Identify and enter a new market succesfully with a sound market entry strategy. Create a business case to identify market opportunities.

Author: Klaas-Jan Meijer, Head od E-Commerce at Salesupply

Why doing all the trouble of creating a market entry strategy?

Going into a new market is basically an investment decision that should be analyzed according to a proper decision making process. I have been seeing many companies thinking twice about buying an expensive new machine to improve fullfilment, but going into a new market is often considered as opening up a new marketing channel like Adwords. The entire decision making process is skipped following the ‘let’s just do it’- mentality. The process of internationalization gets started and ‘we will see what happens’. 

Altough it is nice to see companies getting excited and just go for their goal of selling abroad, I have never really seen it work for any company that went into a market ‘just like that’. Enthousiastic in the beginning, copy-pasting the website, translating it by some cheap translater (bad) or google translate (even worse) and throwing in some left-over marketing budget and they think they are done. Expectations go through the roof. A few months later usually the company is down to earth again. 

Going international is not opening up a new marketing channel. It is an investment that needs time, effort and money to become succesfull. Therefore, there should be a decision making process before going international, and the person to make the decision should be the one who makes all important high level investment decisions, usually CEO, MD level. 

My recommendation to make a proper decision is by following these steps described by Ronald W. Hilton in his interesting read Managerial Accounting – Creating Value in a Dynamic Business Environment: 

  • Clarify the decision problem: Which problem or effect do you want to solve with going international? For example, being less dependend on home market.
  • Specify the criterion: What is the target in the new market? Increase marketshare, maximize profit, minimize costs. Define here the framework. Some of the targets will conflict with each other. So here it is important to define the main target and add constraints. For example: Decision criterion is to gain market share, but the CPO cannot exceed 50€ or profitability needs to be achieved within x months.
  • Identify the alternatives: How are we going to do it? Central or decentral? Assign project team? Hire new people? Getting support from an agency?
  • Develop a decision model: This is a simplified representation of the choice, the criterion and all the constraints. We call this the business case.
  • Collect the data: This is the most important task of the marketing analyst. Selecting the required data to make a decision model
  • Select an alternative. The investment decision can be evaluated properly against other opportunities. 

After getting through these steps you will have a quantitative decision making process. Still there is another factor involved and that ist he qualitative considerations. Gathering data is analyzing what happened in the past. You need to add some experience to be able to look at the data and decide relevancy and accuracy of it for the future.

So what goes into a market entry strategy? 

Well, basically only two factors go in there: 

  • Benefits
  • Costs

So that’s the easy part. Now the tricky part is to estimate the benefits and the costs. I put benefits first as I have seen many companies starting with the costs and use bottom up pricing to decide the benefits. Unfortunatly the prices are determinded by the market you are going into. So they are restrained to a certain level if you don’t want to take a big hit in conversion rate. 

For this article we will take as a criterion gaining x% market share in a new market with the constraint that the company needs to be profitable after y amount of time. 

Market share is the size of the opportunity, time and profitability are the constraints. 

Now what data do I need for this marketing analysis so I can fill in the numbers? We will need a contribution margin. We leave out fixed costs as that is different for every company.

Contribution margin = Revenue – Variable Costs. 

For the revenue I need: 

  • Sales forecast
    • Conversion Rate
      • Pricing
      • Quality Localisation
      • Service
      • Reputation
      • Products
  • AOV
  • Buying behavior within the time constraint
  • Expected Traffic 

The biggest cost drivers are usually:

  • Marketing
    • Cpc / cpo
    • COGS
    • Shipment Costs
    • Return Costs
    • Payment Costs

How to identify market opportunities and create a sales forecast?

Therefore we need: 

  • Size of the market for expected revenues
  • Expected performance of the localized website in the new market
  • Buying behavior of your customers 

The great thing about identifying marketing opportunties is the data that is freely available nowadays. This data can help you in getting the above information for your marketing plan. 

First determine the size of the market. I’m focusing here mostly on the online revenue opportunities. 

We can use several tools: 

  • Similarweb.com
  • Google.com
  • Keyword tool
  • Search metrics
  • Amazon (reviews & merchants)
  • Alexa.com

 So let’s take a webshop for pets that wants to grow in Germany. 

I use the handy website similarweb.com and select animal products in Germany to get a list of websites as a starting point. Results are that zooplus, fressnapf and zooroyal suppose to be top ranking websites on the German market traffic wise.

 

So if I click on zooplus.de, I can get a very rough estimate of traffic:

 

 Traffic is about 800k. To see what channels I need to activate to reach this traffic Similarweb has also some information about the marketing mix.

 

Let’s confirm these numbers with Alexa.


 I can see that a huge chunk is „branded“ traffic, so we need to compensate for this.

 

 Pricecomparison and affiliate marketing seems to deliver most of the referral traffic.

 We can compare if fressnapf is doing it different. It seems like the channels are the same, but the focus is more on search for fressnapf.

