Chapter 5

Barter

Tit for tat

The pattern

The term ‘Barter’ describes a business model in which products or services are exchanged between people or organisations for products or services in kind. The exchange relies solely on goods or services, without the involvement of money (VALUE?). While similar to sponsorship, as a business model Barter goes beyond the mere promotion and financial support of third parties, to take on a form of marketing. The external partners are actively engaged in the value creation process. An example is Google, which provides free directory assistance in order to improve its voice recognition technology. Another example is the pharmaceuticals industry, which supplies drugs free of charge to doctors and hospitals that then test them on patients in clinical trials, with which they perform a very important brokerage function for the pharmaceutical companies.

Barter can also serve as a useful tool to boost a brand by introducing more new potential customers to certain products (WHAT?). This strategy is frequently used for baby food. Most new parents are confronted with these products for the first time after a child is born. In such a situation, Barter can be a great way to acquire and retain new customers, as offering baby food to new parents for free familiarises them with the brand.

The origins

The roots of Barter go back to antiquity. In ancient Rome, it was not unusual to foster culture and community with non-financial incentives. Gaius Cilnius Maecenas, a political adviser to Emperor Augustus, is regarded as the founder of this system: he developed the concept of patronage, whereby individuals or institutions were supported without a reciprocal contribution. His gifts were not entirely altruistic, however, as Maecenas used them to further his own political or economic agendas. The Barter pattern developed on the basis of this principle and has become increasingly common in professional circles since the 1960s. While the Barter system was used primarily as a means of backing organisations and sports clubs financially and publicly, in the 21st century it has developed into a full-blown business model. More and more companies now include Barter as a staple element of their value creation logic.

The innovators

Fast-moving consumer goods giant Procter & Gamble (P&G), based in Ohio, is probably one of the most well-known innovators of the Barter business model. This multinational corporation and producer of consumer goods, which include personal care products, cleaning agents and pet foods, works together with entertainment outlets (radio and TV) to promote its brand and products in a form of bartering. P&G has sponsored and produced radio and TV shows (hence their designation as ‘soap operas’ on account of the company’s involvement with soap manufacture), which enabled P&G to gain exposure and marketing benefits, while the broadcasters obtained entertainment material with little or no production costs. By producing successful radio and TV programmes in return for advertising slots, P&G was able to reach a large audience cost-effectively, and thus increase the popularity of its mainstream products and its earnings. P&G today remains involved in this form of collaboration and marketing by way of its Procter & Gamble Entertainment division (PGE). P&G also relies heavily on the Barter business model in its marketing for Pampers. People tend to pay little attention to nappies before they become parents, but by offering Pampers products free of charge in maternity wards, P&G vastly increases its chances of gaining new parents as customers.

Lufthansa was also open to Barter trading. Based in Germany, the Lufthansa Group is one of the world’s largest airlines, with more than 140,000 guests in 2018. In the 1990s, the company owned an expensive retail space in New York (2,000 square feet) that was unused. As the lease had some years on it and mounting costs could not be fully recouped by subletting the space, Lufthansa’s answer was to barter – swapping vacant real estate for airtime and paraffin. This allowed Lufthansa to work around the potentially huge losses they would have suffered if they had simply sublet the space.

Based in Denver, Colorado, Magnolia Hotels manages and develops a number of boutique hotels in Dallas, Houston, Denver and Omaha. The company uses the Barter concept in many of its business functions, offering room nights and meeting spaces in exchange for goods such as flat screen TVs, laptops and gifts from other companies. In addition, services such as advertising or building work are accepted in exchange for agreed use of the hotel facilities. Magnolia generally offers these options in the off-peak season, so that they do not affect its regular income from hotel guests. Rather than paying for goods and services, in this way Magnolia cuts its overheads for services such as construction work, room renovations and the acquisition of products such as televisions and laptop computers. Such a practice of trading resources can also be beneficial between hotels in different locations – reducing overheads and increasing profit margins.

The Internet is now awash with Barter formulas. One exceptionally inventive implementation of the concept is ‘Pay with a Tweet’, harnessing the network effects of social media platforms to market goods and services. Businesses register the products they want advertised through Twitter on the ‘Pay with a Tweet’ website. Twitter users then receive a free sample of the product when they Tweet information about the company and its products to their followers. ‘Pay with a Tweet’ has the potential support of some 330 million monthly active Twitter users and, as such, is a highly efficient system to exploit the Barter concept and market products successfully online.

Barter: ‘Pay with a Tweet’

When and how to apply Barter

This pattern is full of potential for businesses with complementary partners, which can include not only suppliers or customers but also competitors, and they do not have to be doing business with one other already. It is also recommended to think totally outside the box and approach highly dissimilar partners – for example, suggesting combining a subscription to Blacksocks with Lufthansa Miles & More, or with a subscription to a newspaper.