Think Tank: How to Manage Risks of International E-commerce
The opportunity to tap into the latent global demand for brands in overseas markets is enormous and brands see this opportunity as increasingly accessible. While increasing a brand’s customer base is compelling, expanding internationally is not without potential pitfalls. Each new market carries with it different regulatory environments, compliance requirements, and issues related to clearing customs. In addition, important decisions must be made about localizing the e-commerce experience. With opportunity comes risk, and brands must identify the risks inherent in expanding their business internationally and find suitable solutions.
Cross-border e-commerce at its most fundamental is providing consumers with access to products that may not be available to them in their local market, or available but not as cheaply. With cross-border commerce, the product purchase process and the shipment of the customer’s order to the final destination span many regulatory environments. These regulations bring with them risk and opportunity that can either make cross border a success or become a resource drain for businesses and create a poor customer experience. When properly planned for, the opportunity is larger than most domestic markets and as accessible.
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However, if not properly planned for, cross-border e-commerce transactions may not be worth the demands they place on business resources and can create a customer experience so poor and incremental international sales so low that it may not be worth the effort. Understanding the risks and following the requirements of governments and trade agreements as well as tax regulations and local laws enables e-commerce businesses to avoid potential issues.
Some of the business challenges relating to regulatory environments include:
• Are products allowed to be sold to customers in certain countries? While this may seem obvious, trade embargoes are enforced in such a manner that businesses need to have a clear understanding of which nations they are allowed to trade with. Currently, most U.S. businesses do not allow customers from Iran to purchase products from their U.S. based online businesses. Failure to comply with this regulation can lead to fines and legal ramifications for cross-border e-commerce businesses.
• Are customers able to purchase products in a certain category? Some products within certain categories are not allowed to be imported into some countries and may require permissions and licenses in order to be shipped globally. Beauty products, cosmetics, jewelry and woven materials are a few examples of products that could lead to potential legal trouble or fines for any business that has failed to do the stringent research into the laws of the countries it ships these potentially restricted products to.
• Are there regional regulatory environments that are being changed or that have to be honored? Presently, the European Union is leading its member nations to a single digital market in which customers from any market in the EU cannot be discriminated against, or barred from purchasing, based on her location. For example, prices for the same product cannot be different based on the customer’s geographic location. E-commerce businesses need to be aware of these changing regulations on pricing, as well as payment data storage and the requirements of general data protection regulation.
Compliance does not need to be a minefield
Compliance requirements related to duties and taxes are factors that need to be part of a cross-border e-commerce solution. For every transaction, calculations need to be conducted in the background, ensuring that if the products are to be sold and the duty/tax pre-paid then the business needs to be able to display accurate rates to customers.
Taxation and duty collection are friction points that can negatively impact a customer’s purchase process. Duties are often required for product purchases that cross borders either by import or export. Further, brands and consumers should be aware of value-added national and local sales taxes, which are also added on top of the purchase price.
Countries have different duty thresholds, may or may not require VAT, and may add local sales taxes — called De Minimis thresholds. It is important that businesses are not only aware of the De Minimis thresholds, but also factor them in real-time on their site, at an order level, so that order totals falling below the benefit are not charged any duty. Sophisticated cross-border purchasers ensure their basket value is below these thresholds wherever possible. A modern cross border-e-commerce software solution can calculate the total landed cost of a product based on the geographic location of the customer as well as real-time factoring of De Minimis thresholds.
By communicating the complete landed price to the customer prior to placing an order allows them to make a purchase decision that does not lead to surprise costs and ultimately a poor customer experience. This negative shopping experience can lead to a heavy reliance on resources in the form of customer service and can be largely avoided by ensuring the customer is fully aware of all relevant pricing factors early on in the buying process. Moreover, in some markets, such as the EU, the responsibility for accurate tax calculation and remittance lies with the brand, placing it in a risk minefield if not carefully managed.
Clearing customs
Globally, customs agencies use many variables including the quantity, the item’s price, shipping costs and item’s harmonized system (HS) code to calculate duties & taxes charges. All import and export codes are based on the Harmonized System (HS) of the Harmonized Tariff Schedule. The Harmonized System assigns specific six-digit codes for varying classifications of products and commodities and is a global standard.
Once the product’s duties and fees are calculated there are two options for the customer: One is they can pre-pay the duties upfront at the brand’s checkout and have the brand ensure the duty/tax is remitted. Alternatively, they can rely on paying after-the-fact through the shipping carrier or at the border itself.
In the first option, where duties are paid upfront, the cross-border e-commerce business displays a final price to the customer either on the product page or at checkout that contains all of the fees and duties reflected as part of the displayed price. The price labelling and display is very important here as a duty/tax inclusive price can lead to shopping cart abandonment or lead businesses to charge prices that eat into their margins. Retailers should best address this issue by testing in key markets the best form of duty/tax display to balance conversion rate with the customer experience – for instance, presenting one product price inclusive of duty/tax versus separating out duty/ tax and displaying them on PDP pages or check out only.
In the second option, depending on the market and shipping carrier, consumers either rely on the shipping carrier to pay customs on their behalf and then reimburse them on the doorstep (sometimes with additional fees) or they will need to pay their local Customs department directly to release the products when the order arrives at the border. While this approach leads to a lower product price shown to customers upfront on the site, it leads to additional costs later that the customer will not have anticipated and often creates delays when clearing customs. Usually, the selling of products cross border excluding duty/tax upfront leads to an exceptionally poor shopping experience, causing high volumes of customer service complaints and low repeat purchase rates.
Not knowing how to navigate the customs process in different markets can have a negative impact on your e-commerce business, not to mention the cross-border consumer. Items or products can be seized or destroyed by Customs due to non-payment of import duties and taxes. Customers who refuse to pay the customs costs may ask for a refund or request their credit card provider to chargeback the transaction to the retailer. Businesses that fail to properly plan for duties and taxes can find cross border transactions to be unprofitable, whereas those who successfully plan and test can reap the rewards of a lucrative international market.
Cross-border e-commerce does not have to be risky or complicated
Cross-border e-commerce can be a great revenue generation channel but it requires e-commerce businesses to understand the costs incurred and risks of distributing and selling internationally. Failure to calculate the appropriate taxes or communicate how duties are being collected can create order delivery delays to the end consumer. Not carefully considering the best pricing strategies and landed costs for products in different markets could ultimately lead to lower margins and unprofitable customer acquisition.
Cross-border e-commerce contains a variety of less visible costs such as taxes and duties that can become problematic and could potentially place an e-commerce business at risk. Solutions that provide retailers with granular control over landed costs, as well as pricing displays, can help to optimize sales and monitor margins so there are no business surprises. Likewise, this level of control can allow your business to provide a great localized experience to cross-border customers that feels domestic and encourages them to become regular shoppers.
Rob Keve is chief executive officer and cofounder of Flow Commerce.
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