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BARTER: A SMALL BUSINESS

STRATEGIC OPTION IN
A WEAK ECONOMY

Matthew C. Sonfield
Hofstra University

ABSTRACT

This anicle probes the currently growing phenomenon of baner as a small business
straiegic tool. Fust, the concept ofa barter exchangeis explained, and the mechanics of small
business membership in such exchanges are described. Thisis followed by a review of the
liierature, which indicates minimal academic analysis of this phenomenon. The research
methodology of this study, involving a two-stage series ofin-depth telephone interviews with
owners. managers and small business members of barter exchanges, is then described. The
research findi ngs are then presemed and are used to generate a set of specific guidelines for the
small business ownerlmanager considering membershipin a barter exchange. These guidelines
answer the questions: "Will barter be applicable and beneficial for my company?" "flow should
I choose a barter exchange?" "How can l fully benefit from barter exchange membership?"

INTRODUCTION

Humans have always engaged in baner, and the first prehistoric "small businesses"
certairdy existed before the invention of money. Yet the past few years have seen a significant
rise in the use of barter by businesses in dus country and in others. Specifically in response to the
ctuiently weak economy, many businesses (and primarily small businesses) have implemented
the use of barter as a strategic tool.

Information on the gmw th and extent of barter in our economy varies by source, but the
general consensus is that somewhere between 200,000 and 400,000 small business firms have
joined about 400 to 500 baner exchanges throughout the United States. While growth of these
.exchanges averaged about 8 percent per year in the 1980's, it has increased to about 12 percent
per year in 1990-1991. lite total retail value of these barter uansacuons in 1991 was about $6
billion (Kleiman, 1992; Nordheimer, 1992).

Simply stated, a small business that belongs to a bauer exchange is able to trade its goods
and services with all of the other members of the exchange- typically several hundred businesses.
'Ibe exchange acts as a clearinghouse and "bank" of baner debits and credits, and thus obviates
the need for one-to-one barter. For example, Member A can baner goods to Member B and then
obtain services from Member C at some fwure date, without any obligation to take goods from
Member B.

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The barter exchange typically charges an entry fee to new members, as well as an annual

membership fee. Also, the exchange collects a commission (typically 5 percent to 10percent) on
each transaction, paid by the buyer and/or the seller.

In return for these various charges, the barter exchange does more than simply act as a
clearinghouse. It will work to develop a broad mix of members with a minimal duplication of
specific types of businesses. Directories of members are regularly published, as are newsleuers
and other publicity maiTings to keep members informed of available goods and services and to
encourage them to barter. Exchanges also monitor members'rices and other practices to assure
fair and ethical conduct. Many businesses belong to more than one exchange, and most members

use their trade credits to buy not only goods and services for their businesses, but also for their

persorud and families'se.

Barter sales are conducted at full retail prices. For tax purposes, a barter sale is a taxable
sale. Sales tax must be collected if appropriate and the sale must be reported with all other sales.

TIte primary benefit of barter exchange membership to the member firm is the potential to
increase sales volume. This has the direct effect of greater inventory turnover. The other major
benefit is the ability to obtain goods and services for the business and the owner without paying
cash, and this reduces the pressure on cash fiow. For the typical business with both fixed and

variable costs, baner sales reduce fixed costs per unit and can be considered validly profitable to
the firm. Barter exchanges also contend that barter sales lead to greater awareness of the business,
and thus in turn lead to more cash sales. As the currently weak economy has had a negative impact

upon many small businesses'ales volumes and cash flows, these benefits oflmrter have increased
in their attractiveness, and more small businesses have joined baner exchanges.

REVKW OF THE LITERATURE

Many articles have been written about this phenomenon in the past few years, primarily in
practitioner-oriented business magazines and in the business sections of newspapers (Applegate,
1990;Cohn 8c Kaufman, 1991;Healey, 1991;Nash, 1991;Selz, 1990;Stevens, 1992; Sympson,
1992; Williams, 1992). These articles are largely similar in content and provide a summary
overview of the recent growth ofbarterexchanges and membership and the mechanics of how they
work. Usually a few highly satisfied businessperson members are proBed. However, a search
of the literature shows no academic business journal coverage of this topic, and no scholarly
empirical research having been conducted.

RESEARCH OBJECTIVE

In response to this lack of empirical research and academic-level analysis of barter
exchange membership, a research study was conducted. The objective was to develop a listing
of specific guidelines for small business owners contemplating membership in barter exchanges
(or for those who simply wish to know more about such exchanges). Furthermore, these
guidelines would be of equal value to consultants who advise small business clients.

