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Beyond The Limits Of Cash or Credit

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(Reprinted from BarterNews issue #54, 2000)

Countertrade Creates Symbiotic Relationship Between Sellers And Buyers

By: Todd H. Bol

My definition and concept of countertrade has constantly changed during my 20-year career in the countertrade business. Each definition has always required exceptions.

Generally, we can safely say that a countertrade transaction is the portion of a transaction that is noncash. It is a very common form of transaction.

Understanding this concept, we realize that countertrade comes in a wide variety of forms including, but not limited to:

  • health insurance
  • rebates
  • frequent buyer programs
  • hotel points
  • premiums
  • company car
  • free drinks in first class
  • chocolates on the pillow and free HBO
  • a drawing for a free car
  • you pick up the kids and I will wash the dishes
  • stock options
  • free dessert with dinner
  • paid vacations
  • maternity leave
  • employer-paid life insurance
  • a free car wash with fill
  • a free newspaper with your hotel room
  • gift with purchase

The world surrounds us with countertrade activities every day and in many categories. It is a common, acceptable practice that influences all our lives.

The great irony lies in the fact that we regularly participate in countertrade, yet we insist on being uninvolved in an official or professional capacity because we think it is like trading our products for someone else's used tires.

Once something becomes commonplace-for example, health insurance, paid vacation, frequent flyer miles, free gift with purchase-we no longer think it is unique, special, or worthy of special consideration. We need to remove the mystery surrounding countertrade to recognize that it is commonplace and easy to understand.

However, more important than understanding its definition is understanding why it is prevalent and why its use and scope will continue to increase. A manufacturer or an airline, from a seller's standpoint, wants to entice its customers to use its products, services, or both without price being the only factor determining the purchasing decision.

Thus, a manufacturer offers rebates, drawings, bigger sizes with purchases; and an airline offers competitive frequent flyer programs to secure dominance in a marketplace. These ploys are all attempts to obtain additional sales without reducing the normal cash price.

Cents-off coupons are used effectively to drive down the perceived cost of items. Just like with mail-in rebates and gift certificates, better value is perceived. But in reality, a large percentage of the rebates, cents-off coupons, or gift certificates are never used.

Countertrade ultimately creates a symbiotic relationship between seller and buyer: the buyer and seller attempt to become partners.

The buyer wants the seller to improve the buyer's overall condition through a relationship that progresses beyond a simple lowest-price bid. Conversely, the seller wants to satisfy the buyer's needs with inexpensive solutions.

My current negotiations involving a countertrade program for the agricultural sector of a foreign government will serve as an illustration of this relationship.

The government wants to improve its agricultural sector and the overall nutrition of its country without any additional expenditure. It has clearly stated to the vendors from whom they usually buy commodities that they no longer are going to simply provide cash for commodities.

The simplest and easiest solution would be to sell corn and accept pineapple as payment. This solution may be feasible and may actually occur, but it does not represent any long-range changes for the agricultural sector.

What considerations would help the overall agricultural sector? The considerations, which are fairly consistent regardless of the field or concern, can be expressed as the following:

  • What technologies are needed to improve conditions?
  • What services, education, marketing strategies, and so forth can be obtained to improve conditions?
  • How can exports be stimulated?
  • Does the client possess or have access to inventories, knowledge, technology, products, processes, education, training systems, or processes that would be useful to its customers?
  • Does the client have a special understanding or some financial clout that allows it to positively influence its customers or government sectors?
  • What is the client looking for...to improve profits or integrate overall business efficiencies?
  • What knowledge, contracts, or both does the client have that can be used for the betterment of its customers?
  • What would create a long-term relationship where the customers look beyond simply the cost of buying goods from the client and look to the client to help their business in other ways?

Applying the above questions to an agricultural sector of a given economy might generate the following ideas:

  • Distribute agricultural training programs through CD-ROM, internet, classroom, and individual training for the local farm population to increase profits from and efficiency in farming dairy, beef, hogs, etc.
  • Analyze local feeds for livestock to develop improved feed products and methods for specific animals, and share the information through training, articles, CD-ROM, and the Internet.
  • Advertise used bakery, canning, and food processing/packaging equipment throughout the agricultural sector.
  • Analyze seeds and determine what seeds should be used for a given region.
  • Improve planting techniques and support those techniques by developing training that is then provided to the population.
  • Use internet auction techniques to distribute the agricultural sectors' excess capital equipment, processing equipment, and real estate.
  • Set up and fund (from outside sources) models of internet-based spot buys, futures trading, countertrade, procurement, inventory management, education, analysis, and asset disposition.
  • Establish improved logistics systems to reduce the cost of shipping and handling for agricultural products.
  • Combine related organizations for more efficient and enhanced purchasing power. (These mergers can go beyond country associations to regional consideration, e.g., coffee growers, rice growers, cattlemen's association, and so forth.)
  • Improve strategies for storage, distribution, and handling to reduce pilfering.
  • Improve analysis for growing and raising products for export. For example, how do the Japanese want their bananas, pineapples, and so forth? What do the English or French expect?.
  • Create joint business opportunities (e.g., a sugar processor and a cookie and cake manufacturer build a factory in a developing country; an association of corn growers in the United States promotes a joint venture in Asia to raise corn in a partnership).

