To Export or Not To Export

A Hot Tip about Sales in the United States

Last updated: 9 Jun 2011

A Small Business Dilemma - To Export or Not To Export. Time vs. Money - Money vs. Time.

A Small Business Dilemma ? To Export or Not To Export Time vs. Money ? Money vs. Time By Shana Lawlor, President, Álainn Exporting The bottom line in every business transaction is king ? right? Then why are small businesses around the world shying away from taking their products to the global market place when expanding their market base is sure to expand their bottom line? It goes back to the old adage of seeing the forest for the trees. Many small businesses struggle to understand the value that an international relationship could bring to their business because of the costs associated with establishing and managing the relationship. Consider the following: ? An international sales cycle can be up to a year longer than a domestic sales cycle ? English is not always the customer?s first language which can make negotiations laborious ? There is often a significant amount of research and documentation that goes into every transaction not to mention the international laws and regulations that must be followed ? Foreign buyers may require companies to package and/or label their products according to their standards ? Prices may need to be heavily discounted to enable market entry So, it?s not just about a fear of commitment when it comes to small businesses pursing an international relationship, there are tangible factors to consider. Time vs. Money Like any new business relationship there is a lot of upfront work that every small business must do in order to better understand their new international buyer. There are references that need to be checked, terms that need to be negotiated, packaging that must be discussed, shipping timeframes and logistics that must be arranged and let?s not forget ? pricing! Interestingly enough pricing is often taken for granted when establishing an international relationship because the price has already presumably been seen by the buyer and the buyer still remained interested in the product. Therefore, all too often small businesses, eager to expand their market base, invest a significant amount of time into developing an international relationship only for the deal to fall through because of price. Why is it that an international customer would spend a lot of time working with a small business to develop a relationship only to pull out of the deal at the last minute? ? strategy. Many international 1 of 4 ©2011 Álainn LLC buyers know that eager small businesses would rather take less margin to salvage a deal when significant time has been invested than to walk away. Depending on the product, last minute negotiations can reduce the sales price 25% to 40% or more. International buyers justify the price negotiations in all kinds of ways but what small businesses need to keep in mind when they are considering how much time to spend developing the relationship vs. the product discount they may be asked to provide is the following: ?What is the end user paying for similar products in the buyer?s home country? Determining the price that the end user is paying for similar products is important because it quickly solidifies if there is enough margin for the buyer to work with. Buyers can take up to a 35%+ margin to cover their costs not including shipping charges, inland freight, taxes, duties, fees and retailer margins. If there is not enough margin between the small business? starting price and what similar products are selling for in the buyer?s home country and the small business is not willing to provide a product discount than the small business should consider whether it?s worth the time to develop the international relationship. ?How many hands are touching the product before it reaches the shelves and which party is coordinating these logistics? When a product is sold in the same country it is manufactured in there are very few additional hands that touch the product before it hits the shelves. However, when the product is being shipped internationally, depending on the country it is being shipped to, there could be as many as seven additional hands that are involved in the transaction. Seven plus hands may seem illogical, in more ways than one, but when it comes to the logistics of international relationships logic, in many cases, can be thrown out the door. What?s important is that from the onset of the relationship the small business determines who is going to coordinate these logistics and how that party is going to be compensated for doing so. ? Are labeling changes required? What many small businesses most often do not consider is the manpower required to translate, label and/or sticker their products to comply with country and retailer regulations. Have you seen the movie, ?Lost in Translation?? Much confusion can result from culture and language differences between countries when it comes to labeling and it?s important to get it right. Therefore, time must be spent on this effort and this adds additional costs to the bottom line. ?Who will facilitate the clearance process? Even if the buyer says they will facilitate the clearance process there will be materials and paperwork the small business will be required to produce in order for the buyer to complete the task. Most often the materials required by the buyer for the first shipment are more extensive than later shipments but any additional time spent on this process must be considered. In the end, no matter how unsure about starting an international relationship a small business may be, it is important to keep in mind that everyone involved in the transaction wants