E-commerce has greatly reduced the barriers to international trading for even the smallest companies. Continued technological development has lowered barriers further still. Little surprise then that British companies have been keen to expand their horizons by trading across borders; 53% of UK SMEs are already exporting goods and services, and 73% expect their export revenues to grow in the next five years.
At present, the outlook is positive for British exports with a predicted growth of 2.6% by the end of 2016. Despite this optimism, many businesses are ill-prepared for the challenges of the global marketplace. Here are some of the top mistakes SMEs make when they expand into international markets:
1. Failure to understand the target marketplace
Cultural norms and preferences vary widely, making it very easy to misjudge how well a particular product or service will perform in a foreign market.
In the 1990s, Kellogg’s made a $65m investment to launch three new cereals to the 950m+ customer base in India. However, what Kelloggs failed to realize was that according to Indian tradition, the day should begin with a hot meal – a stark contrast to a bowl of cereal with cold milk. Despite continuing to invest heavily, by 2010 Kelloggs had generated only $70 million in revenue and captured less than 1% of their target market.
Although the Internet has proven to be a democratizing force, there will always be offline factors to consider. British SMEs risk making the same mistake as Kelloggs if they fail to consider the cultural implications that may affect their international sales – very few small companies can afford to absorb losses on the same scale.
2. Failure to define and refine processes
When dealing with a single, domestic market, SMEs can deploy a single framework of supporting processes with relatively low risk. Expanding business across boarders requires re-engineering many of these processes to cope with a change in requirements. Payment handling is often not at the forefront of considerations when expanding internationally but needs to be to ensure that customers get the services they demand, and that profit margins are maximized. This requires a process that is seamless and transparent. Payment channels used for domestic transactions may not have the capability to support international card payments, or they may apply handling charges. The added cost-per-transaction would reduce profit margin to the level at which it makes international expansion economically unviable.
Businesses need to identify and implement a more cost-effective, flexible payment solution. The same goes for other processes (shipping, translation, customer service) that will need to be rationalized and streamlined for use across the globe. If the capabilities are not there internally, partnerships or collaboration are both cost-efficient options.
3. Failure to price products and services correctly
The relative cost of living and local wages will influence how much international customers are willing to pay for products and services. To thrive, SMEs will need to develop a scale of prices that can be applied to each market, or risk being priced out. Lower profit margins may be acceptable in some cases, but reducing operational costs will reap greater benefits in the long term. Lowering the cost of business through the use of intelligent payment handling services would enable lower prices to be applied in local markets.
Without the ability to compete on cost, SMEs will find it impossible to penetrate a market and establish market share – particularly when pitched against lower-priced domestic operators.
4. Failure to adhere to local legislation
Beyond adaption to the culture of a new market, SMEs need to be aware of local legislation that may affect the way they do business. In many cases, not only on a country–level but often at a state level. Collecting and paying local value-added taxes could prove a challenge to an SME, particularly in countries that do not have any kind of trade agreements with the UK or the EU. Failing to comply with local trading laws could see businesses exposed to a fine. Further, they could even be banned from trading.
A general understanding of the legal requirements in each market is useful, but partnering with experienced service providers could help to mitigate risk and boost compliance. By using a hosted payment platform, SMEs are able to outsource responsibility for calculating and applying local taxes, reducing administrative overheads and ensuring compliance. Partnerships of this kind can help avoid prosecution and reduce operational expenditure, retaining profit margins in the process.
Plans and partnerships are key
Ultimately, international trade success is reliant on properly understanding each new market, and building expansion plans using those insights. Being prepared avoids problems with local demand, pricing, fulfillment and compliance. SMEs can further reduce the overheads of international export by partnering with service providers who can outsource key functions such as payment processing. Tackling international trade with the assistance of partners helps to avoid compliancy issues, and allows the business to focus on meeting their customers’ needs – wherever they happen to be.