Choosing the right export strategy for your business
Article co-written & researched by Maleah Grue
Before you’re fully ready to enter a new market you need to develop a market entry strategy. One of the biggest considerations in this strategy is how you actually intend to enter the market, which can be somewhat confusing. To help you devise a clear plan, here is an overview of the ways a Canadian business can enter new markets.
The traditional means of market entry fall into these four main categories:
Direct exports mean you are selling to your client directly. The advantages of direct exportation include a greater return on investment than if you sold through a distributor. This method allows you to set lower prices and develop closer connections with your customers. A major disadvantage of direct exports is a lack of services or expertise in the market that a foreign intermediary would have, which can result in slower market growth as you have to learn the customs, language and establish contacts on your own.
This means you are selling your products to intermediaries such as foreign agents, distributors or representatives. This method is often used by Canadian businesses who are first-time exporters since it is a good way to become familiar with a new market. By having an intermediary set up the connections, companies can save a lot of time and money. The advantages and disadvantages for each type of foreign intermediary are as followed:
- Agents and representatives. Agents secure orders from foreign customers in exchange for a commission while a representative specializes in sales within a specific geographic area. Both of these intermediaries can be authorized to enter into contractual sales agreements with foreign customers on a company’s behalf (you will need to watch out for potential tax consequences as allowing someone to enter into contractual relationships on behalf of the business may result in local tax liability). Using these types of intermediaries often reduces operating costs compared to setting up a permanent location and still allows you to set the prices of your products.
- Trading houses. A full service trading house can handle exporting, market research, transportation, appoint distributors or agents, exhibitions at trade fairs and preparation of advertising and promotional material. They can take the form of a principal or export merchant who buys products from you, or acts as agent by requesting a commission on sales.
- Foreign distributors. Distributors purchase your products and resell them to local customers. Often they set the selling price, provide the buyer financing and look after warranty and service needs. A bonus of using a distributor is that they can provide after-sales services in the foreign market, however, it may reduce your profit margins and will likely require you to give up some control over your products or prices.
Partnering with a local company is another strategy Canadian businesses can use to enter into a new market. It is important to find a partner that either complements or enhances your capabilities along with providing local expertise, insight and contacts. There are a number of ways to establish partnerships and they can take a number of different forms. The following are the primary ways businesses create partnerships:
- This form grants the foreign company the rights to use your proprietary technology or intellectual property.
- Allows the franchisee the right to use the Canadian companies manufacturing or service delivery processes and provides to them established business systems or trademarks whose use is controlled by a licensing agreement (think of McDonald’s).
- Joint ventures. Each business contributes capital and resources to a newly created corporation that they can operate together.
An alternative to partnering with a local business is to acquire one. By acquiring a local company, you immediately gain access to the local market as well as all proprietary information such as IP in addition to resource availability, access to capital, and specialist expertise.
As you venture closer to your expansion it is imperative to determine your market entry strategy. Choosing between intermediaries, partnerships, direct and indirect methods of exporting requires a lot of thought and consideration but when done right, can save you enormous amounts of time and money. For assistance deciding which market entry strategy is the best fit for you, contact the Du Plooy Law team today.