International Market Entry
You may also be interested in a couple of our white papers: “Channel Options ” and “ Build or Buy ” – a discussion on the pros and cons of establishing an international subsidiary or having someone else do the selling for you.
(Update Selling Direct?) The key element of an international plan is to determine the most effective way to reach international markets. There are many channels that can be established, all of which require time and resources to implement successfully. A company needs to analyze its objectives, review budget availability, and determine market priorities. It is usually counter-productive to enter too many markets at once, and different countries often require different approaches. For instance, some companies prefer to have their own offices in key markets, and use indirect channels to establish a presence in secondary markets.
The illustration below shows the most common ways of going international, all of which have distinct advantages and disadvantages that have to be considered.
Some products can be sold direct over the web
Selling direct over the web does not require a significant investment in additional staff or infrastructure, so it can be a low cost way to start an international effort. Many of the processes will already be in place, and any revenues that are generated will drop to the bottom line.
Not all products are suited for web-based sales, especially overseas. Some of the characteristics of products that can be sold are:
* Shrink-wrap, plug-and-play
The product should be easy to ship or download, and easy to install
* Little or no tech-support
With users in other countries, it can be difficult to provide technical support, so the product should be self-explanatory
* Priced under US$200
International clients are reluctant to buy high-priced products over the Net. They are concerned about return rights, so are unwilling to accept a significant financial risk
* Consumer or SOHO market
Many corporations have a requirement that software products come with local support
* Not language-intensive
The product should be intuitive to use and/or without a lot of screens, such as systems utilities
There are a number of challenges that have to be addressed. First and foremost is the issue of getting paid. If the product is being sold from the U.S., you will find that international buyers often do not have or use credit cards. In many parts of the world it is more common to have debit cards or smart cards that are not compatible with banking systems outside their country. It is also too much of a hassle to get a foreign currency check, so overseas sales tend to be limited.
A second challenge is that of marketing. You still have to generate awareness in order to bring buyers to your website, which means advertising or getting editorial coverage in publications with overseas readership.
“Getting and sustaining the attention of someone else’s sales force is a full-time job, since helping to sell someone else’s product is an unnatural act that must be stimulated constantly”.
– Geoffrey Moore in Crossing the Chasm
Most companies that are just starting to go international will do so through an indirect channel. Vendors are justifiably proud of their technology, and they know that anyone willing to invest their time and resources in marketing their product will be successful. This is what a reseller hears from everyone that comes knocking on their door, so you have to do more than simply have a good technology. So, before starting, we think it is important to explain how the world looks through the eyes of resellers and distributors.
Channel partners assume three levels of risk when they take on a product
The first level of risk is the sales and marketing risk. They spend their money to market your product, they receive a discount, and if the product is successful, they can make a good return on their investment. If the product doesn’t work, they will have lost their investment, but this is essentially a risk they are paid to take.
The second level of risk is what we call the “exit” risk. This is the risk they run if the product turns out to very successful, and the vendor either sets up a direct operation and terminates the agreement, or the vendor sells out to a larger company, such as Computer Associates, which sells direct. This has happened to almost every channel partner that has been in business for an extended period of time, so in his mind he realizes that he has 3-5 years to make money. During the first year he invests his money, and won’t get much of a return; the second year the product starts to ramp up and he starts getting a return, but it will be in years three, four and five that he will make it big. Beyond that he cannot plan on maintaining a product.
The third level of risk is the vendor risk, and all experienced channel partners will try to minimize this risk. If they sense that a vendor doesn’t know what he is doing, they will not invest a significant amount of money to promote the product. They will sign a contract to represent a product, just in case anyone asks, but it won’t be one of their core products.
Resellers and distributors often represent 20, 30, 50 or more products, but in most cases make most of their money from two or three of them. If you want to become one of their core products, it will require a change in the reseller’s internal business process, and they will only make these changes if they are convinced that they vendor is committed to developing and supporting a high quality channel.
The main issues are the same in almost every market:
As a vendor you want to keep as much of each transaction as you can, but if the margin or discount that is being offered to your partners isn’t attractive, they won’t actively sell your product
* Technical support
Is the channel partner supposed to provide first and second level support? At what point are you expected to intervene? Will your partner get enough product training to do the job properly?
* Two tier distribution
Is the market large enough to justify two-tier distribution? How many prospects are there for your technology? Can the market be segmented according to geography or industries?
Are you going to offer exclusivity? Most channel partners are going to ask you for it. Within the European Union you cannot legally provide geographic exclusivity, because a reseller from one country cannot be prohibited from selling to any other country
* Channel conflict
This is the #1 issue in most markets. If you are going to sell direct, either from the Web or through a company owned office, it is very difficult to build a motivated channel
Basic Rules of Channel Development
*Be selective, resellers aren’t
As discussed earlier, resellers are notorious for signing agreements for a wide range of products, as long as there is no real commitment. Make sure you qualify your prospects carefully, and don’t be afraid to say no. It is simply too expensive to support non-producing channel partners
*Don’t overpopulate the markets
Keep in mind that most markets are going to be smaller than you think. Brazil is the 7th largest ICT market in the world, yet it is less than 2% of the world ICT spend. As another example, there are more mainframes in Chicago than there are in any European country
*Set reasonable targets
Make sure you set targets that allow you to get rid of under-performers, but setting unreasonably high targets only creates problems
*Don’t publish prices on the Web
This is a big issue with channel partners, because local pricing tends to vary from market to market. Publishing your prices, if they are lower than standard international pricing, can make life difficult for your partners
Absence does not make the heart grow fonder. Stay in regular contact through phone calls, e-mails and visits
Channel partners control the sales process. They make the sale, install the product and provide support. Marketing partners influence the purchase decision, but don’t control the sales process.
