This is the first in a series of blogs on market entry.
There are a variety of ways in which a company can enter a foreign market. No one market entry strategy works for all international markets. There will be a number of factors that will influence your choice of strategy, including, but not limited to, tariff rates, the degree of adaptation of your product required, marketing and transportation costs. While these factors may well increase your costs, it is expected the increase in sales will offset these costs. The following strategy would be the most sensible entry options open to you.
Direct exporting is selling directly into the market you have chosen using in the first instance you own resources. Many companies, once they have established a sales program turn to agents and/or distributors to represent them further in that market. Agents and distributors work closely with you in representing your interests. They become the face of your company and thus it is important that your choice of agents and distributors is handled in much the same way you would hire a key staff person.
Agents do not take ownership of goods but act as a representative of the supplier. They are also engaged by exporters of services to represent them in overseas markets.
An agent is generally paid by the exporter based on a commission of sales value generated. The exporter receives orders for customers from the agent but then delivers goods or services directly to customers, invoices the customers, and collects payments from the customers. The exporter is also responsible for setting the selling price, although the agent will likely provide input on local market conditions to help the exporter decide on pricing.
A distributor buys goods – that is, the distributor ‘takes title’ of the goods – and then resells the goods to local end users who may be retailers or consumers. In some cases, the distributor may sell to other wholesalers who then sell to local retailers or end users.
Exclusivity versus non-exclusivity
Appointing an agent or distributor on an exclusive basis – where they have sole rights to sell your product within a defined territory – allows the agent or distributor to build their business free of competition in that territory.
Many agents and distributors want exclusivity as they will invest effort and financial resources into building brand awareness to create a market for your product. The stronger the brand reputation, the more valuable an exclusive arrangement will be.
It is a good idea to think through the issue of exclusivity versus non-exclusivity before entering into negotiations with potential partners. If you intend to agree to an exclusive arrangement, performance measures will need to be established, as well as a termination clause within the agreement in the event of non-performance.
In the next blog I will discuss the advantages and disadvantages of chosing an agent or distributor.