My clients have often heard me say that as long as you can sell your products at an acceptable margin with minimal risk, you should accept payment in whatever form a customer is willing to provide, whether boats, bananas, or coins.

Many experts can help you handle these items as payment mechanisms, and-in many cases-can actually reduce your risk with more favorable contractual considerations.

On several occasions, I had contracts with clients in which we agreed to split the additional profits if they represented a greater margin than the expected return. Clients are usually bewildered by the concept that countertrade can often produce more profit than a monetary transaction.

Although this article has defined countertrade as more than a swapping of products for products, the same consistent challenge persists: How does the seller embrace the buyer's position without strictly competing on a cash basis?

If the seller is able to create a strong countertrade initiative with the buyer, a relationship can be created that is more dynamic and secure than one involving a competitor who delivers only a lower cost of goods.

Fallacy Of Creativity And Risk I once made a presentation to a major New York banking concern regarding a countertrade program to alleviate distressed inventories. After the presentation, the bank management teams commented, "We can see how the benefits would help, but in the banking industry, we associate creativity with risk."

Contrary to their view, during my career developing creative solutions to problems I have found-for the most part-the exact opposite to be true.

When you are the seller and willing to help a buyer solve a problem, the buyer usually reciprocates with more agreeable terms. I call this dynamic "the migraine scale."

The migraine scale is an inverse relationship between buyers and sellers. The closer the seller is to solving a customer's ultimate migraine, the more the customer is willing to accommodate or reduce the typical risks of a transaction, thus reducing overall risk.

In many situations, a client would never remit payment before receiving a shipment of goods, but would gladly participate in a countertrade transaction providing goods up front...months in advance of receiving goods or services in exchange.

Imagine, for example, an instance where a client delivers a solution for its customer and secures the business from a competitor without much negotiation.

The client is a small software provider in competition with a major software company to deliver a new reservation system to a hotel chain. Instead of accepting cash, the small software provider accepts hotel rooms as payment.

By providing hotel room credits, the hotel gains a new corporate client and pays for major software at virtually no additional cost. In return, the hotel chain provides a 1.5-to-1 advantage as long as the hotel rooms are not discounted, plus new, incremental business is achieved.

The small software provider then trades the hotel room credit to a computer hardware company for components needed to run its operation. In doing so, it realizes a substantial profit.

Thus, the software client has obtained the hotel credit, passed it on to the hardware company, created more than normal profit, and acquired the necessary hardware before starting any work on the software development for the hotel chain.

In retrospect, the countertrade transaction caused four positive results. First, it secured a deal for the software client, who bested its competition by making a countertrade accommodation instead of a strict cash arrangement.

Second, the software provider made a greater profit because of the countertrade 1.5-to-1 ratio. Third, the hotel chain obtained a new customer and paid less than expected for its new reservation system. And fourth, the software provider was paid up front with the hotel credit, which it then used to acquire new hardware.

By countertrading creatively, the software provider made greater profits, reduced risk, secured business for a customer, competed successfully with bigger and possibly better competitors, and was awarded the transaction because the hotel chain was able to solve its problem by paying less for the software system.

Think about it. The software provider made more money, and the hotel chain paid less. That outcome certainly seems to involve a contradiction in logic, but well-orchestrated countertrade programs can consistently deliver similar results.

Ability To Understand Outweighs Ability To Accomplish

Most major corporations are so departmentalized and define jobs so narrowly that few employees can function flexibly and creatively, and few are accustomed to looking for solutions beyond the obvious.

Employees are unable to move throughout the corporation because divisions have no incentive or reason to support other divisions.

Most of us are aware that conducting a creative transaction with a client is often easier than transacting business with a separate division or even a separate department within a corporation. When a corporation shuffles around an excellent opportunity rather than approaching it creatively, the competition will inevitably obtain the business.

During my career, I have worked with a wide spectrum of multinational corporations that have stifled creativity by losing the entrepreneurial outlook that spawns innovative processes and solutions.

Obviously, the aforementioned software provider is neither in the hotel business nor in the business of selling hotel rooms like a travel agency. The provider, however, seized the opportunity, used the opportunity to its advantage, and profited substantially from its willingness to view business with an open mind.

Countertrade transactions give a corporation the best opportunity to make full use of its greatest resources: its staff, marketing skills, processing skills, available technology, and purchasing power.

Each corporation can be viewed as an engine with many parts. An analysis of this engine and its moving parts (processes, contacts, purchasing power, technology, financial resources, and most of all, staff creativity) reveals what can be utilized to help conduct a countertrade.

Satisfying the countertrade interests of the customer may be as simple as passing along an old technology or used equipment, or preferential rates for hotels, shipping, or insurance.

A well-planned countertrade solution produces more customers. These customers will become more reliant on your organization, will typically increase profits, and will obtain uniquely creative marketing advantages that the competition will find difficult to reproduce.

In an increasingly competitive global economy, strength will lie with companies that offer creative solutions to customer problems. Countertrade is a way to compete beyond cash; it is a partnership between the buyer and the seller.