International Market Selection – Does Size Matter?
When going international many companies automatically go after the largest markets, but this is often a mistake.
When a company makes the commitment to expand internationally, one of the first, critical questions they face is that of market selection. Success or failure in the first foreign foray will often determine whether the effort should continue, or whether it is more prudent to sound the retreat and withdraw to the safety of more familiar surroundings.
In deciding where to start, there is often a tendency to equate market size with market potential. This is a fallacy sometimes referred to as the "Chinese Market Share Theory". With more than a billion people, all you really need is 2% to be hugely successful. Unfortunately, the largest markets for technology products, especially software, have significant hurdles that can make them quite a challenge.
After the U.S., the largest markets for IT and telecom products are Japan, Germany, the UK, and France. In addition to representing distinct cultural challenges, Japan, Germany and France will normally require that products be translated and localized. This can be expensive enough for European markets, where the costs can sometimes exceed $100,000 per language, but in Japan, where software products often have to be re-built to support double-byte character sets, the costs can be many times that.
The UK is usually the first port of call for U.S. technology companies for several reasons, not all of which are valid. First, it is a large market. Second, they speak the same language, and their way of doing business is similar to the U.S. This is more or less true, but some of the subtle differences in language and business practices can lead to big misunderstandings, since both sides assume that the other side has the same interpretation of certain words or actions. And finally, the UK is seen as a springboard to the rest of Europe, which is perhaps the biggest fallacy of all. Trying to sell to other European countries from the UK is rarely successful.
Perhaps the biggest drawback to going to the UK first is the fact that so many companies do the same thing. This means that a company ends up facing the same competitors in the UK as they do in their domestic market. It also creates tremendous competition for qualified channel partners, making it more difficult to find competent representation.
What, then, are the options for a company just getting started? Many companies new to international expansion will often do better in the smaller, less obvious markets, such as Australia, South Africa, Brazil, the Netherlands, or Scandinavia. These countries have a number of advantages. First, most products, other than pure consumer products, can be sold in English. Second, they are early adopters of new technologies. Third, since they are not the first port of call for most products, there tends to be less competition, so potential channel partners will be more enthusiastic and easier to work with. Finally, and perhaps most important for a new exporter, it will be easier to recover from the inevitable missteps. Every technology company starting out internationally is going to make mistakes, so it is better to make these mistakes, and learn from them, in smaller markets. Many major software companies launch the latest version of their software in Australia, instead of the U.S., for this very reason.
OK, the small markets might be less risky, but what about the revenue potential? South Africa is only 0.5% of the world's IT spend, so doesn't it make more sense to take your chances in the UK, which is ten times larger? The truth is that many first-time exporters are likely to make more money from small markets during the first year or two. It is only later that the hypothetical market potential becomes meaningful. The reason is simple. Regardless of the market, a channel partner is rarely going to dedicate more than one full-time salesperson to sell a new product during the first year of a relationship. And there is only so much one person can sell, whether they are in the U.S., the UK, or South Africa.
The choice of initial markets will depend on a company's ambition and resources. For a firm with a large budget and a mandate to get 40% of their revenues from international within three years, it is clear that they have to be aggressive and go after the largest countries first. However, for smaller firms that are just starting their international program, they are likely to find the smaller markets more approachable, more rewarding, and ultimately a much better platform for further expansion.
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