Are there times when it makes sense to do a deal where you exchange your services for others, rather than cash, arms-length transactions? The answer can be “yes” — but my view is you should always make your decisions on valid business grounds.
As an example, see this post from Michael Stone’s weekly eletter, where a contractor was offered advertising/exposure considerations in exchange for a price reduction.
My fear going into the meeting was that knowing how many baseball team owners can be with their players – “frugal” ? coming to agreement on price would be difficult. The meeting went well ? they are very interested in my services ? but I was right: they are going to want a cut-rate price and possibly offer tickets or program advertising instead of cash payment.
I don’t need more advertising or more work. Given a bigger budget right now, I would put the money into my web site or equipment before increasing my advertising. Furthermore, I have to pay the bills. And make a profit. I know you would agree. Have you ever encountered situations like this?
Basically, after presenting my proposals, and discussing their interests, the owner moved right to “pricing” and “cost”. The emphatic gist of his message was: “This is different from your normal project;” “People are happy when they come to the ballpark, they’re in a great mood,” and “This is going to be your showcase,” implying that this project is going to result in a ton of business for me, and that that is going to be a big part of my recompense/reward for the project.
The contractor decided not to take the deal and I agree, (as Stone does) that if you wouldn’t spend the cash on the advertising, why should you buy into the “promotion” here?
Since my business earns virtually all of its revenue from advertising sales, of course, I also see this matter from another perspective. I find there are many situations where contra-trade works well and is mutually beneficial, but in virtually every valid circumstance, we are effectively both selling advertising to the same market and the true hard cost of providing the trade-out is insignificant.
“Wait,” you may wonder. “Are you suggesting you trade out with competitors?” The answer is partially yes, but it only makes sense to do this sort of thing in some circumstances.
For example there is a major national trade show for Canada’s architectural, engineering and construction industry every year in Toronto. Booth rentals go for several thousand dollars. However, the show organizers want to promote their event as much as possible, so they grant us free access to the show in exchange for some advertising in our publications. Neither of us are forgoing actual revenue — because we wouldn’t pay each other cash dollars for the services we provide — nor are we incurring exceptional additional hard costs since we have booth or advertising space available at virtually zero incremental cost. Here a trade-out makes perfect sense.
A second example takes things even further, and is perhaps more relevant to AEC businesses. Many construction trade publications are associated with commercial leads services. We obviously cannot work with the services offered by direct publishing competitors, but the lead services’ own competitors can become our friends and allies in joint venture options. And in fact, we have one of these arrangements now, which will facilitate a new publication, generate thousands of dollars of revenue, and make money for both us and the lead service.
This explanation suggests there is a rational curve in deciding when/how to engage in trade-outs and joint marketing/venture initiatives. It is the answer to this question.
Are you trading “Soft for hard”, “hard for hard”, “hard for soft” or “soft for soft” (defined as actual real time/cost/money required at your or the other party’s side)?
- “Soft for soft” trades are relatively easy — you aren’t stressing your cash or capacity, so the question becomes more “Do I want to be associated with the partner/marketing service” than “How much am I going to sink into the project.”
- “Soft for hard” are deals that are usually good for you — you don’t spend a lot of cash, time or effort, but you reap some tangible reward you would have needed anyways and would rarely be available without cash. My only concern here would be to beware “too good to be true” scams if these opportunities are available.
- “Hard for Hard” — here it is an evaluation of real need/benefit for both sides. Certainly I wouldn’t buy/trade for something I don’t actually need and wouldn’t buy anyways.
- “Hard for Soft” — usually these deals are one-sided (and not on your side!) I would generally pass, unless I had already budgeted and planned to spend the money on the relevant service.
The key, always, in evaluating trade-out and JV deals is the risk and reward. Zero or very low risk/expense for moderate reward makes sense. High risk/expense for the same reward opportunity doesn’t.? In most cases, if you are an architect, engineer or contractor, you will need to take some hard risks and expenses, either in time or real materials and labour costs. This means you should, as Stone suggests, pass on most of these promotional or contra-trade offers.