This week, Pete talks to Dom about a very different night out, before digging into the topic of Trade Exchanges, and the concept of the Mirror Economy.
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Dead Bodies, Wedding Cakes and The Mirror Economy
Pete Williams: Hey mate, how are you?
Dom Goucher: I’m good.
Pete: Good to hear. Is it podcast time?
Dom: Can be.
Pete: Cool. It’s Thursday. I know we’re a little premature, but that’s how we podcast.
Dom: Definitely by the seat of your pants. Definitely.
Pete: What are we going to talk about today?
Dom: Do you know what? The other week when we talked, you mentioned…
Pete: I mentioned silence?
Dom: Yes, my brain just went dead. It’s been on my mind all week. And just, there you go, like a performance…
Dom: Performance anxiety, yeah. I’m getting it so bad I can’t even say it.
Pete: Well, while you think about it, let me tell you about my 24 hours. It’s been interesting.
Dom: Go for it.
Pete: Last night, I went to one of the most fascinating presentations I’ve ever seen in my life. And I can say, hand on heart, that I have been a seminar junkie and a workshop junkie. But this was something that I’ve never been to before in my life. It was actually put on by the Melbourne Homicide Squad, the police department. This is through Dave Jenyns, who we’ve mentioned on the podcast a few times, a good buddy of mine.
Dom: Who now I really don’t want to meet…
Pete: Yes. Basically, he went to this thing last year and was raving about it. My fiancée, again, which is very strange, has a fascination with crime. She just loves all the crime shows, not necessarily the crime shows like Law & Order, but the crime scene investigation shows like the shows that actually talk about real-world crime and break it down. And this time last year, we headed up to the snow for a couple of days with Dave Jenyns, his girlfriend and a few other people. It was about six to seven-hour car ride to where we had to go. It was dark at night and we started talking about random stuff, talking about crime and killing.
Dave shared this story about this night to Fleur to her fascination, and we’re going down these backstreets with no lights. Anyway, he was telling about this thing he went to thrown by the homicide association, or the homicide unit or whatever it might be, as a fundraiser. They do it once a year. It is a closed-door kind of session and they get people from the Homicide Squad up to actually talk about different cases. They talk about the start of the case, all the way through to how they found the murderer and put him away to the point where they are showing photos of bodies and showing snippets and video sequence of the interrogations.
It was incredible. I can’t really talk much more about it than that, but it was just the most fascinating three and a half hours of these senior sergeants talking about how they go about solving crimes, showing us the step-by-step process, the interrogation tactics, and showed us the videos, confessions, photos, and evidence. It was really, really cool.
So that was my night last night. And my night tonight, I just got back from wedding cake sampling. So how is that for two extremes? Literally just walked back in the door from sampling wedding cakes from a really cool little bakery, which is actually three doors down from the house, so it was a nice little stroll back.
Dom: Wow, that is a bit of a range, dead bodies to wedding cakes.
Pete: Yes, so it was really cool last night. I was trying to think all day how we could actually tie some of this stuff they spoke about at this homicide night into the podcast and how it could be business-related and educational. It was a fundraiser, so there was that sort of element. And it was pretty cool, the whole interrogation tactics.
He didn’t really go into too much about how they go about the interrogation process per se, but it was very much about building rapport and sitting on the same side of the negotiation table, if you will, with the accused, or the witness, or the person they’re interrogating. It was really interesting to see in real life how an officer actually goes about talking, communicating and getting information out of a potential suspect, or a suspect I guess you’d call it.
Pete: Very, very cool. Very hush-hush, I’d love to tell more about some of this stuff, but it was real interesting. So there you go.
Dom: And despite that incredible distracting story, I remembered what it was I wanted to talk to you about.
Pete: Ooh, ok.
Dom: You’ve mentioned a couple of times, trade exchanges as an interesting way, an alternative way of addressing certain issues in your business. Is that something you could wax lyrical on for a little while?
Pete: Absolutely, not a problem at all. Actually, funnily enough, another thing that happened in the last 36 hours is, I’m having chats with a couple of the daily deals sites here in Australia, the Groupon-type sites about doing some pretty funky stuff with the MCG frames. It’s AFL football season, AFL Finals season at the moment. And the whole MCG carpet stuff that if people don’t know about it, let’s do next week’s episode telling the story of how I sold the MCG, Australia’s version of Yankee Stadium and how I’ve re-sold MCG and all that sort of stuff.
But people who know that story, it’s the AFL Finals right now or about to start this weekend here in Australia. And the MCG frames obviously relate very much to football here in Australia, and talking with the Deal of the Day sites to do a special series of MCG frames, probably the last deals we’ll ever do, to actually sell quite a few through a Deal of the Day kind of offer. For those of you who don’t know the metrics and the numbers of these daily deals sites like Groupon, Scoopon and Spreetz, I don’t know what you’ve got over on the Europe side of things like Groupon.
