Deciding which market to enter and when to do so is critical for a startup. If played well, your market entry strategy can create new revenue streams, accelerate customer acquisition, and propel a startup toward profitability. If played badly, a startup may end up plunging into a desperate situation that could lead directly to business default.
There are currently 31.7 million small businesses in the United States, representing 99.9% of all US businesses. Many small businesses open every month, but the failure rate is high. As of 2021, the launch failure rate is around 90%. 21.5% of startups fail in the first year, 30% in the second, 50% in the fifth, and 70% in the 10th year.
In this article, we want to show you how to get it right and keep your startup on track.
What is a market entry strategy and why does your startup need one?
The first question to consider is what is a market entry strategy. A go-to-market strategy is a plan to bring a new product or service to market. One of the most important considerations when going to market for a startup or small business is the sales cycle.
When you have a limited amount of time, money, and resources, understanding the sales cycle is key to success.
Market entry strategy is the way an organization can access the market depending on its structure. Your go-to-market strategy will largely depend on identifying potential customers in that market and whether or not they are willing to benefit from your potential offering. It all starts with developing your minimum viable market.
Why is it so important?
Market entry strategy means building and planning a long-term approach to help you achieve your goals, such as entering the global market, attracting new customers, providing new products to them, increasing profits, and increasing brand awareness in international regions.
But before you start building your entry strategy, there are a few things you need to figure out and make sure you're ready to move on.
The step-by-step market entry road
#1. Set clear goals
The first step is to decide what you want to achieve with the exported project and some basics on how you will do it. Details that need to be clarified include:
- business goals for expansion
- your target sales level
- market entry strategy framework to use
- the specific product or service that you intend to export
- target market
- main actions and timetable for their achievement
- budget and other available resources
For any company, management tools are critical when entering new markets. Instead of going into details, you better have a clear plan for the future. For example, think about the company's achievements in the past year. Then draw a step-by-step market entry strategy based on previous successes or failures. Follow the plan and keep in mind what you want to turn your business into. Strategies and other methods are not only useful for achieving long-term goals. You should also outline each step as it minimizes the risk of hitting traps.
Feel like the C-level executives of your company need an upgrade? See how to find and hire a CTO for your startup.
Not the same as an export marketing plan
Keep in mind that a direct market entry strategy is not the same as an export marketing plan. You usually start with a market entry strategy, which is a general document that outlines your direction. You can then use it to create a more detailed export marketing plan that includes details such as:
- necessary adaptations of products, packaging, and branding, taking into account the target market
- details on pricing and promotions
- a more complete look at your target market and competition
#2. Identify your target market and competitors
It is very important to identify a target market (demographics, location, psychographics, etc.) that will increase your deals by buying your products and liking your services.
Population data such as wages, age, social status, occupation, and purchasing habits will help in building a customer profile.
Some businesses may underestimate the level of competition in new markets. But ignoring your competitors is not the best option.
Don't forget that the more information you have about the characteristics of your competitors, their special offers for customers, their strengths and weaknesses, the more leverage you have upon them.
#3. Conduct market research
The next and most important step is market research. At this stage, you have to realize that the most common cause of startup failure is ineffective marketing and sales strategy assessments.
To further reinforce and advance your market entry strategy, you need to do market research.
Market research is part of the important research and analysis of direct and indirect competitors, market size, opportunity, demand, innovation, and consumer behavior.
Marketing research will enable you to find the most reasonable markets and the ones you should avoid. Research is a tremendous discovery of what to do before entering a new business world.
All business options should be tested before they are fully presented to your potential customers.
As you can see, it is not enough to know only your target audience.
Correct market research can also help you predict fluctuations in product attractiveness.
With a report on your potential market, you can safely enter or launch a new product, decide whether to invest time and money and see how useful and profitable your products will be.
Take a close look at the market - what devices are your customers using? How much money are they willing to spend? What services are most in demand?
In general, learn from the achievements and mistakes of your competitors. In doing so you’ll learn how to survive in the market. Also, remember to know consumers to protect your offerings from unpredictable rejections.
#4. Choose your market entry strategy
Once you have identified the right time to enter the market, the next question is how to do it? These are the eight most common go-to-market models:
Export - structured exporting/trading
There are two main export models:
- direct export;
- indirect export through a third-party reseller or distributor.
This is often the first path companies take as it allows them to simultaneously enter many markets, but it can be difficult to scale without raising resources domestically.
Here one of the best market entry strategy examples is Red Bull, a company originally from Austria - something you may never have realized. The company first started exporting to neighboring countries including Slovenia and Hungary, then to Germany in 1994 and the UK in 1995. In 1997, Red Bull wings made it easier for the energy drink to fly across the Atlantic and land in the United States.
Pros
- You can choose your foreign representatives in the overseas market.
- You can use a direct export strategy to test your products in international markets before making larger investments in foreign markets.
- This strategy helps you protect your patents, reputation, trademarks, and other intangible assets.
Cons
- For offline products, this strategy will prove to be really expensive. Everything should be set up by your company from scratch.