to make money. Therefore, it?s not in anyone?s best interest to waste time - because time is money in every corner of the world. Money vs. Time The potential loss of profit on international transactions rightfully causes many small businesses to shy away from developing international relationships. Consider that typical distributor discounts of 20% may turn into 30% and 40% not including any broker fees ? Why? There are many reasons 2 of 4 ©2011 Álainn LLC including the price that comparable products are selling for in the marketplace, the ability for international buyers to get product more cheaply from countries that are closer to them, the number of hands that are going to touch the product before it gets to the shelves, taxes and fees just to name a few. So, how do small businesses know whether an international relationship is worth their while? It?s a numbers game. If the sales volume overtime warrants the amount of the discount the small business provides than the relationship is solid. However, it?s not always easy to predict the sales volume on the side of the small business or the side of the international buyer and there lies the rub. How do you know if the volume you think you?re going to sell as a result of the new international relationship is worth the discount you?re negotiating. Well, this is a tough one. It?s important to consider several factors: ? The volume the buyer currently imports of a similar product. If the volume the country currently imports of a similar product is substantial than it is likely that the buyer of your products has a market for your products and, if your product is appropriately priced, your product should sell. If the buyer does not currently import a similar product than there is certainly risk for both parties to develop the relationship. In this instance, it could be that the buyer sees there is a market for your product in their country and wants to spend some time and effort developing it. If this is the case, than a discount on the product is warranted especially if the small business is not offering the buyer any marketing assistance to promote sales. The discount does not guarantee sales or volume but it?s a good start. ? The end price the retailer is going to sell the product for. The price the retailer is going to sell the product for may not be the small business? suggested retail price. Small businesses must remember that the number of hands that touch the product before the product hits the shelves is one of the main reasons why their products may be sold at a higher price point in a foreign market. However, if the ultimate end price of their product is on the high-end of the curve and on the verge of pricing the product out of the foreign market than it may not be worth it for the small business to even considering pursuing the international relationship. ?Whether other countries near the buyer?s home country are buying similar products in volume. Many countries that are near each other watch what each other?s markets are doing and what the consumers are buying. For example, what normally sells in Japan may also sell in Australia, Korea and potentially China as long as the price is right. ? The marketing expenses associated with selling the product either to a retailer or the end user. Buyers may spend significant money marketing new products in their home country in order to generate sales. Also, almost all large retailers expect a shelving fee to place a product on their shelves and many, if not, all of the retailers will require marketing and/or demo support. If the small business does not offer marketing support than the product price should be discounted accordingly. ? The duty and taxes that must be paid on the shipment when it reaches its final destination. International duties and taxes can be extensive depending on the product and can often make the product cost prohibitive to the buyer unless the small business prices the product attractively. ? The cost of producing the buyer?s order. This seems like the obvious factor to consider but all too often small businesses lose money from international relationships because they fail to accurately predict what their own internal costs are going to be to fulfill the order. Price 3 of 4 ©2011 Álainn LLC increases in raw materials, packaging, labeling and inland freight often slap small business with hefty and unpredictable charges and the buyer won?t absorb those additional costs. So, if the dilemma of the small business is to export or not to export it?s important to consider what every small business already knows - time is money. Likewise, it?s important to consider that in order to make money in the international market place, you must spend time. Therefore, the key to a small business being successful at exporting is to remember that there is risk in every relationship. Just because there is inevitably more risk in international relationships does not mean that there is not a balance to be struck between the time spent on those relationships vs. the money that can be made from them. About Álainn Exporting Álainn Exporting is an export management and consulting company experienced in managing international marketing and sales efforts including: due diligence, product promotion, identification of products of interest to buyers and their customers, price negotiations, financing, preparation of clearance paperwork, shipping and logistics. For more information about Álainn Exporting please visit www.alainnexporting.com. 4 of 4 ©2011 Álainn LLC
Posted: 07 June 2011, last updated 9 June 2011

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Álainn Exporting

Álainn Exporting

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