Ilya Volkov: “The system allows its customers to save hard cash, reduce costs and attract new customers”

The crisis makes some enterprises starve for money, while their wares are lying long in warehouses. How can businesses make efficient deals in absence of cash and get rid of surpluses under falling demand? Our guest is the CEO of the “B2B.ru Open Barter System” Ilya Volkov.

Ilya Volkov


 
– Ilya, what is the difference between conventional bartering, which is well-known to Russian entrepreneurs back from the late 1980s, and the instrument you are implementing in the Russian market?
– Conventional bartering allowed exchanging one batch of a ware for another one, equivalent at the market price. This operation was tied to a certain instant of time, price parameters and merchandise units. 
Under open bartering, a deal is neither linked to time, nor to the equivalent, nor to the supplier, nor to the buyer. A system member can sell goods worth of 1000 conventional units to Company A, receive a service worth of 200 units from Company B and save 800 units on his or her account to use on a later occasion. There is no direct ware-to-ware exchange, all the required goods and services are supplied to and from the system.
The open barter system is a miniature model of the market with many participants from different industries that can participate in deals with each other using an internal accounting unit equated to 1 ruble for convenience.
For instance, there is a network of car dealers, an advertising agency and a trading center. Assume the first supplies a car worth 1 mln rubles to the second, and the second provides outdoor advertising to the latter worth the same value, and the latter leases premises to the first for the same money. As a result, the accounts are zero, but the agency has got the car, the trading center has got the advertising, and the car dealer has got the premises.
Of course, the price of goods and services may be different, for instance, the car may cost 1 million rubles, the advertising – 700 thousand rubles, the premises – 1.5 million rubles. But the substance is the same: open bartering allows saving hard cash, reducing costs and gaining new customers. 


– Some say that bartering is bad and that it destroys the economy.
– Maybe conventional bartering hurts the economy, I don’t know, I’m not an expert there. As for open bartering, it bears no harm. 
In times of crisis economies feature shortage of hard cash, which defines certain limits for commodity turnover. What we do is create additional flows that the state gets taxes from. I may say that we help fighting surplus goods, non-liquid assets, even empty tables in restaurants, which may also be used within our system.


– How?
– The number of tables in any restaurant is calculated in accordance with the peak hour load. Rest of the time, a great deal of tables is vacant. We buy such vacant places from the restaurant for our virtual money and offer it in exchange some consumables, for instance, napkins, or room cleaning services. Then we offer some nearby company to buy lunches for its employees in this restaurant and offer its goods or services to the system. 
Thus, we append the monetary economy with an additional component, which is materialized in workplaces and taxes for the budget.


– Where else do open barter systems exist?
– Such trading sites exist in the West for about 30 years. For example, there are around 400 of such in the USA. The biggest of them are public companies which have passed IPO and their shares are traded on stock exchanges. It is interesting that the first of such instruments emerged in crisis times, however the business proved to be viable during upturns also. For instance, a typical income of an open barter house in 2006 was around $16 mln., featuring a growth rate of 10% per year, which is rather high for the established economy of the United States. 

– Where do you get your income from?
– Our earnings have two components. The first one is the subscription fees paid by members. It isn’t high, the basic tariff is 18 thousand rubles per year (1.5 thousand per month), which is rather affordable even for small businesses. Of course there is a number of discount and bonus options.
The second component is the commission charge we take from deals, which is paid to us in hard cash and totals 6% from the turnover.


– Isn’t it too high?
– All depends on the industry and the commodity group. For example, restaurant business has high margins. Therefore 6% is not a heavy burden for it. If we speak about surplus goods, enterprises which have valuables worth a lot of money gathering dust in warehouses do not think our services of liquidating such “deposits” are too expensive.
By the way, our pricing is rather comparable to western ones. In the United States, the basic commission charge varies from 5.5 to 10% of the deal price. The same for subscription fee: in the USA it is $20 to $60 a month, we have approximately $40. Naturally, as we gain more expertise and as our customers’ revenues grow we may reduce the commission charge amount.


– What is cheaper, to take a bank loan or to sign up with your system?
– Sometimes this, sometimes that. Anyway, our way is easier: in contrast to loan institutions we do not have a complicated procedure for accessing the services. The benefit depends on the goals you will spend the money on. Assume you have surplus goods and need to develop your business and attract new customers at the same time. You have to choose – pay for marketing and advertising in loaned hard cash, which will cost you 30% annually, or to get the required services in our system and pay with your trade surpluses or underloaded capacities of your business and a 6% commission charge.
The International Reciprocal Trade Association, which we plan to become members of, has got a long-term statistics on the profitability of using open bartering mechanisms. General practice is that this scheme may be used for covering 10 to 15% of a company’s turnover. A larger value becomes business-critical, as any business still needs hard cash to develop. 

