The International Entrepreneur – Calculating Estimated Profits in Potential International Markets
In business, I’m somewhat of a numbers cruncher. So here’s a starting point for calculating anticipated profits in a new international market:
Start by looking at market size. If you’re focused on a specific niche, then use known information to find the size of the niche. This is much easier in established markets and requires more estimates in markets where the product is new. If you’re estimating the size of a new market, look first at all potential buyers and then decide what portion of those potential buyers would likely buy a product like yours. If there are similar product categories, you can consider this data (ketchup & mustard).
Once you have an idea of the total market potential, then you’ll want to multiply this by your anticipated market share. In more mature markets this is easier. In virgin markets, you may be the first product to market and claim the entire market share. Remember – market share takes time to build, so careful not to overestimate initial shares.
Once you have an idea of how many products/services you think you’ll sell, you’ll want to multiply this by your price(s). One mistake that some companies make is to just take their home market pricing and apply it to their international markets. This could be much too high or too low. For instance, a high fashion handbag in New York may sell for US$400 and the same handbag could sell in Tokyo for US$800. The best way to judge potential pricing is to check on how similar products or services pricing are priced. Convert this price range back to your own currency. If you feel that your product is of higher or lower quality than the in-country equivalents, adjust your pricing estimate accordingly.
In international markets, typical variable costs include materials, labor, any tariffs or import taxes, sales commissions, and possibly shipping fees if your product is shipped individually. Subtract these costs from your price.
Initial setup costs are the main difference for international markets. You’ll need to spend either your company’s staff time or outsource market research. Research costs include researching any regulatory issues, cultural buying behaviors, localization and translation costs, finding in-country service providers or partners, etc. You’ll also need to spend staff time managing the market entry and any in-country relationships. Normally setup costs and time are underestimated, so to be safe it’s best to double your best setup cost estimates. If you’ll need additional production assets for producing the international markets product, then this falls into fixed costs as well.
With all of these costs, it may surprise you that anyone would actually choose to take their company international. It’s important to keep in mind that entering international markets is a long-term strategic decision. If done well, it can mean exponential growth for your company and a hedge against economic downturns in the home market. Please contact me if you have any questions about this blog post!