With the business world becoming more and more interconnected, the barriers to becoming an exporter are not as onerous as they once were. A strong brand, an internet presence and careful planning means companies can ready themselves for new markets at an early stage in their development. Rupert Eastell, Partner and Head of Retail at accountancy firm Baker Tilly, says the business will need to work out its market proposition, assuming that business has considered why its product may sell in an overseas market over and above a local product. Should the company price low to establish market share and take the risk that it may be difficult to increase the price later on? Or should they price at a premium to mitigate the risks and costs associated with entering a new market?
When companies investigate competition in their target market they may decide that undercutting other players is the way to gain traction. However, penetration pricing (going in low to establish market share) requires careful consideration. “If you need to price 25% lower than you would like, you need to ask can you move the price up,” says Rupert. “If you can't, do you have a profitable business at that price?” Bear in mind, he points out, that you will also need to research import duties, local market regulations, selling costs and tax regimes within your chosen market.
"If you can establish and prove the brand
in your home market, you're much more likely
to achieve success internationally."
Rupert Eastell, Baker Tilly
Online greetings card company Moonpig is an example of a business that tried one strategy and then the other, starting low and then moving its price up to stay in business. When the company was founded in 1990, cards were priced at £1.99 and sales were slow. A greeting card that could be bought online and customised was a new idea and took a while to take hold. In the meantime, the company was burning through its resources and its future was in question.
In a last-ditch effort to inject cash into the business, Moonpig’s management team raised the price to £2.99. The interesting thing about this move, says Managing Director Iain Martin, was that sales did not flinch. “If you have a good product you have to be confident and price accordingly,” he says. “The product was far too cheap and there was not enough margin to sustain the business.”
Moonpig’s early mistake informed the company’s pricing decisions in new territories. The company’s overall turnover has soared to £40 million and there are Moonpig sites for Australia, where the company has operated for seven years, and in the US, where it is a new entrant.
Rival online greetings card businesses in Europe have, in Iain’s opinion, made the same mistake. The danger is that it sets the price for the market. His advice? “Have confidence in your product. Do the sensitivity analysis and make sure you have a pricing structure that enables you to operate long-term.”
On the other hand, pricing at a premium may be a viable starting point for an established brand. A brand with a luxury or rare product and a strong following in its domestic market can afford to price at premium, providing it supports its moves into new markets with promotional marketing and good customer service. In fact, brand is right at the heart of the export proposition, argues Baker Tilly’s Rupert Eastell. “If you can establish and prove the brand in your home market, you're much more likely to achieve success internationally.”
Premium pricing can also work well if you're operating in a risky market with little in the way of competition. “Strong brands have the advantage,” says Brian Shanahan, Associate Principal at REL Consultancy. “If you're not known you should be taking a conservative approach,” he says. “In a riskier market, you should always factor in a higher margin. But you may be charging so much for the risk that you price yourself out of the market, in which case you shouldn't be there.”
The overriding advice for entrepreneurs is that there is no substitute for doing your homework regarding new markets. “It's about knowing what the price point is and getting the right advice,” says Brian. “Go there and find out for yourself. Very often the price is set and you have to accept that you will only be able to operate within that.”
Lance Forman is Managing Director of London’s oldest smokery, H. Forman & Son and the £10 million business is famous for its cold-smoked salmon and luxury foods. Some 15% of its products are shipped to hotels, stores and distributors overseas. Lance believes pricing for new markets is not a matter of sticking too closely to one policy. It’s about looking closely at whether there is real competition locally. “If there is nothing similar, it gives us an opportunity to work on a decent margin,” he says. “If it is a competitive market, we may need to operate on a slightly reduced margin.”
As a general rule, pricing means the UK price plus freight, an approach that has the benefit of being a sustainable argument with clients, but there are some practicalities and clauses to consider. Forman largely invoices in sterling to avoid currency fluctuations, but some clients prefer to be invoiced in dollars or their local currency. The company keeps an eye on rates and factors any large swings into the price.
Pricing also needs to take account of costs relating to food hygiene and packaging regulations in different markets. There is also the risk of non-delivery, damage and failure of temperature control in transit. Credit control is also very important. “You have to consider whether you are going to give credit in the same way as you would in your home market,” says Lance. “You may need to think about pro forma invoicing or trade insurance for riskier markets.”
The message from the experts then is research – not just on local prices, but regulations, tax and the wide range of associated costs.