- While for online products this is probably the fastest expansion strategy, for offline products there is a lot of time spent researching the market, sizing, and hiring representatives in that country.
Talking about online products, why not read our digital product development guide for startups?
Licensing
Licensing is another entry-to-market option that costs less than buying a whole company. When a firm licenses a product or service, they transfer the use rights to the licensee for a fee, and the license fee is usually provided by the licensee to the licensor. The product or service can then be used by the licensee for marketing or production purposes.
Through licensing, you can purchase Bugs Bunny or Mickey Mouse T-shirts anywhere in the world.
This can be a sound strategy if the company buying the license has a strong customer base in the new market. If you are looking to enter into a licensing agreement as a licensor or licensee, this go-to-market strategy is worth considering.
In 1998, Starbucks infiltrated New Zealand, opening its first store in Auckland. They licensed the local company Restaurant Brands New Zealand Ltd.
Pros
- Low cost of entering the international market
- Licensing partner knows the local market
- Offers you a passive source of income
- Reduces political risk as in most cases the local business is the licensing partner
- Allows you to expand in several regions with minimal investment
Cons
- In some cases, you may not be able to fully control your overseas licensing partners.
- Licensees can use the knowledge gained and represent future competitors for your business.
- Your business runs the risk of tarnishing its brand and reputation in foreign and other markets due to the incompetence of its licensing partners.
Franchising
Franchising is relatively similar to licensing and means that the company, the franchisor, is contractually related to other individually owned companies. They appear in relation to customers with a single product range under a common brand and receive technical and administrative assistance from the franchisor. (Kotler, Armstrong, Wong, Saunders, 2008)
According to Holmvall et al. (2010) franchising is a type of license but can be considered more advanced. The supplier provides significant support in the form of marketing and training for the franchisee to comply with specific rules such as the current decor in the store and how to deal with the sales situation.
McDonald's, Subway, Pizza Hut: these are just a few of the franchises that most Americans are familiar with and have created franchises around the world. Franchises are common in the US and are also one of the most popular global market entry strategies. Franchisees can use an established business model and brand name.
Pros
- Low cost of entering the international market
- Franchising partner knows the local market
- Offers you a passive source of income
- Reduces political risk as in most cases the local business is the franchising partner
- Allows you to expand in several regions with minimal investment
Cons
- In some cases, you may not be able to fully control your overseas franchising partners
- Franchisees can use the knowledge gained and represent future competitors for your business
- Your business runs the risk of tarnishing its brand and reputation in foreign and other markets due to the incompetence of their franchising partners
Partnering
A partnership occurs when 2 or more entities join forces to work together. One partner may already be active in a new market. In addition, local partners may have existing contacts in a new market as well as a solid understanding of cultural norms and nuances. In some regions of the world, a local partner may actually be required to enter the market.
This can also be called a strategic alliance. This popular method leverages local expertise and contacts. Partnerships usually follow a win-win scenario. This requires more commitment than exporting or licensing. It is advisable to choose a partner who is well suited to your business and shares similar values and ambitions.
Pros
- All partners can use their respective expertise to grow and expand in their chosen market.
- You can share costs and use the strengths of the participants.
Cons
- There is a risk of conflict between partners, let alone creating a future local or international competitor.
Direct investment
Direct investment involves the entry of a company into a market by making significant investments in the country. Some of the ways to enter international business using a direct investment strategy include mergers and acquisitions, joint ventures, and investments from scratch.
This strategy is viable when demand/market size or market growth potential is large enough to justify the investment.
Pros
- You can maintain control over operations and other aspects of your business.
- Use cheaper labor, cheaper material, etc. to lower production costs and gain a competitive advantage over your competitors.
- Many foreign companies can take advantage of subsidies, tax breaks, and other incentives from local governments to invest in their home country.
Cons
- Businesses are subject to a high level of political risk, especially if the government decides to adopt protectionist policies to protect and support local businesses from foreign companies.
- This strategy involves significant investments to enter the international market.
Greenfield investment
A company can also enter a new market abroad by creating from scratch what is called a greenfield investment. In this case, the company buys the land it intends to build on and then operates the business after the construction is completed.
While this go-to-market strategy can be a lengthy process and involve maximum investment and risk, the benefits include complete control and confidence that work will be completed according to specifications.
This is the most difficult of the market entry strategies, but in the long run, it brings the most benefits. Again, this strategy essentially re-starts the company from scratch in a new market, building and operating new facilities and headquarters.
Toyota started its Greenfield project in Mexico, hoping to hire about 3,000 employees and produce 300,000 pickups a year. Mexico is seen as an attractive country to invest in Greenfield.
Pros
Cons
- This strategy entails higher levels of risk and expense, as well as longer start-up times
Joint Ventures (JVs)
A joint venture is one of the preferred ways to enter international business for companies willing to share their brand, knowledge, and experience.
Companies wishing to enter overseas markets can form joint ventures with local ventures in the overseas regions, with both joint venture partners sharing the rewards and risks of the business.
Both business entities share investments, costs, profits, and losses in a predetermined proportion.
This way of entering the international business is suitable for countries whose governments do not allow 100% foreign ownership in certain industries.