Typically individuals who have good contacts in large organizations, and can arrange a high-level introduction. They rarely acquire any product knowledge, and do not actively participate in the sales process.
Low cost of marketing, since they typically work on a referral fee that is paid only if a sale occurs
Don’t have the horsepower to help close the deal, so once the introduction is made you are on your own
More sales-oriented organizations do this for a living, but do not have a technical support infrastructure to handle installation and after-sales support.
Will usually go through enough product training to make the initial presentation and qualify the prospects, so you get involved when there is a documented need.
A higher commission than referral agents, but you still have to close the sale, handle the installation and provide after sales support
Systems Integrators & Consultants
Integrators and consultants work with their clients to provide a total solution, and can include specific products when they are appropriate.
Have the credibility to recommend include your product in a solution, so a sale is more likely to occur
Not product focused, so volumes will be low. They also tend to be involved with large projects that might require customization of your code, which could lead to significant hidden costs
Hardware vendors will include software products when they think the added software can help them sell more boxes.
Could lead to huge volumes
Hardware vendors are extremely price conscious, so the per unit price is normally very low
OEM (ORIGINAL EQUIPMENT MANUFACTURER) AGREEMENTS
OEM and licensing agreements can be a quick, low-cost way to generate revenues, but beware of the potential risks.
How They Work
Under a typical OEM agreement, a software vendor licenses its technology to another software vendor with complementary technology. In some cases they license the technology to provide specific features that it would take the company too long to develop on their own. For instance, a vertical market software vendor might license a web-enabling technology so that it can integrate a portal into its current offering. In other cases, a vendor might license a technology in order to sell a new module to its existing clients. For example, a company selling system utilities might license a database utility that it can sell as an extension of its own product line.
In most cases the company licensing the technology would re-brand the technology under its own label, and pay a licensing fee to the licensor. License fees can be a combination of up-front fees and on-going royalties, and the agreement will often have a minimum volume requirement that is tied to the prices that have been negotiated. Per unit prices can be a fixed price per unit purchased, or a percentage of the overall product sale. In the latter case, if the licensor’s technology represents 10% of the total solution, they would receive 10% of all sales revenues.
Why They Make Sense
There are many advantages to an OEM agreement:
*Lower overall cost
The licensee is usually responsible for its own marketing and tech support expenses, since they are selling it under their own brand
*Rapid market penetration
The licensees will normally be selling the technology to its existing customer base, which should result in faster market penetration
*Can co-exist with other channels
Because the technology is being sold under another name to a defined market, OEM agreements are not necessarily a conflict with other channels. Resellers and distributors are not thrilled with these arrangements, but there is usually limited overlap with their own marketing efforts
Potential Risks and Challenges
With the proper structure the advantages of OEM and licensing agreements will normally outweigh the disadvantages, there are a number of issues that should be considered:
The technology is sold under a name other than the original vendor, so the supplier does not benefit from brand awareness. Investors tend to place a higher value on companies with an established brand, so to the extent a significant portion of revenues comes from licensing, a company will be penalized in terms of market valuation
*Source code ownership
When a piece of code is integrated into someone else’s technology, great care must be taken to maintain the integrity of one’s intellectual property rights. If a licensee is allowed to build significant enhancements into or around that particular code, at some point they may own the derivative technology. This has implications for IP ownership as well as revenues if per unit pricing is based on the relative value of the code in a larger solution
There have been many cases of companies entering into OEM and licensing negotiations simply to allow them to look at the code. Unscrupulous companies could then build similar technology without having formalized an agreement with the original supplier
The agreement might require significant changes to the supplier’s product in order to facilitate integration with other products. The amount of work, and who pays for it, should be clearly spelled out in the contract
*Tail wagging the dog
If an OEM agreement becomes hugely successful, and a small supplier is reliant on a single licensee for a substantial portion of its revenues, they will have reduced their leverage when it is time to renegotiate the terms of the agreement, and could find themselves squeezed on pricing.
SETTING UP AN OFFICE
For many companies, establishing overseas offices will be one of the biggest challenges they face
The logistics of setting up an office in a foreign country can be overwhelming, and great care should be taken in planning for what is needed. The York Group can help its clients plan, providing valuable input on local rules, regulations and conditions that can impact the process.
Steps in the process
Description and function of the international offices
Type of office environment and equipment required to furnish offices
Logistics of subsidiary or branch office creation
Description of management positions and qualifications for these
Budgets for offices and positions
Logistics of payment for procurement
Additional recruiting or other requirements
Detailing the action plan for the project.
Create local subsidiaries
Developing an outline of the requirements for a local subsidiary office, such as paid-in capital requirements, local directorship requirements, and other associated fees
Deciding on the timing of this phase in each market. In some countries, a permanent local company address is required before paperwork can be completed
Setting up a local bank account. This is usually required for completion of subsidiary paperwork.
Setting up telephone service (if necessary to complete subsidiary paperwork).
Completing all necessary forms (including translation if required) and delivering them to the appropriate local agencies.
Locate office space
Outlining office requirements and budget for each country
Identifying suitable office locations in each country
Evaluating the location choices within each country or city, including a description of the neighborhoods, proximity to other types of businesses and other areas, reputation of the locales, and price ranges of office space in that neighborhood.
Obtaining pricing, rental terms, landlord fees and other relevant information.
Making preliminary visits to qualify and prioritize sites
Negotiating the office space contract
Furnish and equip local offices
Making decisions based on local regulations or norms regarding office space (i.e., space per employee; offices or open seating; lighting; etc.)
Purchasing or renting office furnishings
Purchasing or renting office equipment (computers, printers, copy machines, fax machines etc.)
Applying for telephone and internet services (if not already completed).