Reproduced with permission from Exchange Trainers.com:
I wrote an article the other day on Barter News Weekly about a new phenomenon in Reno, Nevada. Western Trade Alliance, a trade exchange operating in Reno and Las Vegas, has opened and is operating a discount voucher website like Groupon or Living Social. They call it Bumbledeal.
I interviewed the owner of WTA and he gave me some specific insight in to how the program works. Businesses that qualify can sign up for the deal program free of charge, and at the same time they open an account with the barter exchange. The business then agrees to offer a number of vouchers for their services or goods. For each voucher sold the business is compensated with a 90%ish payment, but in trade dollars, not cash. That leaves the exchange free to sell the vouchers for whatever price they want, in this case between 60% and 90% off.
For example, at the time of this writing, they have a hypnotherapy session as their main deal. It shows a retail value of $150. They are selling it for 69% off. That means the barter company will collect $47 for every voucher sold, in cash, and pay the business $135 in barter. After merchant fees the barter company will keep about $45. The business pays no fees on the trade dollars received or spent.
In my article, I tried to be nice and report only the facts about the development and refrained from any commentary, except a quickie in the comments section.
I’ve been thinking about the program for a couple of days now, and I feel ready to give you, those who have a stake in the success of your own barter exchange, a clear commentary on the program. I have consulted with a company in the deal space, Deal Pickle, for the last three years, so I have some insight in to these programs.
From the perspective of a deal site owner, this arrangement actually helps make the business owner happier to offer discount vouchers. Since they are getting compensated 90% of the face value of the voucher, they don’t feel like they are being taken advantage of, which is one of the chief complaints inside the deal industry. No business wants to offer their services at 60-90% off for very long. But, if you are presenting this as a 10% discount, they are compensated 90% of the face value, and they have to take it in trade, it should be an easy close…assuming you have something they want. Just like any other barter exchange sale, you have to be able to get them something they want. New customers in the business, in this scenario, aren’t going to be enough. If you don’t have something they want to trade for, it still may be a little more difficult than you’d like.
From the perspective of the barter exchange owner, it seems like a win all around. You get new businesses to participate. If they are a restaurant or some other desirable category of business, you can buy voucher inventory at 90% of face value if you want and resell it to the participating businesses in your barter exchange. If you have cash sales, you can collect the cash and use it for a number of things: offsetting your lost cash fees (since you don’t charge them transaction fees you are losing whatever your normal transaction fees are – 8-15%), buying inventory like electronics that is hard to get in other ways, compensating your team, working on expansion, whatever.
All seems rosy, right? Roses and unicorns? Well…there are some downsides.
First, one of the downsides of owning a deal site is that you have to be aggressive about advertising the site and good at email and social marketing. If you aren’t, you’ll never have enough of an audience to actually sell enough vouchers to make the program work. I’m sure you have seen Groupon ripoffs appear and disappear in your area in the last six years. They come and go because they don’t build up enough of an audience to make money.
Right now, on Bumbledeal, they haven’t sold one of their main deals. Not one. They have a mexican restaurant as one of the side deals. They sold three of those vouchers. Restaurants 60% off should be flying off the shelves! But they aren’t. Because Bumbledeal doesn’t have an audience.
Groupon’s ascension to the top of the deal world wasn’t an accident. Groupon waged one of the most aggressive and expensive customer acquisition programs in history. Pre-IPO, Groupon spent over $26 per customer acquired, blowing the previous record holder, AOL, out of the water. Remember AOL? They used to send CDs and DVDs to people in the mail. That’s an expensive customer acquisition tool. Groupon spent more. It was they only way they could get enough attention to their deals to make money.
I’ve seen some deal companies make it work by partnering with local charities, schools for fund raising, or using other guerilla or affiliate type marketing. If you choose this road, you have to give up a portion of every voucher sold to the referring party, and that means less money for your bottom line.
As a barter exchange owner, you may have enough members that sell media or advertising that you can use your trade to buy advertising for the deal site. If that is the case, and you use earned dollars, not credit lines, to do it, then you a better position to have your deal site succeed. You spend the trade, you get the customer, and you get the cash at the end.
