But the most adverse impact of a poorly developed or executed expansion plan is the possible damage (both financial and reputational) it could do to your domestic operation. As a result, banks and investors may be kept at bay, making raising capital extremely difficult for your business.
Read on to help you plan your next move towards capturing an international market.
TIPS FOR EXPORTING SUCCESSFULLY
One of the most popular routes to having a presence abroad, without necessarily setting up shop right away, is to export your products. Below is an eight-point checklist, based on pointers published by the UK-based not-for-profit company Business West, that you should consider before exporting your goods overseas.
- Analyse your business’ export potential
Start by assessing your internal capabilities. If you have already managed to get a strong foothold in your domestic market and your operations – from marketing and customer service to production and distribution – are running like clockwork, then those are good indicators of your ability to handle the added demands of exporting. Look at what you have to offer and find out if there are other markets that might have a viable demand for the kind of products that you manufacture or sell.
Having an action plan involves several components. One of them is knowing whether someone in your existing staff has the acumen to drive the export programme forward – if none, recruit a new member. Other aspects include analysing the size of your potential market; evaluating your available resources; understanding the legal requirements; familiarising yourself and your team with the local customs and culture in your target market; and developing a marketing strategy that would suit that particular customer base.
Don’t skimp on research. By the time you’re ready to export, you should know your potential customers and the new market like the back of your hand. Research your prospective markets and pay attention to any trends that could impact their consumption habits. Also, study your overseas competitors and find out how your products or services can rise above the crowd.
- Explore different routes to selling your product or service
Choose a route that fits the culture, customs and habits of your target market and that corresponds to your available resources. For example, you may opt to sell directly, partner with a local distributor, obtain the services of a sales agent, or create a joint venture with a local company. Whichever you choose, make sure that there is clarity in the payment and delivery schemes.
- Think about the culture and language of your market
Incorporating the local culture and customs into your business plan could mean quick acceptance in your target country. If you can, try to learn the language or find reliable translators who can effectively communicate your brand to your customers.
- Prepare to manage finance, payments, and risks
Make sure you get paid for your exports. Prepare a letter of credit and learn about foreign financial transactions and trade taxation. Make sure that your pricing reflects these costs.
- Protect your intellectual property
Ensure that you retain product exclusivity. If you have a local partner, ensure that you have a contract clarifying your exclusive right to your products. If your market is notorious for copycats, then you might have to invest more in obtaining intellectual property rights and brand protection.
Documentation is everything in export, so some things need to be right from the start. Research the legal and documentary requirements of your target country so you’re clear on the requirements for customs registration, including forms and payments. Some of the documentation that may be required are commercial invoice, bill of landing, consular invoice, certificate of origin, inspection certificate, dock receipt and warehouse receipt, destination control statement, export license, export packing list, and insurance certificate.
PROS AND CONS OF EXPORTING
If expanding your business overseas seems daunting, you might ask: Why bother? The fact is, there are many reasons why an overseas market may be good for your growing SME, but similarly, there are also challenges for which you have to be prepared.
- Increased sales. Securing a share of an international market helps boost sales, as demand for your product or service reach a wider customer base.
- Higher profit margins. Higher sales equals higher profit, provided you have planned your operations carefully to cover fixed costs.
- Economies of scale. A larger market base means you can produce on a scale that enables you to make the most of your resources.
- Reduced vulnerability. Diversifying into new markets protects your business from economic fluctuations, as you are not entirely dependent on one particular marketplace to sell your goods or services.
- New knowledge and experience. Going global affords you the opportunity to learn new approaches and marketing techniques that could be useful in your business. It could also help you keep ahead of the competition back home.
- Language and cultural barriers. It is important to understand that expanding your business will require you to recognise cultural differences as well as communication challenges. Some of your existing marketing strategies may not fit local customs and norms.
- Hidden costs. Expanding into new territory may involve hidden costs. These could include import restrictions and requirements, undisclosed duties and charges, logistics fees and regulatory red tape.
- Customer preferences. As a new entrant, you have to contend with the fact that your competitors are established brands in that market. They have already built a loyal customer base and the challenge will be to shift customers’ preferences to your side. This is where local knowledge comes in handy.
- Need for local knowledge. To know precisely how you're doing in your target country, you need information for any export venture. At the beginning, you may need to travel there often, find local partners and distributors, and you might even have to open a local office, which would require you to invest more of your time, capital and manpower.
SELECTING AN EXPORT MARKET
Market research is essential in understanding the opportunities of a new market. These are some steps to guide you in your research.
Step 1: Screen potential markets
Study the economic indicators of your chosen markets. These may include the country’s GDP growth rate, per capita income, and real disposable income per capita. In addition, learn about the competition, as well as currency and political risks. For exporters, one of the biggest risks to doing business is fluctuating foreign exchange rates, which when not taken into account, can eat into your profits. So, factor this in when pricing your product. You may opt to price your product and get paid in the local currency or your own currency, but bear in mind that each has its own risks. You need to assess and manage these risks based on your own research.