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RESEARCH METHODOLOGY

A review of the existing literature, as discussed above, was first conducted. It was
determined that an inMpth, unstructure4 probing of both owners and members of barter
exchanges would best elicit the information needed to achieve the research objective of
developing a set of barter guidelines. Thus, it was concluded that a telephone survey methodology
would be more appropriate than a mail survey.

Five barter exchanges, spread across the United States, were identified, and their owners
and/or managers were interviewed at length by telephone. The objective at this stage was to obtain
ideas about guidelines from reexchange's perspective, and also to obtain exchange membership
lists.

These interviews were then followed by similar telephone interviews with five geographi-
cally distributed barter exchange members, ie. small business owners, chosen randomly from the
various membership lists. Here, too, the objective was to obtain further ideas to help develop
guidelines.

'Ihese first stage interviews led to a semi-structured interview format for the second stage
of the research, which consisted of 15 additional telephone interviews with a random variety of
small business owner members of these barter exchanges. Specifically, 10 questions were asked
(see Table I), giving the respondent ample opportunity to elaborate upon his or her answers.
Interviews lasted from 10 to 20 minutes, and virtually all respondents were very cooperative and
very willing to speak openly and fully. Furthermore, the respondents'omments, opinions, and
attitudes proved to be highly consistent; most of the small business owners interviewed had very
similar thoughts about their barter exchange membership and their recommendations to others
contemplating such membership. Thus, additional interviews seemed unwanunted.

Table I

Telephone Survey Questions (Open-Ended)

l. Is your membership in the barter exchange worthwhile?
2. What are the best aspects of membership?

3. What are the worst aspects?

4. Are the entry fee and annual fees wonh it?

5. Is there a good variety of goods and services available?

6. Do you barter for personal use as well as business use?

7. Do you barter too much?

g. Why did you join the exchange?

9. If the economy improves, will barter seem as wonhwhile?

10. What suggestions can you pmvide for small business owners who are considering
joining a barter exchange?

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RESEARCH FINDINGS

As the interviews progressed, it became apparent that the responses could be used to

generate a valuable set of guidelines for the small business owner. These guidelines can be
structmed for tluee stages of advice to the small business owner. Will barter be applicable and
beneficial for your company How should a barter exchange be chosen? How can you fully
benefit from barter exchange membership? These guidelines are summarized in Table 2.

Table 2

Guidelines for Barter Exchange Membership

Will Barter be Applicable and Beneficial for Your Firm?

~ Unsold service time or products must be available.
~ Gmss margin percentage should be sufficiently high.
~ Firm's products or services should have a broad market.
~ Membership is more valuable to firms where cash flow is critical and/or where there is

a need for fast invenuuy turnover.

How Should a Barter Exchange be Chosen?

~ Choice may only exist in larger cities.
~ Investigate ea:h exchange fully.
~ Talk to exchanges'anagers and staff, not just salespeople.
~ Talk to a sample of current members.
~ Obtain membership directories to determine size and variety of members.
~ Determine exchanges'ther services (member assistance, networking, etc.).
~ How long has the exchange existed?
~ Does it belong to national exchange organizations?
~ What are the various fees, charges, rules and regulations?

How Can You Fully Benefit from Barter Exchange Membership?

~ Exercise conservatism and control!
~ Start slowly and carefully.
~ Don't let barter sales interfere with regular sales.
~ Only baiter-sell in-stock items.
~ Only barter-sell at full retail prices.
~ Keep barter-sales moderate until your baiter-purchase needs level becomes clear.
~ Control your urge to barter-purchase. more than you truly need.
~ Decide whether to barer-purchase for personal as well as business needs.

Some small businesses can benefit more from barer exchange membership than can others.
A service firm will benelit if there is unsold service time available. Extra service time (ie. owner
or employee hours) that is not being sold for cash can thus be used to create barter or "trade"

credits. For a business selling products rather than services, the criucal issue becomes gross
margin. There must be sufficient spread between the cost of the product and the retail price. The

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greater this spread, the more valuable the trade credits become. Of course, there should be no
limits or constraints on the availability of service time or of products, since it is not beneficial for
barter sales to conflict with or limit cash sales in any way.

Issues of supply and demand should also be considered. If a company's product or service
has very limited or specialized demand (glass eyes or nuclear reactor repair), then exchange
membership will have little value. A company's product or service should be useable by a good
portion of the exchange's members. Ideally, the demand for a company's barter sales should
approximately equal the owner's demand for other exchange members'roducts and services.

