To understand how barter works and what is the economics of this business, let us take a simple example, lets say a deal between a home appliance manufacturer (product: mixer grinder) and a media company.
ABC & Co, the manufacturers of mixer grinders agrees to sell mixer grinders (200 nos @ 2500/- apiece) worth Rs 5 lacs and take media space worth Rs 5 lacs. The transaction fee that he has to pay Tradex is 10% when he buys back for this value.
To simplify this transaction, lets compare the deal, both ways, a general one and a barter one, as below:
GENERAL TRANSACTION
BARTER TRANSACTION
Sale of 200 mixer grinders :
Assuming channel margin/customer discount of 30% on MRP
Sale of 200 mixer grinders at MRP
(without any trade margin or customer discounts)
Sale :
200 x Rs 1750/- (after discount)
= Rs 350000/-
Sale :
(200 x Rs 2500/-) = Rs 500000/-
(Banks value in form of Barter Credits)
Less Cost + expenses –
200 x Rs 1250/- = Rs 250000/-
Less Expenses - 200 x Rs 1250/-
= Rs 250000/-
Profit
Rs 100000/-
Profit
Rs 250000/-
Purchase by ABC & Co. –
Say advertisement space in newspapers on barter worth Rs 500000/-.
10% fee on Rs 500000/- to Tradex
= Rs 50,000/-
What we see in the above transaction, are:
1. Margins while selling compensates for the discount loss while buying.
Barter rates are generally at MRPs/Card rates are always higher than the rates quoted for cash deals, but there are negotiated rates on barter deals, especially where the difference between the MRP/card rate and cash rates is significant (e.g. rates of outdoors/satellite channels).
ABC & Co would look at:
A comparison of the purchase price of the advertisement space on barter with the consumption based lowest rates for the advertisement space in cash – assume a trade discount of 15%.
Plus the 10% fee paid to Tradex on the purchase.
And while selling , ABC & Co. would take into account:
margins earned on barter sales – 50%
NET MARGINS EARNED ON THE BARTER TRANSACTION – 25%, i.e. (50% margin profit)
less (the trade margin/institutional discount of 15% plus fee @ 10% to Tradex)