But basically how they work, they’re designed to give you new business. The whole idea is, as a business owner, whether you’ve got some MCG frames, or you are a florist, a masseuse, or a hair dresser; and it’s very much aligned with the service-based industries. You go on there and, for example, let’s say you are going to offer something at one-half price the normal fee. If a haircut is normally $100, I’m going to do it for $50 and I’m going to sell a metric shit ton of these things through a daily deals site to get new business into your salon.
And hopefully, those people will stick and come back and pay full premium price to get a haircut every three months. And that is basically how the Groupon model works from an end user perspective. I think we all sort of understand that, don’t we? That sort of makes sense?
Dom: Oddly enough, I think some people don’t. I think some people go, ‘Why on earth would I do that? Why would I get involved in basically, as some people would see it, giving away my product or service.” So I think that’s a good summary and a good positioning of why you would do it.
Pete: From the metrics perspective, the money perspective, Groupon or the daily deals site generally takes roughly about 30% of the ticket price in commission. So you don’t actually have to pay to get listed. You don’t pay to be listed on the site of the daily deal, they just take a clip on every sale that’s generated. And then the person who purchases gets a little redeem coupon that they can come to you and redeem and cash in their haircut, or massage, or lawn mowing, whatever it might be.
So they take 30%. The haircut, let’s say, it’s normally $100. You do a sale at $50, so it’s half price. Generally, these deal of a day things are at least 50% off which is the reason the consumer will purchase, because it’s a significant savings and it’s an impulse purchase. And of that $50, the deal of the day site would take $15. That’s 30% of the $50 ticket price. You are left with $35, hopefully covering your costs.
But you’re going to get an influx of new prospects into your business that you’ll hopefully upsell, cross-sell, back-end sell, all that sort of stuff; and go from there. If you go back to the 7 Levers episode we spoke about, this is basically the first two or three parts of the funnel. It gets you your business, gets you your traffic and you want to try to upsell them, cross-sell them, and sell them on numerous occasions. That’s basically the metrics.
And a lot of people say, “Ok, that makes sense. I will: A) give a discount and B) give away 30% to get new business in the door.” For them it’s just a cost of acquisition, the cost of prospect. and it all works fine. So that’s the daily deal side of things. And there is a correlation with trade exchanges and we are going to get to this. But does that make sense? Can you see how people justify as a business owner to: A) reduce their price and B) give away 30% to get new business because that’s the cost of acquisition?
Dom: Absolutely, but it’s very, very important to realize that, if you don’t do anything other than let that person in your door, take the coupon from them and provide them with a one-off service; if you don’t do anything to upsell, cross-sell, look for that repeat business, then it starts to lose its value. But then, if you’re not doing that anyway with people that come in the door, your business has got problems.
Dom: Or will have down the line, as you said about the 7 Levers. That is quite an important thing to point out.
Pete: I couldn’t agree more. I already thought of some ways we’re going to do some creative stuff with the MCG things. If people are interested and want to send us a tweet or an iTunes review or an email, we could happily do a whole segment about the pros and cons of daily deals. I’ve been involved in a few now. We’ve done some though our Finger Food Company that I’m involved with, know a few other people in business who have run them.
So we can definitely have an episode talking about the pros and cons and talking about how to make sure you get the most out of the daily deals site. There’s a whole lot of marketing and business pros and cons, tricks and tactics about implementing a daily deal. We’d happily go into it at some point and share my experience at least. It’s not vast, but there has definitely been some experience in there. Marketing is marketing.
But, let’s move across to trade exchanges now. We’ll come back later on to tie it all back together. Basically, let’s talk trade exchanges and let me explain what a trade exchange is. There’s a number of them around the world. Every country has multiple variations of them. The largest one globally is a company called Bartercard. It’s Australian originated and I actually did some work with them for a while a few years back, just to be fully transparent.
I’ve got no correlation or connection with them anymore, except I’m still a member of their trade exchange, but that is sort of by the by now. What a trade exchange is, let’s go back and use this hairdresser analogy. Let’s say, for example, the hairdresser wants to get some printing done and maybe they want to get $1,000 worth of printing. They want to get some business cards and some stationery done, as an easy example. Now, obviously they can go and spend cash. But they don’t want to do that, they want to go and trade.
They want to go and barter that off. If the hairdresser went to the local printer and said, “Hi, Mr. Printer. I want to get a $1,000 worth of business cards printing. Can I give you a $1,000 worth of haircuts in exchange for that printing?” Now, all the printers I have dealt with are fat, overweight and bald. I don’t know why, that’s just been the case here. They’re going to go, “Look, no thanks, sweetheart. I don’t want a $1,000 worth of haircuts. It’s not going to be valuable for me. I don’t really want that.”
