Is Ecommerce the Right International Expansion Model For You?
There are seven basic structures for reaching new foreign customers: ecommerce; distributors; strategic alliances; licensing; new foreign office; joint venture; acquisition.
Each offers advantages and disadvantages. In this article, we look at ecommerce. It’s growing rapidly: global ecommerce sales are on track to reach $4.058 trillion by 2020.
In this model, you sell your products directly to foreign customers by allowing them to order and pay online. ecommerce is typically done in one of two ways: setting up a “storefront” on an existing platform (think Amazon or Alibaba) to sell, or setting up a company website where foreign customers can buy.
New customers come to you, without the overhead and complications of a local presence. Sales may come quickly, and you get low-cost market feedback on product acceptance and pricing. Customers can not only learn more about your products, but also immediately purchase them, avoiding currency exchange and credit issues and generating great cashflow.
Using An Existing Platform
You can set up on one or more existing platforms in a matter of hours. They have a large built-in base of customers, so your products get wide exposure. Some platforms even arrange international shipping and customs paperwork.
Research carefully, though, as services, fees, and flexibility among platforms vary widely. You may still be responsible for things like export compliance, duties, and VAT. Customer service demands must be considered, and shipping to an international customer’s doorstep and returns can be complicated.
Setting Up Your Own Site
Companies can also choose to set up their own website store. If you already sell to domestic customers this way, it could be the more attractive option. You’ll need strong IT help to set everything up and integrate it with your company’s various internal functions. You’ll be responsible for compliance, logistics, customer service, and returns. You may also need to investment in search engine optimization and social media to build demand for your offerings.
Many companies find the initial investment, along with ongoing support and maintenance, are far greater than originally anticipated. This is particularly if they are setting up a website store for the first time.
Ecommerce offers many advantages, but it’s not for everyone. First, transitioning away from this model to other approaches can be tricky. Companies with ecommerce success often want to appoint a local distributor in a particularly good market. However, finding good distributors may be difficult unless 1) they can bundle your product with services/other products, or 2) you can “turn off” customers in specific countries. Distributors generally have little incentive to invest and grow the local market if customers can buy directly from you, often at a lower price. With platforms like Amazon, you generally can’t choose specific countries. Thus, you may need to completely remove your products, forgoing sales everywhere else—a difficult decision.
Some companies resist giving up the distributor margin because they’re accustomed to collecting the entire internet sale profit. Ecommerce is also a difficult method of building repeat sales through brand recognition and loyalty because the customer relationship is limited.
Second, pricing isn’t flexible, so you’ll miss sales opportunities in places and lose margin in others. And in general, the internet pushes price down, potentially impacting your overall profit margins. Finally, it’s difficult to fully penetrate foreign markets. You must wait for customers to find you. Unless your product information is in the local language and positioned for that market, many customers will never find you. True localization adds substantial costs and complexity—even large companies only do it in select markets.
Is Ecommerce Right For Me?
Your company should consider ecommerce if you: lack resources or experience to support other approaches; prefer short-term sales to long-term growth; want to quickly test international demand; and sell products that have clear features and benefits and require little customization, are easy to store and ship, require no installation or after-market service, and are lower-priced so that can be paid for upfront by buyers and are easily returned (or written off).
Ecommerce is an attractive strategy for many companies. It requires relatively low investment, and offers fast, low-risk access to foreign customers. However, long-term growth potential and control over the customer experience are generally limited. And it’s a challenging model when services or customization are a key part of your offering.
Next up, we’ll look at using distributors as another way to reach new international customers.
Doris Nagel is CEO of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Check out Globalocity’s free infographic summarizing the seven international expansion models discussed in this series .
Civil War in Syria: How Conflict Erodes Trade