The business case for export and global expansion
If you plan to expand you company abroad, you will also have to take into account the investments that go along with it. A new market entry may easily costs you 100,000 USD in investments, let alone the working capital. How to determine how much money you need? And what are ways to finance your market entry?
Below you will find the outline of three other articles:
Predicting revenue growth
For all your business case projections you need to estimate the growth path for your turnover. For this you need two elements:
- What market share you eventually think to be able to realize?
- How long will it take to get there?
Whether you want to set up your own sales force in the country or whether you work with local partners like agents or distributor, the sales growth in your home country can already give a comparison.
Even better it is if you have already expanded to different countries. You can then combine and adjust these sales data for local circumstances, and create a generalised growth curve.
Generalised revenue projection curve
Estimating market penetration costs
If you want to sell your products or services in a new market, you will need to invest in setting up your distribution and marketing. You may also have to adapt, certify or import your product first.
Your costs of market entry typically depends on your type of offering. To be able to quickly make an estimate I have defined five broad categories.
- Standard product, perhaps differences per country, but no customisation
- Service that can be provided electronically or from your homeland
- Product with installation, integration or training requirements
- Customised product
- Customised service or solution (e.g. with local consultancy)
The other factor is the complexity of the market entry, based on aspects like geographical and cultural distance.
Market entry costs for different situations
| Nr. | Offering | Market: Simple | Average | Complex |
|---|---|---|---|---|
| 1 | Standard product | 20,000 USD | 50,000 USD | 80,000 USD |
| 2 | Remote service | 30,000 USD | 50.000 USD | 80,000 USD |
| 3 | Product with installation | 70,000 USD | 100,000 USD | 150,000 USD |
| 4 | Customized product | 70,000 USD | 100,000 USD | 150,000 USD |
| 5 | Customized solution | 100,000 USD | 150,000 USD | 250,000 USD |
Predicting the cash flows for market entry
Each of the categories above has a different profile in terms of investments and returns. If you sell a simple product you may enter a new market with some packaging modifications and by presenting yourself at a few trade shows. In case you offer customised products or services you may have to invest longer before the first small orders come in. This is illustrated in the figure.
The green line indicates the way revenue will come in: in some cases this may take a while, and then they typically will grow. The red line indicates the costs for entering the market: with a simple product you do not have to spend that much after 2 years, if you have found a good distributor. With a customised service you will need to invest in marketing and the training of your agents and resellers much longer.
Cash flow patterns for different types of offering
Putting the business case together
Based on your projected revenue, you can calculate your gross margin, taking into account country specific aspects like import duties and transportation costs. This remaining additional margin should compensate for the market entry investments and marketing costs.
If you plot this over the months together with the initial investments and the costs for marketing that you plan to do, you get a feel on the cashflows and return on investment.
Market entry costs for different situations
Convince your board or investors
Any investment plan has better chances for funding if it is detailed and realistic. Typically a pitch for a new market should include the following:
- Why the choice for this specific market? What research has been done?
- What is the market size and how strong is the competition? What revenue growth path do we expect?
- What is our market entry or distribution strategy? What will be related costs and how did we get to these estimates?
- How fast will the investment pay off and what are the risks? What milestone approach do we have to mitigate these?
Use our expertise in building your business case
No one better than international marketing and partnership specialist Alfred Griffioen can help you build your business case for market entry and help you present it.
How much effort does it take to make a good market entry business case?
Drafting a business case may seem a lot of work, but most of it you have to do anyway in the process of market entry. And it gives you more focus in the execution.
First start with a quick estimate of the market size and look at the competition. See what they do on marketing and you can already make a first estimate of your costs. For the initial investments I have standard budgets that are easy to adapt.
The graphs you can make as nice as you want, but you only need them once you see a reasonable payback time.