So that actual exchange, that direct barter would never actually work, would it? What a trade exchange does is it sits in the middle, almost like a bank, if you will, and actually allows that transaction to happen. Because what would happen in this scenario, let’s say for example, the hairdresser joins a trade exchange. They might get a line of credit with that trade exchange for 1,000 trade dollars. Not cash, instead they get a 1,000 trade dollars, so to speak, in their account as an overdraft, an advance, whatever you want to call it, or line of credit.
They can then go to that printer who’s also a member of the same trade exchange and say, “I have a 1,000 trade dollars I want to spend with you for $1,000 worth of printing.” And the printer goes, “Not a problem at all.” He goes and does a $1,000 worth of printing for this hairdresser and gets paid 1,000 trade dollars. The hairdresser is now $1,000 in debt to the exchange. It owes $1,000 worth of haircuts to the exchange. So anybody else who’s part of that trade exchange can actually come in and get haircuts.
And that will go off their account. That printer now has 1,000 trade dollars that he can then go and spend on meals, sign writing, mechanics to fix his vehicles if he does deliveries. He might want to pay part of his phone bill in trade if he finds the right phone company who’s takes a bit of trade dollars. And that’s basically how the trade exchange allows people to barter stuff off. Does that first level of understanding make sense so far?
Dom: Yes, good explanations, good starting point.
Pete: Ok, cool. So the next question to ask is what’s the benefit for the printer and the hairdresser to actually do this in a barter economy as opposed to in a traditional cash economy? Because normally, whether you’re paying with Visa card, check or cash, it’s still a cash economy. You’re paying normal dollars. What’s the benefit of doing this for the printer? Let’s say from the printer’s perspective. Obviously, he has the option of saying to the customer or the hairdresser, “Sorry, I don’t do trade. I don’t do barter. Go and find a printer elsewhere.”
And he’s lost $1,000 worth of potential business. And that hairdresser might go off and find a printer somewhere else to use. So from the printer’s perspective, he’s giving up $1,000 worth of business, business he wouldn’t have otherwise had. But what his real cost? To actually do $1,000 worth of retail, RRP-price printing, what is his real costs?
He’s already got staff. He’s already paying the electricity. He’s already got all the overheads covered. Let’s assume he’s got some spare capacity. Because most businesses if you look at it, they’ve all got spare capacity. They can take on additional business right now without having an increase in overheads. They’re only going to have the direct cost of doing that printing, which will be a little bit of ink and the roll paper stock. Everything else has already been covered.
Even the design of the business card, if there is any design; even the setting it up of it all, that’s all been covered in the labor that would otherwise go squandered if they didn’t have that person operating at full capacity. So that $1,000 worth of printing, the raw cost might be, let’s say, $200 in raw ink and paper to supply $1,000 worth of business cards; probably a bit generous there, really, in terms of the raw direct costs. Does that make sense?
Pete: Cool. So from their perspective, they could actually say yes to this hairdresser, get paid a 1,000 trade dollars; so they have a 1,000 trade dollars in their account from a business they wouldn’t have otherwise had, that has only cost them a direct cash of $200. Does that make sense? So, what do they do with that $1,000 now? Let’s say they had a mechanic and they needed to get some work done on their business vehicles.
They could spend $1,000 cash or they find another trade exchange member and get that $1,000 worth of mechanical work done using their trade dollars. So they have supplied printing to the hair dresser, and they get paid $1,000 trade dollars. They go and spend that 1,000 trade dollars with the mechanic. What’s their raw cost, what is their cash cost to actually do that mechanical work now? What is it actually cost for that printer in cash to get a $1,000 worth of mechanical work?
Dom: On your model, $200.
Pete: Exactly right. So they have an 80% discount. Their cash cost is 80% cheaper than it would have been than if they had to spend $1,000 out of their pocket to do that mechanical work. From the hairdresser’s perspective, let’s look at that. They’ve got $1,000 worth of printing that they would have otherwise spent $1,000 worth of cash on. Now, what does it cost them to actually do $1,000 worth of hair cuts if they have spare capacity in their business?
And most hairdressers, if you look at their weekly sheet, they have room for more clients; there is spare space in that hairdressing business. They are already paying the staff; they are already paying the apprentices there terrible, shitty wages they are paying them. There is no real direct cost to do more haircuts really, is it? You are not going to wear the scissors out more; you might have a little bit of hair dye if you are going to do bleaching or color stuff. But that $1,000 worth of haircuts, what do you reckon, Dom – you’re a man with lots of hair, what are the costs?
Dom: You are so asking the wrong guy.
Pete: What do you reckon, $50 in raw stuff to do $1,000 worth of women’s haircuts? Those things are overpriced. I don’t know. Let’s say $50, let’s say $100.
Pete: So to get a $1,000 worth of printing, it only cost $100 bucks cash and some time they would have otherwise wasted in their business. Is that making sense?
Dom: Yep, I’m following along so far.
