Understanding Countertrade Pricing Mechanisms

Countertrade as a Pricing Tool

Countertrade occurs when products are exchanged for other products instead of cash. For instance, PepsiCo sold Pepsi to Russians in exchange for the exclusive rights to sell Stolichnaya vodka in the USA.

Although cash might be the preferred method of payment, countertrades are becoming an important part of trade with Eastern Europe, China, and some Latin American and African nations.

Types of Countertrade

Countertrade includes four distinct transactions:

Barter

Direct exchange of goods between two parties. In a barter transaction, the seller must be able to dispose of the goods at a net price equal to the expected selling price in a regular, for-cash transaction, and the seller must know the market and the price for the items offered in trade.

Compensation Deals

These involve paying in goods and in cash. An advantage of a compensation deal over barter is the immediate cash settlement of a portion of the bill; the remainder of the cash is generated after the successful sale of the goods received.

Counter-purchase (Offset Trade)

For this trade, two contracts are negotiated. The seller agrees to sell a product at a set price to a buyer and receives payment in cash. However, the first contract is contingent on a second contract that is an agreement by the original seller to buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage (%) of that amount.

This is probably the most frequently used type of countertrade.

Product Buy-back

This occurs when a company promises to buy back some of the products produced using its subsidiaries. In other words, agreements are made when the sale involves goods or services that produce other goods and services (e.g., a production plant, production equipment, or technology).

Usually, this involves one of two situations:

1. The seller agrees to accept as partial payment a certain portion of the output.
2. The seller receives the full price initially but agrees to buy back a certain portion of the output.

Advantages: Can provide a supplemental source in areas of the world where there is demand but no available supply.

Risks: The products bought back may be in competition with its own similarly produced goods.