'The degree of importance of a company's cash flow and inventory turnover are also major
issues. Barter exchange membership can be more valuable to a company with cash flow problems
than to a company without such problems. Barter credits may allow a cash-starved firm to obtain
needed supplies that it could not otherwise obtain. Similarly, barter sales add an extra benefit for
the company that needs to turn its inventory more frequenUy (ifits products become dated or stale,
etc.). Conversely, barter sales are less valuable for a firm with a stable, non-aging product and
rising supplier costs. Of course, barter can still be of value to an owner whose business has strong
cash and inventory positions.

Once a small business owner determines that barter exchange membership IkpIUII be of
benefit, the issue becomes Zbjiilexchange to join. In smaller ciues only one exchange may exist,
but in most localities a choice can be made.

The business owner should investigate the alternative exchanges carefully. The goal is to
join an exchange that serves its members well. The business owner should talk to the exchange's
managers and staff, and not simply to the person selling exchange membership. A good exchange
will provide a sampling of current members who can then be spoken to. One should also obtain
current directories to determine the number, variety and geographic location of the members.
There should be a good mix of useful goods and services available through the exchange. A good
exchange should also provide a wide variety of assistance to members, such as help when looking
for speciflc needs. Does the exchange send out frequent newsletters and other mailings, does it
have membership meetings and acuvities, and are exchange staff members available to help
members when they ask?

Other measures of an exchange's quality are its longevity and its membership in such
national organizations as the International Reciprocal Trade Association and the National
Association of Trade Exchanges. Such membership lends to foster higher ethics and greater
services on the part of the exchange. Of course, the business owner should also dctcnnine the
various fees, charges, rules and regulauons of the exchange being considereiL

After a small business owner chooses a barter exchange and joins it, the guidelines center
on gflnZrygIL1IB and ~n. Although the exchange will encourage the member to sell and buy
(that is how it generates an income), a new member should start slowly and carefully. Barter sales
should be kept under conuol so that they do not interfere with cash sales nor become too great a
percentage of total sales. Generally, only in-stock items should be sold and only at full retail
prices-never at discount or at sale prices. A new member's trade balance should be kept moderate
until the member has a clear feeling for his or her barter purchase needs and expected levels.
Exchange rules vary, but most exchanges allow members to limit or refuse baner sales when they
wish to and this option should be used as needecL

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Similarly, barter purchases should be kept under control. Because cash is not being used,
it is easy to get carried away (as it is in Las Vegas using tokens or chips instead of "real" money).
The exchange member should set quanutative and qualitative purchase limits and guidelines.
Should trade credits be used for personal, non-business purchases? Would the owner spend gik?jl
on this product or service? Is it really needed? Perhaps a monthly budget woukl be of value. The
on-going quesuon is: What was the true cost of the trade credits earned by barter sales and is this
barter purchase worth that cost?

CONCLUSIONS

Barter as a small business strategic tool is a growing and significant phenomenon in our
economy, and small business owners should consider this option as part of their total strategy
package. Such a suategy can serve to offset some of the negauve impact of a weak economy-
especiafly the impact on sales volume, inventory turnover, and cash flow. This article has

presented a series of guidelines that can assist the small business owner in determining whether
his or her firm will benefit from barter exchange membership, in choosing an exchange to join,
and in making the most out of exchange membership.

REFERENCES

Applegate, J. (1990,Nov. 5). Businesses are trading up to a barter economy. Washington Post,
p. 10.

Cohn, J. & Kaufman S. (1991,July). Where money is no object. Nation's Business, pp. 24-27.
Healey, N. (1991,Spring). A beginner's guide to corporate bauer. Illinois Business Review, pp.

13-15.
Kleiman, R. (1992, April). The modern-day swap. Small Business Reports, pp. 20-24.
Nash, C. (1991,Sepl). Bartering for bargains. Black Bnrerprise, pp. 37-40.
Nordheimer, J. (1992, March 14). As economy goes bust, barter is booming. New York Times,

Sec. MET, p. l.
Selz, M. (1990,Nov. 26). Small firms, short on cash, turn to barter. Wall Sireei Journal, Sec. A,

p. 21,
Stevens, M. (1992,Jan Jpeb.). Stretch your company's cash. D&B Repans, pp. 62-63.
Sympson, R. (1992,Jan. 20). Paying with cash may be going out of style. Resrawanr Business,

p. 36.
Williams, T. (1992, April 5). Barter helps businesses stay afloat in bad times. New York Times,

Sec. Ll, p. l.

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