Pete: So, basically what a trade exchange does for business is first caveat, you must have spare capacity. If you have no spare capacity in your business, i.e. you cannot take on another client without also increasing the overheads, i.e. paying more wages, expanding your premises; you’ve actually got spare capacity to take on additional clients. All that it is costing you is basically the raw, variable cost. So from a printer’s perspective, they are now being able to actually buy stuff in the trade exchange at $0.20 on the dollar, because it only costs them $200 for every thousand dollars of trade they actually earn.
It’s additional business they wouldn’t have otherwise had. Basically, every time they spend a trade dollar, they are effectively getting an 80% discount. From a hairdresser’s perspective, they are getting a 90% discount to do $1,000 worth of haircuts and earn 1,000 trade dollars; it’s only costing them $100 cash. Anytime they spend that thousand dollars on printing, on sign writing, on the cleaners, on whatever it might be, they are effectively getting a 90% discount on the dollar. Is that all making sense?
Dom: Yeah, I’m following along.
Pete: So that is basically the whole idea of a trade exchange. There’s definitely some caveats, and we’ll talk about the caveats and the assumptions to a certain extent that make this work. But from a phone system perspective, in the businesses I’m involved in, for us to go out and do some of the service work on a client’s phone system, if we have an engineer that is only going to be sitting in the office scratching his butt, doing nothing or the opportunity to go out and do $1,000 worth of services we wouldn’t have otherwise been able to do that week, it’s worth taking that thousand dollars on because our direct cost at that point is nothing.
It’s just labor, doing service work. So then we spend that thousand dollars trade on sign writing, on printer paper, on office water, on office Christmas party. We’re basically getting that at a 100% discount. Because that time, at the end of the week, that that technician didn’t work, we’ve paid him his hourly wage whether he works or not; but we can’t get that thousand dollars worth of work back two weeks later because that time has passed. His time has been spent on unproductive stuff.
From the Finger Food perspective, let’s look at Finger Food. We can go and cater a party we wouldn’t have otherwise got. So the whole idea is this is business we wouldn’t have otherwise had because the people are coming to us and wanting to do business with us as at the Finger Food Company is because they have trade dollars to spend at a discount. So they come to us and get $1,000 worth of finger foods done. The raw cost is whatever the raw cost is. It’s business we wouldn’t have otherwise had. We can go spend those trade dollars on cleaning chemicals, on uniforms, on car servicing, on plastic plates and plastic cutlery.
So we’re buying the core stuff you might have had to spend cash on using these trade dollars, and we get to keep that cash in the business. Let’s go back to that original example of that printer. If he didn’t get that thousand dollars worth of trade, he would have had to spend $1,000 cash to get that mechanical work done on his vehicles. But because it only cost him $200 cash to earn the thousand dollars trade, he gets to keep $800 in his back pocket that he would have otherwise spent. So the whole idea of trade exchange is it actually gets to allow you to keep cash in your business that you would have otherwise had to spend. Is that all making sense?
Pete: Cool. That is basically the mathematics of trade exchanges. It can get pretty complex. But basically, what you have to do is work out what is the incremental cost or the direct cost I have supplying an additional unit of my product or service. For most businesses, you’re looking at maybe the additional cost to serve one more person is only between $0.20 or $0.30 if you are a service-based business. If you’re selling products, it’s a different sort of scenario. But for most service-based businesses or things of that nature, there’s huge, huge margins in additional new sales because obviously, you’ve got huge overheads which are already covered by the cash-side of your business, which should hopefully be profitable.
These trade dollars are just cream on top; it’s new business taking up that excess capacity. So, there’s a couple of caveats. For people who have actually tried to dabble in trade exchanges, they do find overpricing. If you called up a mechanic and said you need some work done and you normally pay $1,000 cash, he might charge you, or try and charge you 2,000 trading dollars because he’s an idiot and he doesn’t understand his cost of trade. He doesn’t understand his margins. But you do find people inflate their prices in trade exchanges.
But again, realistically, it’s not ideal. It’s far from ideal. And in most cases, it’s against the rules. If you actually flag them with the trade exchange, they’ll get fined or suffer the risk and various things. But let’s again use this example: if the printer’s cost of trade is $0.20 on the dollar, $200 to earn $1,000; that’s $0.20 on the dollar. Even if the mechanic inflated their price three times, so for $1,000 cash or 3,000 trade dollars, which is completely against the rules and very unethical; but let’s say he did that. What’s the raw cost to the printer to earn $3,000 worth of trade? Let’s see what the math is…
Pete: So he’s still ahead, right? He still better off paying that inflated price. Ideally, you don’t want to do that because the whole idea is to maximize your cost of trade dollar and get that 80% discount in this instance. But even overpricing can still work out in your favor if you know what your cost of trade is. It’s the term they use, what’s your raw cost to earn one trade dollar. So that’s one thing. You have to be careful of overpricing.
