Think Tank: Which Markets Are Ripe for International Expansion and Why
With the cross-border e-commerce market exceeding $1 trillion by 2020, the opportunity to sell internationally can’t be ignored and is certainly worth the effort. And when brands and retailers recognize the opportunity of expanding their business cross border, how do they choose which markets to enter?
Several important factors must be considered to determine if there will be sufficient demand — such as the size and growth rate of the market, existing market penetration of your products, adoption rate of e-commerce, and the sophistication of the local consumer. Also, various cost factors need to be analyzed to determine economic feasibility for the selling retailers and additional cost for end consumers. Brands and retailers need a framework to determine which markets are worth pursuing, and in which to prioritize. To use this framework effectively, they require accurate supporting data.
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Attractiveness of the Market
It’s important to take a step back and look at the big picture. In general, is the market you are considering ripe for expansion?
Size of the Market
To determine if the return will be worth the investment, cross-border brands must consider the buying power in that region to justify prioritization for that market. It’s important to quantify how big the market is for your particular category as well as the growth rate of that category overall within that region. For example, if you sell luxury footwear, be sure to research the market and current consumer demand for that category. It’s important to understand if your specific product, at your desired price point, can generate interest and ultimately entice shoppers to buy.
Habits of Local Residents
It’s important to understand your potential customer, and there are a few areas to probe as you consider expansion into a given region. It is always important to consider if the demographic with buying power in the target market is a logical customer for your goods. If they are, then look into the propensity of local consumers to make cross-border purchases. If the overall penetration of cross-border e-commerce is already high, particularly in your category, then that could be a strong sign indicating there are prospective customers for your product. For example, Canada has a fairly high e-commerce penetration of 53 percent, with almost half that number coming from cross border, making this an attractive market for U.S. e-tailers.
Competition in the Market
If the market exists for your product, it’s crucial to determine what other brands have traction already in the market. Is there a similar product that is satisfying the market demand? Be sure to assess the intensity of competition relative to the market opportunity. Investigate all aspects of the shopping experience offered by the competitors in that market to understand the opportunity for you to enter into the market and identify where your business might have an advantage. Many brands and retailers compete very successfully cross border on the basis of differentiated products, breadth of range, merchandising and superior customer experience.
Relative Currency Strength
In some cases, relative currency strength should be considered. For instance, if you are a brand selling from the U.S. to an international market, it is important to understand how the target country’s currency is holding relative to U.S. dollars. If a foreign currency is strengthening relative to the dollar consumers in those countries will find U.S. prices increasingly good value and your cross-border offering will become more attractive.
Traffic Data
Beyond external factors that determine market attractiveness, you should look to your current site traffic, too. Often times, referrals and word-of-mouth create pockets of interest in unexpected countries and converting these to sales may be the lowest hanging fruit of all. Leveraging real-time data on the web site and checkout flow can help you to prioritize which markets to enter first and allow you to understand which site factors are most important to customers in those markets. For example, there may have been a sharp increase in traffic from a certain country, but conversion rates may remain very low. This could be an indication that there is local demand but that there are challenges deterring these potential buyers from purchasing.
Cost Factors
Brands must understand the specific costs involved in engaging in cross-border e-commerce with a particular country. Lower costs compared to competition can encourage shoppers to place orders, so it’s in the interest of the online merchant to be as competitive as possible with pricing and how they communicate to the end consumer the total amount they expect to pay. There are numerous costs and risks for brands to consider that can negatively impact their bottom line, so it’s important to make any new market entry decisions based on a careful balance between what the local consumer would be willing to pay and the ROI you need to run your business.
Tariffs and Duties
Tariffs and duties can add significantly to the cost of a product, and in some cases act as a deterrent for consumers who are shopping internationally. Brands and retailers must fully understand the economics of shipping product across borders and how the related expenses will affect margins. But the “landed cost” — the cost including duty and taxes — is more appealing in some countries than others. Many countries charge relatively low duty and/or taxes.
Shipping
International shipping is different from domestic in various ways. There are many different options depending on the relative importance of speed, service levels, tracking and price. Each can present opportunities to ship internationally quickly or cheaply. Optimizing the logistics strategy is best done by region or shipping lane as both pricing and the shipping carrier presence vary by region.
Proclivity for Returns
Shoppers from certain regions of the world are much more likely to return products after purchase than others. For instance, the consumer expectation in Germany is to return a high portion of a multi-item order. Make sure to factor the economic and logistic considerations of returns into your international selling program as you map out your strategy for each new market.
Retailers and brands looking to expand to international markets must conduct extensive research about the countries into which they hope to expand, and about the consumers in these markets. Once you’ve decided on the best markets for entry, make sure to research tech solutions available that can automate and simplify every aspect of international e-commerce and eliminate the sticking points that have previously discouraged brands from venturing into new markets. The best solutions can help your business create localized shopping experiences for each market, handling multicurrency pricing, cost-efficient and rapid shipping, international payment options, well-defined taxes and duties, and simple returns.
Rob Keve is cofounder and chief executive officer of Flow Commerce, which he describes as a “next generation” cross-border e-commerce platform “that removes the challenges brands and retailers face when selling in foreign markets and provides consumers across the globe with a localized, seamless shopping experience.”
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