Interested in expanding your business internationally and learning more about international modes of market entry? Pick up a copy of my latest book, Business Beyond Borders: Take Your Company Global.
If you’ve decided to expand your business internationally and chosen a market to enter, you’ll need to decide on a mode of market entry. This essentially means working out how you’ll get your goods or services to the end user. Sounds simple, doesn’t it? Don’t be fooled!
Choosing a mode of market entry is an important decision. It’s a key part of your international business model, and will have a significant impact on costs to you and your client. Your mode of market entry will also affect the speed at which you can transact business and the amount of effort you’ll need to put in.
To move forward with an international expansion strategy, you need to be clear on how you’ll get to market and the steps in that process. Without clarity on the what and the how of the route to market, you may find yourself wasting a lot of time on tasks that don’t contribute much to the success of the project. Especially at the early stages, your focus must be on building credibility and generating sales in the new geography.
Moreover, all modes of market entry involve resource commitments of some kind. If you make an initial choice that turns out to be wrong and have to design and implement a new route to market, you risk investing a lot of time and money for not much return.
Here are some of the big mistakes I see people making around choosing a mode market of entry:
- They “go with their gut” or with what seems most obvious, rather than canvassing a variety of options around entering the market.
- They jump in “boots and all”. Rather than doing a series of small, modest experiments, they make a big upfront investment in a particular market entry strategy, before they have evidence that it will work for their situation.
- They don’t think through the global logistics.
What happens when you get your mode of market entry wrong?
Vanessa Garrard is an Australian entrepreneur who founded her group of companies in 2006. Today her focus is developing unique, design-led products for the consumer electronics and camping segments, and one in two Australians own a product that one of Vanessa’s companies has produced. The Garrard Group has a global footprint, with key markets in the US and China and sells to household names including Walmart, Best Buy, Argos, Kmart, Aldi and Target.
The Garrard Group entered the US market as an established business, with significant experience doing business internationally. Nonetheless, it wasn’t all plain sailing. Vanessa says:
My biggest lesson [about international market entry] was going to the US market. We’d have buyers from for example Walmart - our big customers and the ones we wanted - talking to us directly and saying ‘yes we want your product’.
The challenge was that the [US] business model was so different that we underestimated how complex it was. We needed to have distributors on the ground, and local representatives, who the distributors deal with.
In every other market, I could walk in with my sales team and we could deal directly with the buyers. You can’t do that in the US. We thought we could, and so we spent all this money and set up our own team in the US and said “let’s just take our samples to those buyers and start doing meetings.”
It turned out that the buyers wanted to know “Who’s your rep? And who’s your distributor? And what’s the vendor code?”. We didn’t have all that and so we burnt a couple of hundred thousand dollars before we realised that our market entry strategy wasn’t going to work.
We pulled back, got our business model together again and went back in about a year-and-a-half later. At that point we found the right distributors on the ground, we found a good rep base and the orders started to come straight away then. Same product, same price point, same pitch - everything else was the same, we just didn’t have the market entry strategy right.
Market entry - “what are my options?”
Modes of market entry range from low risk to high risk and include everything from simply selling to international customers from your domestic website, right through to acquiring a business in another country or setting up an international company from scratch.
Broadly speaking, you can group these strategies into three broad categories: trading strategies, transfer strategies, and investment strategies. In this post, we’re going to talk about trading strategies.
Trading strategies
E-commerce
Unless you live under a rock, you’ll know that e-commerce is using the internet to conduct business and sell goods or services. Almost any product or service can be offered via e-commerce, from books and music to financial services and plane tickets. Selling online is one of the most rapidly evolving and explosive trends in the commercial sphere and is revolutionising business, especially for small firms, both domestically and on an international scale.
Within the general category of e-commerce, there are a number of ways to sell goods or services internationally.
Sell from your own website into the target market
You should also remember that you want to make the online shopping experience as easy as possible for your customers, so if you were going to sell to China, you should also consider enabling your site to accept Chinese credit card payments, using Chinese third-party payment platforms such as Alipay or Tenpay.
Another downside of selling from your website at home is that the consumer will have to endure longer shipping times, transportation and import costs if the products are manufactured in your home country.
Finally, in some countries the government blocks online selling websites which do not have a local ICP licence.
If you are going to use your own website to sell internationally, my strong recommendation is that you invest in international SEO to maximise your site’s visibility and search engine rankings. Our partners at Online Marketing Gurus are experts at it – check them out.
Create a local website in the target market
A step up from selling from your domestic website is building a standalone website in your target market. If you go about it the right way, this solves some of the problems I’ve just mentioned, such as customer accessibility, language barriers, overseas delivery fees and import taxes, assuming the company and its goods are in the target market. However, it doesn’t overcome the problem of limited reach and in some countries, your company must be a legal registered entity in-market to receive the necessary ICP licence to build and maintain a website in that country. China is one such market.
If you are going to set up a standalone website in your target market, you will need a team member who speaks the local language or an agency or consultant in-country in order to set up the site and localise and translate the content for you. Our partners at PolgyGlot can help you do just that – find out more.