For example, foreign companies cannot have a 100 percent stake in broadcast content services, print media, multi-brand retail, insurance, electricity exchanges, and require a joint venture route to enter the Indian market.
In 2012, tech giant Microsoft and global energy leader General Electric (GE) formed a joint venture to leverage data to improve healthcare and improve patient care.
In the case of a joint venture, both brands have the same level of brand strength for that particular product. And so they want to promote this product together in this international market.
A joint venture differs from export in that a company is combined with a partner from a host country to sell or distribute overseas. It differs from direct investment in that it creates an association with someone in another country.
There are four types of joint ventures:
- licensing,
- contract manufacturing,
- management contracts,
- joint ownership.
Pros
- Both partners can use their respective expertise to grow and expand in their chosen market.
- The political risks associated with the joint venture are lower due to the presence of a local partner who knows the local market and its business environment.
- Allows transfer of technology, intellectual property, and assets, foreign market knowledge, etc. between partner firms.
Cons
- Joint ventures may face the possibility of cultural clashes within the organization due to differences in the organizational culture of both partner firms.
- In the event of a dispute, liquidation of a joint venture can be a lengthy and complex legal process.
Mergers and Acquisitions (M&A)
Mergers and acquisitions, or M&A for short, involve the process of combining two companies into one. The purpose of combining two or more enterprises is to try to achieve synergy when the whole (new company) is greater than the sum of its parts (former two separate entities).
Mergers occur when two companies join forces. These transactions usually occur between two businesses of roughly the same size that recognize the benefits offered by others in terms of increased sales, efficiency, and opportunity. The terms of a merger are often quite friendly and mutually agreed upon, and the two companies become equal partners in a new venture.
Acquisitions occur when one company buys another and incorporates it into its operations. Sometimes the purchase is friendly and sometimes hostile, depending on whether the acquiree considers it more advantageous as an operating unit of the larger business.
The end result of both processes is the same, but the relationship between the two companies is different depending on whether there is a merger or acquisition.
Mergers and acquisitions are a growth strategy that corporations often use to rapidly expand their size, service industry, talent pool, customer base, and resources in one fell swoop. However, this process is costly, so businesses need to be confident that the benefits gained will be significant.
Pros
Some of the benefits of M&A deals are related to efficiency, while others are related to opportunities, for example:
- Improved economies of scale. For example, due to the ability to purchase raw materials in large quantities, you can reduce costs.
- Increasing market share. Assuming that two companies operate in the same industry, pooling their resources can lead to an increase in market share.
- Advanced distribution capabilities. Through geographic expansion, companies can expand their distribution network or geographic coverage area.
- Reduced labor costs. Eliminating redundancy in staff can help reduce costs.
- Increasing labor talent. Expanding the talent pool from which a new, larger company can be recruited can drive growth and development.
- Expanded financial resources. The financial capacity of two companies is usually greater than that of one, which makes new investments possible.
Cons
- High costs associated with buying a company, especially if it doesn't want to be bought. (However, if an investor has a controlling interest in another company, he may have no choice as to whether or not he is acquired.)
- Higher legal costs, which can be prohibitive if the company does not want to be acquired.
- The opportunity cost of abandoning other deals in order to focus on the merger of the two companies.
- The possibility of a negative reaction to a merger or acquisition, which will lead to a decrease in the value of the company's shares.
Tip: Make sure that your strategy will help you meet your business objectives. You should not pick a strategy based solely on cost or convenience.
#5. Create a business plan, consider financing and insurance needs, develop the strategy document
In order to determine the amount and type of funding required to support your business, it is important to calculate how the initial investment in manufacturing, shipping, hiring, and other costs will affect working capital. Be aware that foreign buyers may want longer payment terms.
Check with your banker for any funding needed to cover the deficit. It is better to get a line of credit or a loan in advance than risking a monetary crisis while you wait for sales to rise.
You may also want to consider insurance to protect your company from the unexpected.
Also, be sure to write down the details of your market entry strategy. Don't keep it all in your head. This document will be handy for arranging any funding needed and as the basis for your export marketing plan. You can ask your accountant, lawyer, banker, or third-party expert to comment on the improvements.
You should regularly review your go-to-market strategy to monitor your progress and make updates. This is an important plan to help you stay on track, build support from your team, and keep everyone in business moving in the same direction.
The Bottom Line
Entering a new market is attractive to startups for its benefits and promises additional income. In general, this can be risky. As a business person, you need to get a broad overview of your goals in order to develop a detailed plan for entering a new market.
Breaking a daunting new market entry project into a streamlined step-by-step process makes it much easier to see the big picture and avoid failure.
Start with a deep understanding of the new market, make sure you have enough internal capabilities, and don't get discouraged by losing small battles along the way.
As Drew Houston, CEO of Dropbox said, “Don't worry about failure; you only have to be right once."
Remember that any business is not only about sales and profits. It's about hard work in promotion, software development, advertising, marketing research, and comprehensive industry analysis.
If you have a strong desire to bring your long and short-term projects and goals to life, a go-to-market strategy is what you need.