Step 2: Assess factors that could influence product demand
Once you’ve identified promising markets, examine the factors that could affect the demand for your product or service. Learn about the average consumption levels for products and services similar to yours. Then compare the market share of foreign versus domestic rivals. Also, analyse their approaches and use your knowledge of distribution, local culture and business practices to devise your own strategy.
Step 3: Weigh the factors
Before you take the plunge, weigh all the relevant factors, including hidden costs related to duties, taxes, red tape, labelling requirements and quotas, as excessive trade barriers could raise your products’ cost. If all hidden costs are revealed, then you can make an informed decision on the viability of exporting to certain markets.
PRICING FOR EXPORT
Setting a realistic export price should take into account your production, delivery, and distribution costs. But you should also compare the current price of the competition and analyse the market demand. Setting an appropriate profit margin is one of the most important factors in successful business expansions.
You should also consider other outside variables that could affect your target market and even alter the way you set pricing. These could include currency exchange rates and fluctuations, international postage, cable and telephone rates, freight forwarders, product or service modification and special packaging.
Consider per capita income
Your target customers’ ability to pay for your goods is a critical element in any export venture. Per capita income for most part of Asia, for example, is much lower than in developed nations. When entering these types of market, you might want to consider a simplified version of your goods or services, so you can set a price point that your new customers can afford.
Consider the competition
When setting prices, always take into account your competitors’ pricing. You need to match the going price or even undercut it in order to grab a share of the market.
Consider your market objectives
Reflect on your market objectives when setting prices. Penetrating a new market, attempting to attain long-term growth, or alleviating production surplus would require different pricing strategies.
There are several pricing strategies available. Find out what is best for you and establish a price that gives you a healthy profit margin.
- Static pricing (same price to all customers)
- Flexible pricing (adjusting prices for different types of customers)
- Full cost-based pricing (covering fixed and variable costs of the export sale)
- Marginal cost pricing (covering only the variable costs of production and exporting, while domestic sales cover overhead and other fixed costs)
- Penetration pricing (low price to attract more customers, discourage competitors, and gain quick market share)
- Market skimming pricing (high pricing to enable optimum profit among high-end consumers, where there is little or no competition)
COMMISSION-BASED AGENTS VS DISTRIBUTORS
When entering a new market, there are several concerns you have to take into consideration – foremost of which is your mode of entry. If you have limited resources and expertise, your best bet would be to export either through a commission-based agent or a local distributor.
Commission-based agents are like brokers. They can connect your company with and introduce your product to a foreign buyer, in this case, in the market of your choice. Such agents don’t fulfil the orders, but pass them on to the exporter. They can also assist with logistics, including packing, shipping and export documentation.
Unlike agents, distributors buy a product from an exporter, then re-sell it to local buyers at a profit. Distributors are engaged with fulfilling the orders, maintaining an inventory of the export product, and providing after-sales service to the local buyers, while dealing with issues related to import customs regulations and processing.
Not sure whether to obtain the services of an agent or distributor? Below is a table that enumerates some of their advantages and disadvantages.
Source: Australian Trade and Investment Commission
DRAFTING AN EXPORT CONTRACT
Any business agreement with an agent or distributor has to be documented in a written contract, so as to safeguard your interest and that of your business partner. Seek the advice of a law firm or legal professional, who has expertise in global trade practice. Aside from issues related to intellectual property rights, the basic provision of any contract is the transfer of goods from seller (you, the exporter) to the buyer (importer) in exchange for payment.
The export contract needs to specify the terms and conditions for doing this, and should include the following information:
- Name and addresses of the parties
- Description of the product
- Specify the units in both words and measurement.
- State the nature, manner and focus of the inspection, and the inspection agency.
- Total value. State the total contract value in words and figures, and specify the currency.
- Terms of delivery. State the delivery terms, based on Incoterms – the basic terms for international sales contracts, as published by the International Chamber of Commerce.
- Taxes, duties and charges. Clarify responsibility for all taxes. State clearly who is responsible for other levies and charges in the country of import.
- Specify the place of dispatch and delivery. Give the exact date or period in which the delivery will be conducted.
- Packaging, labelling and marking.
- Terms of payment. State clearly the amount, mode and currency in which the payment will be made.
- Licenses and permits.
- Your contract should provide for coverage in case of loss, damage, or destruction during transportation.
- Documentary requirements for international trade transactions. (letter of credit, invoices, bill of lading)
- Product guarantee. Fix and specify the length of the period of guarantee.
- Consequences for non-performance of contract (force majeure or delays).
Note: This article was originally published on Accelerate SME and it has been republished on Zawya with full copyright permission.
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