Sell your product through major e-commerce sites
If you prefer not to, there’s no need to build and operate a standalone website to sell your goods into a new market. Major e-commerce sites (also known as online hypermarkets) like Amazon, and Tmall are vertically integrated, multi-category marketplaces that purchase directly from suppliers for sale through their own network, much like a traditional ‘bricks and mortar’ retailer. In China, for example, around 90% of online transactions take place on open, third-party e-commerce sites.1
These sites can display products, receive orders and handle payments on behalf of merchants located in the target market and overseas. Selling wholesale to a hypermarket is done through negotiation with a procurement manager. The hypermarket manages the distribution and the shopfront, but you might need to provide marketing material to promote your goods.
Hypermarkets and specialty sites – hypermarkets like Amazon.com, Shopify, and Etsy also allow independent merchants to list products or operate shopfronts within their marketplaces.
Traditional direct exporting
For smaller operators, online sales can be a cost-effective means to establish a sales footprint in your target market, especially for niche products. If you’re looking for higher turnover, you’ll probably need to investigate traditional direct exporting channels. Traditional direct exporting is shipping goods, or providing services across borders or transferring technology from one country to another, directly to the end customer.
Where you are selling IP online, there is really no difference between “selling online” as a mode and “direct export”, they are the same thing.
Practically speaking, direct export is usually suitable for smaller quantities of unique products where a developed distribution network is not necessary, or for export of services or technology. The higher gains come from cutting out any middlemen (intermediaries, agents etc.) and avoiding the costs of setting up in the foreign market.
However, the downside is that companies that export directly are responsible for doing their own market research and carrying out all the necessary administrative requirements, such as:
- ensuring that goods, service or technology can enter the market,
- meeting standards and certification requirements and
- meeting necessary labelling and licensing requirements.
Indirect exporting
Agents
An agent is your company’s direct representative and is normally paid a monthly management fee and/or a commission to help represent and sell your product.
Agents act as the supplier’s representative – they don’t take ownership of the goods or services – and are generally paid by the exporter based on a commission of sales value generated. The exporter receives orders from the agent but then delivers goods or services directly to customers, invoices the customers, and collects payments from them. The exporter is also responsible for setting the selling price, although the agent will likely provide input on local market conditions to help the exporter decide on pricing.
Agents are generally based in the target market and often represent several complementary product or service lines. They may operate on an exclusive basis, as the sole agent for a company’s goods or services in a specific export market, or as one of a number of agents for the exporter in that market – that is, on a non-exclusive basis.
Agents – pros and cons
Local agents have the knowledge and contacts to promote foreign products and help overcome barriers such as language and culture. They can also assist in keeping track of policy and regulatory updates, both locally and nationally, collect market data, and quickly respond to change. They are effectively your eyes and ears on the ground.
However, finding a dedicated, reliable, professional and credit-worthy agent or distributor takes work. Embassies and chambers of commerce are often contacted by agents who offer services, so it can be worth checking with your country’s trade representation office in the target market to see if there is any specialised agent who has been introduced to them. Likewise, many agents and distributors will advertise their services online and can be met at relevant trade shows.
What are the criteria for finding a good agent?
- Knowledge of your product/service and its market
- Good references and previous experience (you should check to make sure)
- Language skills in a non-English speaking market (as well as English, if that is the language you work in)
- Strong networks and geographical coverage
- Support team, staff, sub-agents
- Soft skills and sales experience
- Ability to work with incentives (i.e., commission-based and subject to customer’s payment first)
- Strong work ethic, such as the ability to prepare and submit reports and marketing plans, conduct training, work with limited marketing budgets and translate honestly related marketing materials
- Respect for the professional image of the company and transparency about any potential conflict of interest.
Distributors
Using a distributor can also be a cost-effective and relatively easier way to enter a market.
A distributor buys your products and then sells them on to customers through a third party or directly. In some cases, the distributor may sell to other wholesalers who then sell to local retailers or end users.Their income comes from the difference between their buying and selling price.
Because a distributor has more responsibilities in selling your product in-market than an agent, they require a higher margin and this may affect how you price your product. You will often need to absorb the distributor margin rather than adding it to the cost of your product, in order to keep pricing to the end customer competitive. Some exporters find that they are unable to use a distributor as their profit margin is too small to provide enough margin for the distributor and a competitive price for customers.
If you can find a reliable distributor and the numbers work, this approach can supercharge your reach in a new market. Whereas you as a business owner or single salesperson can probably do a maximum of several hundred meetings a year to promote your product in an overseas market, a distributor with dozens of representatives can do thousands or tens of thousands. If you get it right with a distributor, the potential for sales is exponentially greater than working alone, although margins are lower.
Exclusivity versus non-exclusivity
Appointing an agent or distributor on an exclusive basis – where they have sole rights to sell your product within a defined territory – allows the agent or distributor to build their business free of competition in that territory.
Many agents and distributors want exclusivity as they will invest effort and financial resources into building brand awareness to create a market for your product. The stronger the brand reputation, the more valuable an exclusive arrangement will be.