That’s probably the biggest thing in terms of that scenario. The other thing, you want to make sure you’re only spending trade dollars to actually offset costs that you would have otherwise incurred. If this printer goes and spends $200 cash to earn 1,000 trade dollars, that he then goes and buys a motorbike or goes on a holiday that’s not tax-deductible, it’s really not the smartest use of his trade dollar. The whole idea is to use those trade dollars to actually offset your raw costs, so that’s an important thing to think of.
There are a few other caveats and things to think about, but for a lot of businesses who have spare capacity, a trade exchange is a really, really good way to actually help you bring in new clients. There are different ways to upsell and cross-sell those clients in different things. And there are also the fees, the fees. Oh no, the fees. How do the fees work? A lot of people start muttering and bitching and moaning about the fees. Because what a trade exchange will do is they will charge you cash on every transaction as a commission. So for example, to be completely transparent, let’s say the trade exchange charges you 30% commission on transactions.
To earn and spend that $1,000, the printer has to spend $300 in commissions to that trade exchange. So they have their $200 cost to deliver their extra printing and they have the $300 cost to the trade exchange for the commission to bring them new business. So it costs them $500 to earn $1,000. So their cost of trade dollar in the true sense is $0.50 on the dollar. Still pretty good though, right? You’re still ahead of the game. So the math will still work, correct? It still makes sense to do this at $0.50 on the dollar.
Pete: So even with 30% commissions, these only charge 5%. Not even 5%, how dare Bartercard or any of these other exchanges charge you 30%. They’re ripping you off. Well, not really. If you know the cost of your trade dollar, which in this instance is $0.20. What if it’s $0.40? Even if it costs you $400 to earn $1,000, and you still have that $300 trade fee, your cost of trade dollar there is $400 + $300. It’s $700 to earn $1,000, it’s $0.70 on the dollar. You’re still ahead. You’re still getting a 30% discount every time you transact in the trade exchange. Is that making sense?
Pete: And it’s all about giving you new business you wouldn’t have otherwise had, correct?
Pete: Firstly, you’re paying $0.30 on the dollar to actually get new business you didn’t otherwise have. And you actually get to go spend the money you earned at a discount. You’re spending money at a discount. So when you spend those trade dollars, you are ahead as well. You’re actually saving cash. You spent $0.30 on the dollar, 30% to bring in new business. And when you spend it, you actually get a discount when you spend. Make sense?
Pete: Cool. Let’s go back to how we started this conversation, daily deals sites. Every man and their dog right now is tripping over trying to get listed on a daily deals site. Anybody that has a service-related business is doing everything they can to get listed on a daily deals site. Is that fair? Like these Groupon sites and these daily deals sites are popping out day after day. I know in Australia particularly, like every two weeks, there’s a new daily deals site popping up.
Nothing different. There’s absolutely no new unique offering or no unique difference or differentiator. It’s just the same thing, daily deals site – get stuff at a discount, yay, woo-hoo. And then people are throwing their business at them. And business owners are throwing themselves at these daily deals sites to pay 30% commission to get new business, but they’re doing it by dropping their prices by 50%. So they’re dropping their prices by 50%, and paying 30%.
I’m going to repeat myself again. A trade exchange charges you 30%, but then allows you to spend the money that you earn at a discount because you’re getting that savings. So you spend 30% to get new business and then get a discount when you spend. Daily deals sites charge you 30%; but also makes you drop your prices, drop your income to do it as well. So you’re dropping your income – you’re halving your price and spending 30%. What sounds like a better deal? Does that make sense?
Dom: It makes sense. I see what you’re saying.
Pete: Pick it apart. There’s plenty of people who have different opinions on trade exchanges. That’s mine, my little rant for the last half hour. But throw me some questions. What are your concerns? What are your problems?
Dom: I’m going to come in swinging on the premise first…
Pete: Bring it on.
Dom: Ok. First of all, your 30% from your daily deals, is that 30% of the 50% price?
Dom: So it is not the same as the 30% from the trade exchange?
Pete: True, very true. You’re still paying 30% of your revenue; you’re still giving away 30% of your revenue to get new business, just like a trade exchange.
Dom: Yeah. And the other thing to me, looking at these two things, is that a trade exchange is a kind of a closed loop or a closed system.
Dom: So the people that you can deal and trade with will invariably be other tradespeople.
Pete: Correct. You can only trade with people inside the exchange. Correct, you can’t just go and spend your trade dollars anywhere.
Dom: Correct. Whereas, the daily deals site opens you up to anybody that can basically get online or in some way address the daily deal issue.
Pete: And spend cash, exactly.
Dom: And spend cash. And thirdly, they will be spending actual cash; they will be injecting actual cash into your business if they come via that the daily deals site.
Dom: So, I’m not saying that either one is better or worse; but to me, what we do on this podcast is it is all about being informed.
Dom: It’s all about making sure that when somebody looks at something, they look at it… We started way back in the Numbers episode, you made a great piece in the Numbers episode about what numbers to look at and what to look for. And that really did embody what were after in this podcast; it’s about making sure that when someone looks at their business or looks at a business opportunity, they are looking at it in an informed manner. So, to me, I’m not really picking holes so much as identifying things that you should be aware of.