 
– What is the basis of your open barter system? What underlies everything?
– We have bought exclusive rights for the use of software in the territory of Russia.

– From whom?
– From a specialized western developer. This software is rather sophisticated and in some aspects is similar to that used in banking. We refined its design, translated it into Russian, adapted for Russian accounting rules and made some other changes. This took several months: approximately from December 2008 to April 2009 we were engaged in the refinement. We are not using all the capabilities of this software yet. For instance, we can issue plastic cards using which companies would pay to each other and at various points of sale. As the number of members grows, we will activate these capabilities.
The software is wrapped by people. First of all, the call center. Its task is to attract new members, to receive calls. Second, the sales team, the task of which is to browse the market and tell people about our system’s virtues. They are followed by brokers, each of which has a dedicated pool of customers. A broker is obliged at any time to know what his or her customers want and need and to keep encouraging them to making new deals.
If a broker does not see the goods or services demanded by a customer in the system, he or she assigns a task for the sales team to find those.


– And what if the sales team fails to find the required goods or services? What does the system do in this case?
– Such situation is quite probable. But we explain to our customers from the very beginning that our system’s capabilities are within certain domains. For instance, raw materials, energy products and non-ferrous metals are not our business. In most of other cases we say that we are ready to engage a new member.
Besides, a client always has some other demand, which can substitute the first one – the structure of costs of any enterprise is rather diversified.


– What is the average number of members of a single open barter trading site in the USA?
– National houses like International Monetаry System have about 20 thousand members. The smallest have 100 – 200 companies. An average local player has 2 to 5 thousand customers.

– How ambitious are you?
– Our project was commercial started on the 7th of April. In three months the number of members reached almost 400. The active work of our salesmen and brokers makes us hope to reach around 2500 companies from Moscow and Moscow Oblast alone by the end of the year. Besides, in mid-fall we will actively enter regional markets. Today we are focused on Moscow and work with regional companies only in case they are ready to solve the delivery issues themselves or if they provide location-independent services, for instance in the IT domain.

– Which regions are the most attractive for you?
– We are not ingenious in this question – Saint Petersburg and all cities with population of above 1 million people. Here, the development strategy is rather conventional for the Russian market. 

– What’s being done in this regard? Do you have regional representatives already?
– We have tuned the process in Moscow and started working with people in regions: we employ them as brokers, invite them for one to two weeks to Moscow for training, then they return to their region and works by phone with customers from Moscow. Thus they learn and improve their qualifications. Thus, when we start opening branches in regions, we will already have trained personnel there, “tried-and-true” in their work with customers from the capital city.

– You have almost 400 customers. What turnover does the system get from them?
– Approximately 10 mln rubles monthly. Correspondingly, an average deal amounts to 80 to 100 thousand rubles, and there are about 100 deals per month. 

– What are the figures in the West?
– An average transaction amounts to $500 – 5000. Systems usually work with a large number of small deals. When were planning our business, we thought that an average deal would be worth of 5 to 30 thousand rubles. In practice we’ve got much more.

– How many employees do you have? How many customers can one employee service?
– Excluding legal advisors and accountants, we have around 30 employees. Many operations are outsourced. We have a problem typical for the Russia in general, which does not allow us to use the software at its maximum effectiveness. The deal is that there are rather few Russian people who are used to making Internet-enabled payments. Naturally, their number grows, but the percentage is much lower than in the West. For us such a state of things creates certain difficulties. If customers were “clicking buttons” more eagerly, it would be easier to provide service to them.

– Judging by the figures, your system is designed for small and medium businesses. At that the level of technical expertise and equipment thereof is still very low.
– I generally agree with this. And yet there is a positive vector for development: the level of expertise and equipment is rising. At the same time, in contrast to the West, where efficiency of software is much higher, we have to attract much higher human resources in customer servicing. Apart from the unwillingness to “click buttons” and the low technical expertise, the reason is that for Russia our business is rather new and we have to “spoon-feed” and provide support for each deal.
Honestly, 30 people are too few for us. We need new salesmen and brokers and are actively searching for such. 


– Where is your growth potential concentrated?
– It’s within this 10 to 15% of turnover that the companies may afford for barter deals. The crisis is a very good time to establish our business. When the hard times end it will also do great, of course, if it gets a steady position in the near future.
The IMF rates the world market’s potential at $240 bln., of the Russian – around $6.6 bln. At that, we estimate that by 2011 the Russian open barter’s turnover will reach about $800 mln. This is much place to grow.


– Who owns the company?
– The company is equally owned by three persons. I am one of them. The second one is Mikhail Safin, a co-owner of a telemarketing company and owner of a travel business. The third one is our companion Garry Budkov, who’s been working in the USA for a long time and now develops his business in Russia. 
We already receive support offers both from financial institutes and market players. But we’re not ready for this yet, the more so we don’t have any need for assistance from outside.

http://www.finansmag.ru/firsthand/71