The Barter Transaction: Magic Beans or Tangible Value?

What is Media Barter?

An often-misunderstood concept, media barter is simply the exchange of goods or services for media advertising space.

It is a financial process that either allows clients to:

1. part pay for their associated marketing using their own goods/ services or
2. to gain a guaranteed return on investment vs their marketing expenditure in the form of incremental sales of their goods/services or increased marketing activity.

Let’s look at each of these models in turn.

The ‘Trade Credits’ Model

The barter company purchases the advertiser’s goods or services upfront and settles the transaction using a virtual currency known as ‘Trade Credits’. These credits are often issued at a multiple of the expected cash resale value of the goods/services, often two to three times, creating an uplift in purchasing power. The Trade Credits are then used, alongside cash, to acquire media or media-related services.

The ‘Return on Investment’ Model

This model is based on the advertiser maintaining its full media investment in cash, with the barter company operating alongside the media agency to trade qualifying media activity and generate an agreed return on investment. Importantly, the ROI is delivered in cash rather than media credits, which gives the advertiser a high degree of flexibility in how value is realised.

In practice, the cash return can be used in several ways, including supporting incremental sales of core products, funding the purchase of excess inventory, or reinvesting in additional media or media services.

Under this model, the barter company purchases the advertiser’s goods or services at full cash value, even where those goods are subsequently resold at a discount, often in the range of 25–50% of the cash price paid to the client. The transaction may be executed directly through the advertiser’s e-commerce platform or via third parties acting on the advertiser’s behalf (e.g. a broker or leading company), depending on the agreed structure.

Barter can be a powerful way to unlock additional media value, stretch budgets and create flexibility in how marketing investment is funded.

3 Key Risks to Manage

Barter can be a powerful way to unlock additional media value, stretch budgets and create flexibility in how marketing investment is funded. There are, however, three key areas where, in our audits, we see issues arising.

1. Variances between Media Bookings and Barter Statements

Differences between the value of media booked in the agency’s media buying system and the statement produced by the barter company are common, as media barter sits outside of standard media buying workflows.

Barter providers typically report against contractual or agreed barter value, while media agencies report transactional activity i.e. what was booked, delivered and invoiced through their systems. Both datasets can be accurate, but they are often describing different things, often when the trade credit model is used.

Unexplained differences usually indicate suboptimal processes between the agency and barter company, such as a lack of reconciliations being performed, inconsistent definition of values and a lack of clarity over who truly ‘manages’ the account.

2. Ownership of the Barter Account

Often we come across a lack of understanding as to which organisation ‘owns’ the barter account. We see instances where the client is not fully aware that barter activity is taking place, how the account is structured or what the current balance is. This typically occurs where the day-to-day relationship with the barter agency is managed by the media agency without regular reporting and disclosure of new or historic activity to the advertiser.

From an audit perspective, this presents a risk. When the advertiser is removed from the relationship, visibility over commitments, balances and delivery is reduced. The resulting lack of oversight can also result in barter accounts being left open longer than intended or, when moving to a new agency, the barter account in the advertiser’s name being left behind in the transition.

Responsibility cannot be laid solely at the agency’s door – the resolution involves clearly defining who at the client ‘owns’ the barter relationship.  The effective governance of media barter requires the advertiser to retain clear accountability and oversight, even when operational management has been delegated to the agency.

3. Understanding the Balance of Trade Credits and Using it Effectively

In most Trade Credit arrangements, advertisers have two options: they can either utilise the trade credits on account by purchasing media at the stated value or they can elect to cash out the balance (typically at a significant discount e.g. 50%).

We have seen advertisers enter into arrangements where either a thorough media evaluation has not been conducted by the barter company and the media agency, or if it has, the client has not fully understood the implications. In such cases it can lead to an unrealistic volume of ‘Trade Credits’ being issued, which the advertiser subsequently finds itself unable to utilise, as it simply doesn’t spend enough in cash terms to blend with the trade credits available.

In one instance, we calculated that our client would have taken more than 10 years to clear its trade credits at its current level of media investment!

The key is for the advertiser, media agency and barter company to work closely together to avoid such occurrences, as utilising the balance effectively, based on the needs of the business, is key to maximising the benefit of media barter.

Ineffective utilisation can lead to suboptimal business outcomes, such as rushed spending to clear balances or a discounted cash out that crystallises lost value. In either case, the issue is not the existence of the balance, but rather the absence of ongoing visibility and the sub-optimal decision making that can result.

How Financial Progression can help

At Financial Progression we encourage and support our clients in gaining as much visibility from their media agencies as possible and, by extension, their barter agencies as well.

As part of our standard financial compliance audit of a media agency of record, we will:

• Liaise with the media agency to identify any barter accounts in existence
• Compare the value of media booked in the agency’s media buying system to the statements issued by the barter company
• Investigate and report any differences
• Confirm the value of trade credits / the amount available if they are cashed out
• Make recommendations to ensure the effective management of barter in future
• Create opportunities to establish clear and regular reporting requirements for media barter

If you would like to have a conversation with us about managing the risks associated with media barter, or anything else marketing financial compliance audit related, please get in touch.

A source for this article is the ‘Guide to Barter’ published by ISBA and Astus Group in May 2022.