That brings us to the next problem: packing the pipeline. Unlike barter exchanges, a deal website can’t go a week or two without anything new and expect to remain relevant to customers. They want new, shiny, and deeply discounted. And that means at least one new deal on the site per week. So, you’ll need to manage a new sales team of at least one person, whose full time job it is to find new voucher offers for the site. If you are wiz at whipping up a sales team, you’re already 90% of the way to filling up your deal site pipeline.
Pipelines aside, there is another problem. How will your members perceive your willingness to part with one trade dollar in exchange for between .10 and .40 cents?
Lets say you have T$150 trade dollars in your operations account, and you sell a hypnotherapy voucher for $47 dollars, like Bumbledeal is doing right now. You give the T$150 to the hypnotherapist, and receive cash $47. Your new member then has the perception that your trade dollar is only worth .31 cents. After all, they just sold you .31 cents of value for one trade dollar. You’ve just set a new perceived value for your trade dollar that is much lower than a one dollar to one trade dollar standard that most exchanges strive for.
The good news, at this point, is the currency value problem is only a problem of perception. The customer perceives the value to be less, but as they go out and spend the money in your trade exchange with your members, we assume they’ll find they can spend it on a one dollar to one trade dollar standard, and not less. We assume they will be pleasantly surprised they can use their barter dollars like cash.
And now you have $45 dollars or so (after merchant fees) cash, to do with what you will. With Christmas shows or other needs, you can go out and buy goods that are more scarce in a trade exchange, like electronics. Never mind that your buying power has decreased by 69%… (You just paid T$150 to get $47 of something else. Might not be a good trade. It might, though, depending on what you are buying and how much and if you can negotiate a discount on the purchase side, too.)
Alas, all of this points to the scariest problem for a barter exchange owner wanting to run a deal site: currency devaluation. If you care about the value of your currency and want your exchange to maintain it’s health and value long term, you’ll be very cautious if you go down the deal path.
To make it easy, if you do a deal site and fund the sales through trade dollars your company has rightfully earned, from sign up fees or monthly or trade transaction fees, then you will never have to worry about devaluing the trade currency.
The only problem lies in the temptation to open an operations account or an inventory account and use that credit line to fund large cash conversion plays through your deal website.
For example, your exchange signs up a restaurant to sell vouchers. The restaurant offers a $20 voucher and you sell them for $8 on your deal site. Let’s say you sell 1000 vouchers. You just received $8000, cash! Good news right? Well, you now have to pay the restaurant T$18000. You just exchanged $18000 trade for $8000 cash.
If your trade currency sucks and your members are already disgruntled, I guess this isn’t a bad deal for you, but from my perspective, it’s akin to stealing if that $18000 has to come from a company credit line. If you have T$18000 sitting in an account and can make that trade without going in to debt to do it, happy days, do the deal. If you have to finance it through a company credit line, it is going to tank your currency’s value by T$18000.
I know many exchange owners wouldn’t worry about this. They’re also pirates. They don’t care about the long term value of their currency.
By financing your T$18000 deal with a credit line, you effectively raise the quantity of trade dollars in circulation by the same amount. The quantity goods and services available within the exchange has not changed, but the quantity of money attempting to purchase those goods and services has changed, and not in the direction that makes the trade dollars more valuable. More money chasing the same goods means prices start to go up and the parity you’d like to have with the dollar disappears. Soon Jeeps worth $2000 on the open cash market start selling for T$20000 trade. When that happens, you will know that your currency has very little value. Or rather your trade dollar is worth about .10 cents to the dollar.
Do these kinds of deals long enough and you might be rich, but your members will probably want to form a class action lawsuit against you for defrauding them. This kind of program can only be financed safely through trade dollars earned by the exchange, not through deficit spending or credit lines.
I’m not an advocate of operational credit lines or barter companies spending trade dollars they don’t have. It’s the best way for them to fail long term, or at a minimum devalue their currency until it is useless. But if a barter exchange could fund the whole deal operation, as we have outlined here, with earned trade dollars, it might be a good way to boost business and get new members.