It is a good idea to think through the issue of exclusivity versus non-exclusivity carefully before entering into negotiations with potential partners. Be careful about signing exclusive agreements which put the future of your business in that market completely in your partner’s hands. This puts your business at significant risk if the relationship goes sour, particularly because in some countries, distribution agreements are very difficult to terminate.
If you intend to agree to an exclusive arrangement, you should establish performance measures, and include a termination clause in the agreement, in the event of non-performance.
TIP: If a distributor insists on exclusivity, agree to it only for a limited period (six months) and make continuing exclusivity subject to the achievement of milestones.
CASE STUDY: Ego Pharmaceuticals
We still have distributors in some nations – great distributors, who have been strong partners, who understand us and we understand them, and together we work the relationship strongly. But in many countries, we’ve outgrown distributors.
Distributors vary hugely. The benefit of using a distributor, particularly in the beginning is that they’re easy. They look after the sales and marketing for your brand and that’s an easy start to doing the export… but one of the big challenges of using a distributor is that a distributor always has lots of principals that they’re working for. So you need to ask yourself ‘how are you going to inspire that distributor to spend more sales and marketing time on your brand, rather than the other brands?’. And can you? Has the distributor got sufficient resources to do all the brands? And that’s a question you need to keep asking, because distributors tend to add more and more principals without necessarily increasing their staff. So your whole brand can gradually get diluted.
When it comes to managing the distributor relationship, Openheim says:
It takes a lot of time. I think managing a distributor takes more time than managing your own staff. Remember that when you have a distributor, you’re delegating the responsibility for your brand to that distributor, which is a huge responsibility. We’ve discovered that when we’ve replaced distributors with our own people, that a particular distributor may have treated our brand vastly differently to how we treated it. And that’s a challenge, because then, when you go in with your own people, you have to unlearn the market, before you then educate the market about who Ego really is.
Trying to nurture and inspire that distributor is about spending time with them, sometimes it might be incentives for the sales team, sometimes it’s about asking the question ‘how can I inspire you?’, sometimes it’s setting KPIs in your agreement with the distributor – that the distributor will commit a certain number of staff full-time for your brands – if that can work, it depends how big you are. When you’re starting from scratch, that can be a whole lot harder. It varies. In the end, we’ve found having our own people, in most countries, means that we lift the growth from, in some cases 2% or 5% to about 20%.
Distributors are really useful in the beginning, but I’d recommend companies, as they grow, if they can to have a long-term plan to grow beyond a distributor, unless the distributor is great.
Choosing an agent or distributor
More complicated and more messy than recruiting for staff… if we’re going into a brand new country that we don’t know, we’ll talk to Austrade [Australia’s Federal trade promotion agency] and we’ll talk to the Victorian government …and they’ll give you information about the country, in our case ‘where do you buy your skin products? Do you go to a pharmacy? How do patients get their pharmaceutical products?” We’ll also go into the marketplace and talk in the shops and try to understand. We’ll talk to people about prospective distributors to try and get lists of them. In some cases we’ve used a consultant.
One of the things I’ve found is, if a distributor is similar in size and culture to Ego, then the relationship is better. They’d understand our problems better, our strengths and our challenges and the empathy was just a bit stronger. I’ve worked with very small distributors, I’ve worked with a distributor listed on the local stock exchange. The latter is not one that I’d recommend particularly, because there were then issues with communication. So, it’s trying to find a distributor that you feel comfortable with… that has the skills and has the values. And you have to make sure they have to invest in your brand and to pay the bills … there’s a whole suite of things you have to consider in selecting a distributor.
The most important factor in choosing an agent or distributor is that you can establish a close working relationship. Business is much easier to transact if you enjoy working with each other and so you have to be able to build high levels of trust and communicate regularly.
Before choosing an overseas partner you should undertake a rigorous research process and speak with a range of potential agents or distributors – perhaps four or five – before narrowing the list. Before making a final decision ask your potential partner for trade references, and also consider using a professional credit checking agency to confirm the potential partner’s financial stability.
Wherever possible, you should meet potential partners in their own market rather than in your home country. They should show you the market firsthand, which will give you a feel for how well they know the market and give you a chance to get to know them better as a person.
Exporters who rely only on email communication with overseas partners often have misunderstandings leading to problematic relationships. While email is ideal for confirming discussions, meeting in person or via video in the early stages can go a long way towards reducing misunderstandings.
Remember that you are relying on your representative’s local knowledge and contacts to win business in the market, so make sure that the relationship is real. You may need to meet several times to build a relationship and work through the fundamentals of how you will work together and what should be included in an agreement.
Before drafting an agreement you should be in agreement about who does what; then you should engage legal advice in order to have a contract drawn up. Drafting agreements and making changes when two parties have differing views on core issues can be a waste of time and money, so it is wiser to agree on the big issues first, then start the legal work.
In my next blog, we’ll talk about transfer strategies – that is, licensing and franchising your intellectual property in international markets.
Interested in expanding your business internationally and learning how to choose a mode of market entry? Pick up a copy of my latest book, Business Beyond Borders: Take Your Company Global.