Dom: Just as you have by saying that people are slighting off trade exchanges because of the 30% commission or the bad people, bad, bad, bad. And yet if you look at it and do the math as you presented it, it’s actually quite a good deal.
Pete: And just on your talk before about their injecting cash to your business. I just want to make it completely clear. I clearly enjoy trade exchanges. They have worked for me because I know how to work them. Now, if we just go back to the hairdresser example, and let’s say the hairdresser had the option of going to a daily deals site; and I’m not saying it’s one or the other choice here, you should be doing both of these things in your business. Let me get that completely clear. It’s not a one or the other deal. I’m not saying one is bad and the other is good, they both have their application. Just be aware of them.
Dom: Yeah, good point.
Pete: Hairdresser, the hairdresser is normally $100 for a haircut. We said before that the actual cost is $0.20 on the dollar. So $200 to do $1,000 worth of haircut. So $100 haircut costs them $20. So, they go on a daily deals site, they dropped their price from $100 to $50 to be eligible to be on the daily deals site. They give away 30% of that $50 to the daily deals site in commission. So their raw cost to do that haircut is $20 plus $15 commission, so they’ve spent $35 to earn $50. So you’re not getting a huge cash influx because $20 plus $15 is going straight back out to do the haircut and pay the commission.
So you’re really getting only $0.15 cash influx – sorry, $15 for every client cash influx, which isn’t a huge. It is a cash influx, it’s definitely that; but it’s not to be a wave of cash. People say, “I sold 1,000 haircuts. I’m getting $50,000 coming into my business. How good is that for cash influx?” Well, yeah, it is. But you rather spend $15,000 in commission, and $20,000 in raw cost to provide those haircuts. So you are only really netting out $15,000.
Dom: It’s a number. It’s revenue versus profit again.
Pete: Correct. And something else, I’ll get on my high horse again in a second and explain why I refer to a trade exchange as a mirror economy. I’d love to talk about that. But do you have anything else to say? I cut you off as I always do, Dom?
Dom: No, not at all. Yes, you did; but I don’t care. I’ll get you back, I’ll edit you out. No, you’re right, the important thing there was, once you have identified what the relative value is to your business for each of these systems, and hopefully we have given you some more information about each one of them from the business perspective, they are both valid ways of bringing in new customers.
Dom: One of them does bring a small influx, and it is potentially a small influx of extra direct cash into your business; but they both bring new customers in one way or another that you may or may not have had before, either by a direct Groupon-based discount or via the principle of the trade exchange that somebody else in that trade exchange appreciates. And they do have their relative value, but you have to be aware of it.
Pete: Exactly, exactly. Onto the mirror economy stuff, to talk about it really, really brief; I don’t want to go too much down the rabbit hole. Another thing a lot of people who have had experience with trade exchanges talk about, is how hard it is to spend your trade dollars. Because as you rightly pointed out, it’s a closed economy. There’s only to be so many mechanics who will accept your trade dollars.
There’s only going to be so many florists or sign writers. There’s obviously someone from almost every industry in these spaces. It is definitely harder to try and find someone who will take your trade dollars because there’s limited numbers and obviously, they’re going be in more demand. But the whole idea and why I call it a mirror economy is, traditionally in the cash economy, in the real world, what’s harder to do as a business owner: spend money or make money? What’s harder?
Dom: Ooh, tricky one…
Pete: Make money, right?
Dom: Sure. Yeah, of course.
Pete: The hard thing is making money. That’s why we speak most of the time on this podcast about marketing, getting new business and getting new leads. I’m not going to talk and teach people how to spend money because I am not great when it comes to managing money and that sort of stuff. That’s not my forte. I’m great at getting it in the door, not so great at managing it. That’s a whole another conversation.
Dom: No comment, Mr. Custom Sneakers.
Pete: I’ve got a Nike fetish, I’m sorry. So, that’s the normal economy. It’s easy to spend it, hard to make it. Easy to spend it, hard to make it. In a trade exchange, it is generally easy to make it, hard to spend it because most people say, “I’ve got too many trade dollars and I can’t spend them,” because the printer is in demand, the mechanic is in demand, the florist is in demand. So it’s easier to actually earn trade dollars than it is to spend it.
So let’s say in a real-world economy, to earn and spend $1,000, hypothetically – obviously, these rates can change; it takes eight hours to earn $1,000. Eight hours in marketing, sales meetings, proposal preparation, follow-ups, delivery of the goods, earning the money, going in the shop, and spending it. It takes eight hours to earn $1,000, right? So of that eight hours, let’s say six hours is in the actual making of the money, the actual sales process, the marketing and sales process.