 

As we know the traffic levels of the top players now, we need to get a picture of the size of the market in terms of revenue.

For this the website statista.com is really helpful for retrieving raw data.

 
In 2014 the online market for home animal reached € 420 million, growing 5% against last year.

So now we need to find out the market share of the top players. Zooplus makes this easy as they are listed on the stock market and have to publish their numbers.

This means 166/420 = 39% marketshare for Zooplus. They have a very strong grip on the market. So per month € 166 million /  12 = € 13,6 million per month. 

Thus, if you want to have e.g. 4% marketshare, this equals € 16 million revenue or € 1,33 million per month. So now we have answered our first questions. Now we need to know how many orders that translates into. 

Therefore, we take a look into one of my favourite tools google analytics for the AOV (average order value) -> 47€. Take into account your current AOV. Predicting if the people buy more or less in a certain market is a waste of time in my opinion.

This means we need to achieve € 16 million / 47,28 = 340,425 orders. 

We already saw that the top player has following acquisition channels:

  • Search (36%)
  • Referrals (price aggregators) (12%)
  • Social (1%)
  • Direct traffic (50%) 

Direct traffic already indicates the brand traffic that we need to compensate in the startup phase. The question is how? SEO, Social, Display, Email, Offline? 

Now we know the order target. We also know where traffic is coming from.

To continue with the forecast, we need to know a conversion rate to estimate the traffic we need. Well we just take the one from your home market! What?! That cannot be correct... Well it can be, if you segment it properly. 

The shop we are looking at has a 6,82% conversion rate. Than we take this and we are done?

No, this conversion rate clearly shows that they have been active for a few years and have built a customer database with a good retention. 

So let’s try to simulate a more realistic number by trying to replicate the situation we are facing in a new market. Meaning we need new customers in the above mentioned channels. So we can do this by segmenting the traffic to ‘new’ and ‘returning’ visitors.

 Returning visitors have a 9,69% conversion rate and ‘new’ visitors only 4,34%.  Can we do more? Yes, because we need to somehow filter out the ‘word of mouth’ traffic. Meaning if somebody gets a recommendation, the conversion rate will be better. But in a new market nobody will recommend you in the beginning. 

So lets filter deeper and look at the biggest channel adwords and new visitors. Conversion drops to 3,47% 

 

But on campaign level we see that the brand campaign is having 23,74% conversion! Filter it out!

 What is left is a conversion rate of 2,2%. This sounds like a realistic conversion rate for the business case.

 Are we done? No!

This 2,2% is only valid when all else is equal. Meaning, do you have the service, prices, localization on the same level as on your home market and / or of the market leader in your new market.

 One of the most important factors on conversion rate is pricing.

Before going into pricing, we need to know what is selling. So make a quick 80/20 analyses or ABC analyses of your products. And check out the A- products. You can use webanalytics again to quickly make an export of your best selling products and use Excel to analyze the data.

 After the ABC analysis, position yourselve on the matrix of Porter. Do you have a clear USP (are you unique), do you excel in costs and how wide is your target group?


http://www.quickmba.com/strategy/generic.shtml

Basically it comes down to the question if you have a cost advantage or if you (or your best selling products) are unique. In my example I believe the pets business is a cost leadership industry. People buy where it is the cheapest. You could of course do some more research to see if this is true in the new market.

If you are not unique you need to have a lower or the same price. If you are unique, then you need to be able to communicate this properly and more focus will lay on communication as you need to be able to explain the difference in the new market and evaluate how much more people are willing to pay for this. 

So in our case its time to check prices. There are many opportuities to get rough idea about pricing. 

  • Pricing Tools
  • Google Docs
  • Google Shopping
  • Amazon

 You can use a pricing tool like Metoda to find out about current prices. They match your products with relevant competitors in different markets.

 Or you take few competitors which you think are relevant (see results of similarweb) and automatically extract their prices through the importxml function straight from their website:

 Google Shopping has some interesting data in the assortment section:

 So if you can match the prices in the new market, you can expect the calculated conversion rate...

 ...unless you have problems in your value chain. 

Value Chain, created by the strategist Porter, has all the elements that effect revenue, margin and with that also conversion rate. Think about USP’s, Story, Brand, Price, Material, Production, Costs: these are are all factors of activities shown in figure 1.

 

https://www.mindtools.com/pages/article/newSTR_66.htm 

For all activities a decision on how much quality, service and message you want to givem the potential target group has to be made: 

  • central or decentral (warehousing) = quick shipment and returns or not
  • inhouse vs agencies (hire an external agency for a new market or get an internal team – who gets your marketing acquisition and merchandizing up and running?)
  • Do I offer technical changes to the site, like adding payment methods etc.?
  • Do I buy or create products tailored to the market?
  • Localization (translations, payment methods)
  • Customer Support and after sales
  • Logistics (shipment and returns) 

This is the more qualitative part. If you cannot meet market standards, you need to apply a negative factor on conversion rate. 

