The Return on Investment for international expansion
Once you have a strategy on how to enter a new market, you can start estimating the expected revenue and related costs. This is the basis for your Return on Investment calculation. You can find the relevant articles here:
Often market entry decisions are based on feelings and subjective opinions. With the right business case setup you can improve the discussion and also measure whether your market entry is on track.
Plotting the expected revenue
Normally, you first start with one or a few products in a new market and later extend your product or services line. This also means that you have revenue streams that will start growing one after the other.
Please note that this revenue won’t grow by itself. Even if you work with local partners, they will expect your support in product training, sales and marketing. It is common that as a brand owner you pay at least a part of the advertisements and other marketing investments. Supermarkets may even ask listing fees.
This may implicate that apart from your initial investments in a market, also need to put in marketing contributions ahead of sales.
Projected revenue from three different product lines
The complete market entry business case
Based on your projected revenue, you can calculate your gross margin, taking into account country specific aspects like import duties and transportation 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.
INvestments, marketing costs and additional margins
International expansion cash flows and return on investment
All business case elements combined generate a cash flow for the company, which is at first negative but should become positive at a certain point. In the example this is after 1,5 years. The payback time is here about 2 years.
In this example I have cut off the cumulative cashflow curve with a reason. A model like this Keep in mind that such a model does not take into account competition that will copy your product, price wars or any delivery problems that may arise. Having such a continuous growth is often a dream scenario.
Return on investment for market entry
The cumulative investment as projected in this example is around 70,000 USD. This is a basis for ROI calculations.
Please note that ROI is strongly dependent on period that future cash flows are included. You need to discount them just as in a company valuation, but with a higher risk factor than for the company as a whole. This will normalize the hockey stick curve that also is visible in this example.
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 keep it realistic.
A business case always helps
It may seem a hassle to make all these projections, but in the end it will help a company make better decisions. These are a few individual benefits:
- Export or area managers will more easily get the budget they want for market exploration if they can present a good plan.
- CEO’s will get a better grip on their commercial organisation, if results can be offset against plans and benchmarks are available.
- CFO’s can make better projections and anticipate on cash needs in the organization.