An hour to deliver the product, to service the car, to install the phone system. And then one hour to actually go and spend it – to drive to the shop, spend 1,000 bucks at a printing company or at lunch or on some sort of expense. So, of that eight hours, six hours to earn it, one hour to deliver it, and one hour to spend it. Is that a rough, fair analogy?
Dom: Yes, I’d say it’s an interesting way to look at it. I’m quite intrigued by this.
Pete: That’s the normal, that’s the cash economy. Let’s look at the trade exchange economy, which is what I call a mirror economy. In a trade exchange, it takes one hour to make it. You don’t really have to do a lot of marketing to get business in the trade exchange. You’ll be knocking back work. In most trade exchanges, they’ve got brokers out there who are actually designed to help you get more business. They’re almost an additional salesperson for you.
Another way to justify that 30% commission you’re paying is that not only do you get access to this extra economy, the second economy, you actually have an additional staff member who goes out and does sales for you, and also does purchasing for you. You have that resource. That’s one of the reason you pay your commission. But generally, it takes one hour to actually earn $1,000 trade. To deliver the actual product, the time doesn’t change. It’s still an hour to deliver it. No matter what product you’re doing, the product should actually be the same.
It still takes an hour to fix a car, or install a phone system, or prepare a meal. So the delivery is the same. But it takes you six hours to spend it because it will take you longer to call around different providers in the trade exchange and find someone who can do your printing. You might actually have to go and get printing kind on the other side of the city, in a different state even sometimes to make it work, potentially on the other side of the country. But based on your cost of trade dollar, it’s worth getting printing from another state if you‘re getting it at an 80% discount isn’t it? You would do that in the real world.
Pete: It might take you six hours to spend it, it takes you a bit longer. The actual transaction time from starting to earn that thousand dollars to spending it is still eight hours. There’s no difference, it’s just the way you spend the time. It’s a mirror. But with the trade exchange, you’re still investing the same amount of time just in a mirror way in a different fashion, in a different order but you’re also going to be getting new business from new clients you wouldn’t have otherwise had.
And when you spend that money, you are actually getting a huge discount. So people who start thinking it normally takes me one half an hour to spend something, never think how long it actually takes to earn that in the first place. And in a trade exchange, it is an absolute mirror. It’s a mirror economy.
Dom: Ok, interesting way to look at it.
Pete: It’s a way to justify it, almost. Again, that word transparent, it’s just a way to look at it to not get caught up saying, ”It’s not like cash, it is not like cash.” Because it is not cash, it’s barter. It’s a trade exchange. It’s a different economy, so it has to be looked at differently. So many people just have those blinders on in business and think everything should be the same. That’s the reason why their marketing is not working, their cash flow is not working, their staff is not working.
It’s because they expect it all to be exactly the same. And, yes, from a foundation perspective, every business is the same. Sales is the same no matter what industry you’re in. Accounting is still black and white. There are still debits and credits. But at the same time, you have to be creative to a certain extent and be willing to look at things slightly differently to make them work for your business. The foundation is the same; it is just the way you have to look at it with a different mirror, if you will.
Dom: Ok. So we are over the usual baseline of a half an hour by a fair jump. But I think closing this one up, you’ve already mentioned a few businesses as examples. But in your mind, from your opinion having been successful with a trade exchange for your businesses, could you give some general examples, types of businesses just to compress that information back into one point in the podcast. Some types of businesses or some actual businesses that you think are better suited to trade exchanges, the people who will benefit the most. It’s either an attribute to the business or a type of business or something like that.
Pete: Yeah, absolutely. It comes down to some of the stuff that hopefully some of the listeners have already picked up is – the higher the margin, the better. And when I say the higher the margin, I mean the higher the margin when you are looking at incremental costs. A business that has high fixed overheads and low incremental costs, it works extremely well for. Mechanics, hairdressers, restaurants where there is going to be spare capacity and it won’t cost you too much to fill that spare capacity in.
In a retail environment, any retail store really: clothing store, an electronic store, where there is no really spare capacity because if that product doesn’t sell today, you can still sell it tomorrow. But in a restaurant, if that seat or table is not full tonight, you can’t have two couples sitting at that one table the following night to make up for that. Once it’s gone, it’s gone. So any business where you actually have spare capacity where once it’s lost, it’s lost, works really, really well in a trade exchange and works really, really well in a daily deal as well.
Because it’s all about filling up that excess capacity. So, that’s where it works extremely well. But again, it will also work phenomenally well for a number of different places. If anyone would actually like to delve a little bit more into trade exchanges, head over to preneurmarketing.com. On preneurmarketing.com, when you go there for the very first time, you’ll have a little popup that will allow you to actually put your name and email address in, and download the free audio version of my very first book, which was originally published by Wiley called How to Turn Your Million-Dollar Idea Into a Reality.
And in that is a whole chapter on trade exchanges that goes into a lot more depth. It does the math but then it goes into a lot more depth of how you can apply it and how you can use it to generate more cash for your business and stuff like that. Completely no cost. Part of the book deal that my agent was able to negotiate for me at the time was I had the ability to get the rights back to the book after a certain amount of time. I now have the rights back to the book after Wiley published it originally, and I’m just giving it away for free.