In our example we will match the top tier players for service. 

So that means we have the following: 

Sales target: 16 million

Conversion Rate: 2,2%

AOV: 47€

Orders: 340000 orders

 So now we have a sales forecast. Now we need to know what we have to invest to achieve this. 

How to estimate marketing cost for your market entry plan


So the following costs we need to know:

  • Marketing costs
  • Logistics
  • Service Costs
  • Payment Costs 

We saw that google adwords was a very important channel.

Here comes a no-brainer -> use the keyword tool from Google. Throw in some keywords or website of the competition and do a quick scan for the cpc prices. 

Of course search volume varies, so my suggestion is to take the weigthed average (sum product of average monthly searches * suggested bid).

So we see that in my example we have an average cpc of 1,17€.

Now we can calculate the CPO as we already found out the conversion rate = (1 /2,2%) * 1,17 = € 53 

In my experience a lot of companies do plan with ‘free’ channels like SEO. Here you can also estimate your costs.

By using tools such as sistrix or searchmetrics you can easily identify traffic and competitors for keywords. 

 You can actually get those 331 keywords from the tool to see which keywords are important traffic drivers. 

Here is an example of a pet website. They have 1000 top 10 keywords.

 

You can group those keywords through matching the URL and assign your product category to it.

 

With this you can identify which product category is most succesfull for your competition.

Keyword rankings are based on a good content strategy. You can use screaming frog or alternative crawling software to get an idea how much content the competition has for keywords related to a certain category. 

 Make a split if the content is a product page (based on the URL you can get Excel to automatically assign if it is a product URL or content URL).

 

 In this particular case, in order to compete with a big pet shop, you will need 4030 content pages for the category dogs. Our example shop has 3684 product pages (how many products do you have?) and 346 ‘content / SEO’  pages about this category. Now you now that SEO pages need to have between 300-600 words. Congratulations, you have identified the costs of SEO!  Which is: 500 words * 346 * 0,07ct = € 12.000 for one category.

 greatcontent.nl

Let's assume we do top 4 categories, that will result in an investment of approx €48k for SEO. 

Who said SEO is for free? So now we can adjust the cpc. For SEO, predicting results is quite hard. So my advice here is to use a realistic benchmark. Normally you should expect at least 5% of traffic coming through non branded keywords (look in your own webdata). That would result in € 80k of revenue with a 2,2% conversion rate. That means 0,05% of the revenue. Which means the cpc will be 99,5%*1,17=1,169. 

Why am I adjusting the cpc? Because I want to have a weighted average of costs for new traffic in the end. New traffic that should drive new customers. 

Other channels like price comparison or facebook marketing usually are also cheaper per click than Adwords. Here you can ask expectations to local price comparison partners. My experience is that those channels are usually limited in size, say 10% of the revenue and 3/4th the costs of adwords. So we could adjust the cpc if we decide to open up these channels accordingly by (0,1*(75%*1,16) + (0,9*1,16) = 1,14 cpc. 

Now the interesing part. Of course not every order needs to be paid. Hopefully you will have repeated purchases.

So here we need some business intelligence and get the data out of the database.

I always take the order frequency per year. In our example we will take 2,5 orders per year. Meaning customers in month 1 will do 2,5 order per year. Customers in month 2 will do 11/12 * 2,5 orders per year and so on.

Than I distribute the orders throughout the months based on the size of the customer base. In month 12 I expect more repeated purchases (17%) than in month 1 (1%). You could also do a cohort analysis and use this for distribution. But I like to keep it simple.

 This results with our 16 million target in 153.768 orders I need to pay for and 189.123 orders that should come direct or via email (unpaid). Repeat purchases I calculate with a 0€ CPO. So better get your email or customer loyalty campaigns right. Yes if you fail you need to pay for remarketing or other retention costs and your CPO will get worse. 

Other costs:

  • COGS
  • Shipment -> get estimates at local cariers
  • Payment costs -> Check rates at your psp

 After getting all this information we can put it into a simple Excel file, and we are done:

 

 

With the conversion rate, AOV, CPC prices etc. I will need 8 million in marketing budget to achieve 16 million in sales within 12 months. This will generate a loss of 4,4 million. Now we can actually expand the case in 2-3 years to see when it breaks even. Which is not in the scope of this article. But as your client database builds up, you can decrease marketing. So either you extend your time constraint if you cannot afford the loss (with the risk that your competition will try to push you out of the market or you take the hit to get profitable faster).

 Of course this is a starting point. You can add theories or actions that will justify a lower CPA. Making different scenarios is always a good thing. Still the basis is there: all in 1 simple to read Excel file.

A business plan will not predict the exact future or the exact outcome. It will serve as a guideline. When you are in a new market you can check your ‘actual vs plan’- results and see exactly where you need to adjust the business case, where you need to improve on your performance or both.

So let me know what you think of this business plan! Are you looking at complete other set of KPI’s? Am I doing it all wrong? Let me hear your thoughts!