period etc).
Therefore while purchasing Co. X would take into account:
- A comparison of the purchase price of the ad space
on barter with the normal / lowest rates for the media
space when purchases normally for cash – assume
a market discount of 15%
- factor in the 10% fee paid to net 4 barter upon purchases
(which also adds to the cost) – 10%
And while selling X would take into account:
- margins earned on barter sales – 50%
Thus it earns a net margin of 50% less 25% (15%
+ 10%) = 25% in the barter deal.
A barter deal needs to be evaluated in the above
manner and the economics would read as follows:
|
What a biz earns (saves) on barter
sales – assume MRP rates |
What a biz pays (extra) on barter
purchases |
Saves trade margins / customer discounts
normally offered – 30%
Earns Co.’s own profit margin – 20% (in
e.g. of co X ,from its margin of 50% X offered a 20%
discount)
Total margin earned – 50% |
Higher price on purchase of media space as compared
to cash rates – 15%
Net 4 Barter fees to be paid upon purchases –
10%
Excess payment / margin lost – 25% |
NET MARGINS
EARNED ON THE BARTER TRANSACTION – 25%.
Thus as long as the margins earned on
sale are higher than the extra cost of purchases on barter,
it makes economic sense to transact on barter. The added
benefit to X to be taken into account is also the fact
that through barter, it has been able to purchase media
space cash free – without straining its cash reserves
and the sale of the 10 computers is absolutely INCREMENTAL!
The other way to understand the above could also be by
working backwards on the calculation, i.e. to convert
the value of whatever X purchases into the cash rates
and then figuring out the profitability:
For Example - The cash rate for the media
would be Rs 500,000 less 15% = 4,25,000. This value of
4.25 Lakhs is the cash, which could be obtained by X in
case it would have encashed (cash rate), the media procured
on barter. After paying the Net 4 Barter fees of 10% on
Rs 500,000, X would be left with Rs 4,25,000 – Rs
50,000 = Rs 3,75,000.
Out of the Rs 3,75,000, X would require to spend Rs 2,50,000
to manufacture the 10 computers and sell on barter at
Rs 500,000. The cash left is Rs 1,25,000 which is the
profit earned, equivalent to 25% of the transaction value
of Rs 500,000.
Also the profit in the cash transaction is Rs 100,000
as compared to Rs 1,25,000 in barter which is in excess
by 5%, i.e. Rs 25,000 on a transaction value of Rs 500,000.
5% can also be arrived at by comparing the difference
between the cash transaction margin and the barter transaction
margin (i.e. 20% earned in cash and 25% net earned on
barter).
|
