Fairly often when trying to make a trade someone will suggest that we make the trade 50% barter and 50% cash. In this article we’re going to explore why this comes up, if it’s a good idea, and how to respond.
The most common reason that a 50/50 trade is suggested is that the vendor you are talking to says that they need to cover their cash costs. When working through a barter exchange I think this is a totally bogus excuse because everybody (including you) needs to cover their cash costs. That’s why you have cash customers. When I am bartering through an exchange I eat my cash costs when I earn credits and I expect my bartering partners to eat their cash costs when I spend my credits. Fair is fair. Often I also run into specific industries that claim that their cash expenses are higher than others, which justifies their asking for cash. This doesn’t hold any water with me either: If their cash costs are really that high then they should not barter that particular product or service. It is simply not equitable for some people to charge cash when they earn barter credits and then spend 100% barter when they make purchases.
The problem with a 50/50 cash barter scenario is that it greatly reduces the value of barter. By 50% to be exact. Let’s say you are earning barter credits and your profit margin is 50%. By the time you pay your commissions on barter let’s say you have a 40% profit margin. So that means that when you purchase on barter you are getting a significant 40% discount. Of course the argument could be made that barter prices are pretty high which would further dwindle that discount rate. Now, if you make a deal on 50% cash, your discount just dropped to 20% or less. Certainly 20% is better than nothing however when you add in the extra work that it is to barter over a cash transaction and the reduced purchasing options, it’s really starting to not look like such a great deal.
Here’s another thought: What if everyone charged 50% cash? All you would be doing is reducing the savings that you get with barter by 50%. Think about it…it’s nice to receive 50% cash for everything you sell, but what if you had to pay 50% for every time you purchase? Not only would it make barter less valuable to you, it would make barter less valuable to everyone and very soon you would start receiving less new business through the barter system.
When you are working through a barter exchange on a fairly small transaction and someone suggests 50% cash, my advice is to play hard ball and say that you can only make the deal at 100% barter. Honestly, I’d rather pay 100% cash to a different vendor that has my best interests in mind. I can usually find a lower price for cash anyway. I also usually let my broker know what happened so they know what’s going on too.
Next time: It’s not all bad. There are some times when a partial cash deal can make sense and is a win/win for all parties. We’ll explore that in the next article.