So, if you want to head there, if you’ve been to the blog before and you haven’t got a copy of the book, there’s a couple of places where you can sign up with your name and email address on the site. Go to preneurmarketing.com and you’ll get sent to a download page where you can download an audio book, and one of the chapters is all about trade exchanges and goes into a lot more depth. I really do believe they can work, if you work it.
Dom: I came across it from a very different angle quite a few years ago. At the time, I just couldn’t see how it would work, so it has been very interesting to me to listen to this from somebody who has been inside, who has used one and used it successfully. I’m a lot more positive towards it now, I have to say. I’m still not 100% convinced for me and for what I do, although I can see that if I was to put my head above the parapet inside of the trade exchange, I might actually get…
Pete: Let’s give two minutes about you. You would work exceptionally well in it. Well, knowing you, you don’t have a lot of spare capacity because I and a few other people keep you ridiculously busy.
Dom: There is that minor detail.
Pete: But, if you had spare capacity, if you were just starting out and wanted to get some more exposure and build up a portfolio, it could be awesome for you. What’s your raw cost to do another hour’s worth of video editing? You don’t have any raw cost, there is no real direct raw cost. Your bandwidth is covered, you’ve already paid for your computer, it’s just less time in the sun, which could be a positive because you’re not going to get cancer. But there’s no real direct cost for you to earn that. So you paid X an hour in trade dollars, and all you have to pay is the fee of 30%.
You can then go spend those trade dollars on graphic design. You could find a graphic designer to work with you who could actually do all the designs you’re going to use in your future client’s work. You could now offer an additional service with graphic design work. So when you earn trade dollars, you can then spend those trade dollars on a graphic designer to work with all your clients and you just sub-contract that out but you pay in Bartercard or trade dollars.
You can then use those trade dollars for a holiday. You can go away on holiday, for meals. You could offer people that if they buy this package, they also get a beautiful bottle of wine as a thank-you gift when you work with them. You buy that wine on trade. Every client who works with you, every client gets a bottle of wine to say thank you for your business. It’s going to help you increase your customer’s retention and upsells.
Offer them massage vouchers, give your better-half a massage, get some benefits that way. There’s a whole range of ways you can spend those trade dollars very, very creatively in your business. When you’re going overseas for a conference, do the accommodation on trade. And then you get that accommodation in London on trade, rather than spend in cash. So it makes that holiday even more cost-effective, or that business trip even more cost-effective. That sort of stuff.
Dom: Just to wrap this up, you’re absolutely right. Mine is a classic example from what I understand from you and what I have worked out myself, my situation and those of people like me, graphic designers, etc., they are ideal ones to take into this environment. Because we pay our electricity, our internet connection, all the rest of that, we pay it whether we’ve got the work or not.
So, anything that we bring we bring in, in any form whatsoever to offset that is a bonus. And if we have spare capacity, then great because off we go, doing this barter, trade exchange. And as you say, as long as there’s a service inside of there we can use it for; and as you say, you can be a little creative with that; but as long as there is a service in there we can use to offset our other business needs, then it’s a winner.
Pete: Exactly right. It’s all about being creative, which is what PreneurCast is all about.
Dom: Indeed sir, indeed. And on that, I’m going to cut us off. We are well overtime. This has been great; it has really opened my eyes. Like I said, I’ve been interested in this topic since you mentioned it because, as I said, I came across it years ago. So it’s really informed me and given me some background on that, which is great. And hopefully, it has helped listeners.
Pete: Absolutely. If people have had experiences with trade exchanges, good or bad, or want some potential advice, shoot us an email. What’s the email address, Dom? I have no idea. What’s the email address people can reach us at?
Dom: You can reach us at preneurcast [at] preneurgroup [dot] com.
Pete: Beautiful. Or @preneur on Twitter. Or you are?
Pete: Please, by all means, people who are sending us emails and giving us great comments and tweets and all that sort of stuff, please keep them coming. We do really enjoy it. This is powered by ego. As I said, there’s no sponsors, no money being made out of this. It’s all about our ego or mine, particularly. So please, help fuel it that way.
And also, iTunes reviews. We do love a good iTunes review. Well, we don’t love a bad iTunes review, we’ll take a bad iTunes review if you need to give one; but preferably, iTunes reviews are great. Hopefully, you enjoyed us rambling on for this 45 minutes, or 50 minutes. If you can give us just 30 seconds or more of your time and jump into iTunes and give us a comment, we’d really appreciate it.
Dom: Indeed. Ok, folks. We’ll see you all next week.
www.bartercard.com – An example of a Trade Exchange
www.preneurmarketing.com – Visit Pete’s blog and sign up to the mailing list to receive a free copy of his audiobook where there is a whole chapter on trade exchanges.