The hidden value of trade many people overlook. Are you?

Even thought we've written about this in our book, "The 9 insider's secrets to winning with corporate trade", it bears repeating since so many people we talk to still believe that they MUST use up all of their trade dollars in order to make trade successful. Their thinking is that if they're left with an unspent trade balance, the transaction has failed them. Fortunately for everyone involved, this is NOT the case.

When measuring your ROI for a trade transaction, the critical number to hold in mind is the fair market value of the inventory, real estate or other asset you sold to the trading company. For example, let's say you sold $1mm in food product for which you received a $1mm trade credit.

The question to ask yourself is: What could we have sold that product for in the cash market? Let's say the inventory was worth $300,000 cash. In other words, if you hadn't entered into a trade with Evergreen Trading, you would have sold your food product inventory in the liquidation market or discounted it to a customer for $300,000 in cash.

Because you traded that inventory, you now have a $1mm trade credit to show for it.

Let's also assume that your trade credit pays for 25% of your advertising costs. Every $100,000 magazine page now costs you only $75,000 in cash and the remaining $25,000 is paid by the trade credit. If you do a little math, you determine that in order to use the entire trade credit, you will buy $4mm in media. ($1mm/.25=$4mm)

It's at this point that you may question entering into the trade since you don't have $4mm in media planned and committed to. "We can't use up all the trade."

Remembering that the inventory was worth only $300,000 in cash, how much trade credit would you need to spend in order to break even? Let's do a little more math: $300,000/.25=$1,200,000. You need only buy $1.2mm in media in order for the trade to return $300,000 in savings, or cash, to your bottom line. You'll use $900,000 in cash and $300,000 in trade credit to buy $1.2mm in advertising, right?

At this point you might be saying, "But we didn't do the trade just to break even!" No, you didn't. But notice that every dollar of advertising you place after $1.2mm is incremental added-value from the trade. If you place another $1.2mm in advertising, you've doubled the return on your inventory. And, you've only used 60 percent of your trade. Can you see how lucrative trade can be for you, even without spending even close to your entire trade balance?

The cash value of your inventory or asset is also the starting point in determining your ROI for the transaction. Using the example above, if you spent $600,000 of your trade credit, you've reaped a 100% ROI! Sure, there are other aspects of your transaction's investment like time value of money and your effort, but how many vehicles does your company have at its disposal to get better than a 100 percent relatively short-term return on capital?

Last, Evergreen Trading will not let your trade credit balance expire, and that's an important detail that you should confirm before agreeing to sell your inventory or asset to any trading company. Will they give you the time you'll need to get the greatest possible return from your trading transaction?

The next time you evaluate trade, don't exclusively focus on the total media needed to use the entire credit. Instead, drill down a bit to determine the media needed to return you even with the cash value of the inventory. Starting from there, watch and measure the unprecedented return you'll get from trade.

About Mike Lake

Mike is the Senior Vice President of Marketing for Evergreen Trading. When not playing jazz trombone he is probably obsessing about writing content that will capture the attention and interest of business people and fellow learning junkies everywhere.

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