Bartering has been declared dead in the U.S. more than once since its heyday in the 17th and 18th centuries, when colonists routinely paid off debts with goods such as deerskin, beaver pelts and tobacco.
We contend, however, that the practice is alive and well and serving an important function in today’s economy.
As the global economy continues to limp along and credit markets remain tight, a growing number of individuals and businesses are resorting to barter as a way to secure goods and services, move excess inventory and attract new customers without laying out precious cash. The annual value of barter trade by North American companies expanded to $12 billion in 2008 from $7.78 billion in 2001, according to the International Reciprocal Trade Association, a nonprofit group that promotes barter as a form of commerce.
The popularity of cashless deals tends be countercyclical to overall economic conditions, fading when times are good and growing when things are bad. But with some economists saying that the recent recession was so deep and long-lasting that it is likely to spur an extended period of frugality, we believe bartering activities in the U.S. will persist and flourish well after economic growth resumes.
For Further Reading
See these related articles from MIT Sloan Management Review.
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For a sense of how barter occurs in the U.S., here is a look at four types of common arrangements and when they most often occur:
Consumer-to-consumer, or C2C, bartering involves individuals trading with one another. It surged in popularity during the recent recession as people tried to reduce debt and save money.
The Internet has greatly expanded the scope of these types of arrangements, which initially flourished as casual swaps between friends and acquaintances. There are now C2C barter Web sites for everything imaginable, ranging from the most mundane personal minutiae to big-ticket items such as homes. While some of these sites are free to users, others require membership fees and/or charge fees for transactions.
These sites can be categorized into three types: “Generalist” sites like Craigslist tend to appeal to the masses by listing a wide variety of goods and services. “Specialty” sites tend to pursue a market-segmentation approach by narrowing their listing of items and services. Swaptree.com, for example, focuses on product categories, such as DVDs, CDs and videogames. “Niche” sites tend to be more narrowly focused on only one product category, such as homes or books.
Business-to-consumer bartering is often used as a promotional tool, in many cases to sell products and services via word-of-mouth advertising campaigns. BzzAgent Inc., for example, helps generate word-of-mouth communication for clients by recruiting unpaid volunteer “buzz agents” to talk up products and services to friends, acquaintances, and even total strangers in exchange for perks and gifts. The buzz agents are encouraged to spread the word via chat rooms, blogs, tweets and other consumer-driven media as well as through face-to-face contact.
Business-to-consumer bartering can also involve nonprofit organizations trading with consumers. In 2000, Lindenwood University, a private institution located near St. Louis, launched a “Pork-for-Tuition” bartering program whereby the school agreed to accept full-grown hogs as tuition payment from cash-strapped farm families struggling to put their children through school. The hogs were subsequently slaughtered at a nearby processing plant and served in the school cafeteria as bacon, sausage, pork chops and ribs. The Pork-for-Tuition bartering program served as an effective retention tool for students who were at risk of dropping out of school.
When it comes to business-to-business barter, there are two types of deals: retail barter, which involves small and medium-size companies swapping goods and services via trade exchanges; and corporate barter, which involves large companies trading either directly with each other or through corporate barter companies.
In retail barter, trade exchanges match customers with the products or services companies want to swap. They also act as neutral record keepers of deposits and withdrawals of goods and services. Typically, a company that sells its excess goods or services through a trade exchange receives credits that can be spent on the goods or services of any other exchange member. These accumulated trade dollars don’t expire, and the typical amount bartered per member ranges from $200 to $800 per month.
Most trade exchanges charge membership fees ranging from $450 to $800. They also have monthly flat fees ranging from $10 to $30. Additionally, barter brokers act as middlemen by introducing members to each other, thereby receiving commissions ranging from 8% to 15% per barter transaction. The commission is usually split equally between the buyer and seller.
Corporate barter, meanwhile, is used primarily by large corporations. There are at least three types of corporate barter deals.
Direct, or straight, barter involves two companies getting together without relying on the services of a middleman to facilitate a transaction. The parties directly negotiate the specific quantities of goods and services to be exchanged and the time frame in which the transaction will occur. These arrangements tend to be more prevalent during periods of acute shortages, when large corporations barter from stockpiles in order to secure needed materials.
A reverse reciprocity arrangement is, essentially, a twist or extension of direct barter. Like direct barter, reverse reciprocity tends to be prevalent during periods of acute product shortages. Say there is a scarcity of a vital raw material. To ensure adequate supply of the scarce raw material, one company negotiates with another: “I’ll sell to you if you sell to me.” This arrangement could involve antitrust implications if it is perceived as a means of “cornering the market” for that scarce raw material—in other words, having a big enough market share to manipulate the price.
Some corporations seek the assistance of corporate barter companies such as Active International and Icon International Inc. to exchange their unwanted products or services for other desired goods or services—often media time and space. For corporations weighed down by excess inventory, corporate barter is a viable alternative to drastic markdowns and liquidation sales and may allow them to pay for a portion of their future advertising and promotional efforts without putting out cash.
Corporate barter companies typically make money by buying and reselling the merchandise acquired in barter transactions. They often dispose of inventory overseas where clients don’t have established distributors. These customized barter deals tend to be massive, varying from $50,000 to $5 million.
Sometimes U.S. government agencies trade with business entities, as in the case of an innovative barter program known as Stocks-for-Food.
The program, introduced in July 2007, allows farmers to secure government loans by using a portion of their crops as collateral. If the farmer opts to forfeit the crops rather than repay the loan with cash, the Department of Agriculture’s Commodity Credit Corp. takes title to the goods. Instead of selling the forfeited commodities on the open market and depositing the proceeds in the U.S. Treasury, USDA officials exchange them with U.S. food processors for processed, finished food products such as canned vegetables, peanut butter, canned meat and flour.
The processed foods are then distributed via USDA food-assistance programs. Since the program began, USDA donations have exceeded $100 million.
The Internal Revenue Service has clear-cut guidelines regarding barter, which are detailed on its Web site. Essentially, the IRS treats barter income as equivalent to cash income, so executives and consumers should keep careful records of barter deals. Of course, if an item is exchanged for less than its original value, it isn’t subject to tax, due to the absence of a profit.
— Andrew Kaikati is a doctoral candidate in marketing at the University of Minnesota’s Carlson School of Management in Minneapolis. Jack Kaikati is emeritus professor of marketing at Southern Illinois University at Edwardsville. They can be reached at firstname.lastname@example.org.