Key Elements of an Effective International Sales Strategy

By Scott Goddin, Portland US Export Assistance Center

As software firms manage their business in an increasingly interconnected world, the challenge and opportunity of selling internationally presents itself as soon as they establish a web page. Companies need to plan early on in their business strategy if, when, and how to “go international” although the business model applicable to software sales provides a broader range of flexibility than that available in other sectors. The US software industry derives more than half of its revenues from exports. The Software Association of Oregon hosts a membership of nearly six hundred firms that undertake international sales from a “virtual” web presence to an international network of sales representatives. As software applications succeed in the international market, it will become increasingly important to consider development of a more formal international network to support and expand sales and service. Development and management of this “channel“will be critical to companies’ success in global markets.

International sales channels – HDTV, digital or analog

The flexibility of software sales and delivery could lead to the assumption that one sales method should work globally. Oregon’s firms tend to be smaller and more tightly focused on niche markets that often involve a similar customer base in different markets. Companies must be open-minded, however, with regard to the market approach they take in different countries and regions as business relationships in a market may be an important – often overlooked – characteristic of a successful sales model.

In his analysis, “Establishing International Channels, Part 1”, David Holroyd (manager of international sales development at Telesian Technology, http://www.telesian.com/newsnotes/archive/news0034-1.cfm) offers a well-presented analysis of the different options companies may wish to consider as they approach markets around the world. His views reflect the need for companies to evaluate both their internal capabilities and external orientation.

Sell direct from the US

Many companies treat international opportunities as an extension of their US sales territories: for example, giving Asia to a San Francisco-based sales person, or Europe to someone on the East Coast. This can work well in the early stages if you have a Fortune 100 customer base or strong US channel partners to leverage. In fact, you might want to retain the rights to sell directly from the US, especially where you can sell into the international offices of local US clients. You should certainly consider doing this if you have a multi-channel US sales model. In these cases, you can often contract local frontline (level 1) support to a distributor.

Sell through distributors

There are many different kinds of distributors. Unfortunately, in most key territories you need more than one. For example, despite the continued political integration of the European Union, there are few European distribution channels, especially for face-to-face sales.

"Looks-like-me" (LLM) distributor: This kind of distributor resembles a subsidiary, having most of the components of your own company other than R&D and manufacturing. These distributors have the same kind of sales, support and delivery resources as you have in the US. Sometimes these distributors are two-way exclusive (they only sell your product and have exclusive rights in the territory) or, more commonly, they are semi-exclusive. Exclusive distributors will need to provide level 1 and 2 support in the local language to your customers. They may also develop local language training or product documentation, which is often reimbursed through product credits or discounts. Many companies find that their best international sales come from successful LLM distributors. It isn't uncommon for the distributor to be acquired and rebranded as the new subsidiary. In these instances, it is critical to secure the services of the founders, who are often the rainmakers for the business. This can usually be achieved through an extended earn-out arrangement.

Regional distributors or channel partners: There are several successful regional distributors in Europe, and a few in SE Asia. If you can get their attention and commitment, their expertise and multilingual sales teams can shorten your time to revenue and deliver impressive results.

Channel partner: These companies sell similar products to your target market and may also sell your competitors' products. They will be similar to your US channel partners. The relationship will be non-exclusive. You have little control and there is little loyalty. You can use soft dollars to fund market promotion. When selecting channel partners, check to see if they advertise in local publications that reach your markets. Ask for customer references, especially if they will field level 1 support calls.

Localization partner: This kind of distributor is most often seen in Japan or the People’s Republic of China. The distributor takes responsibility for any special non-recurring engineering needed to enter the market and/or government approval/testing that is needed. These are usually long-term, exclusive relationships. For software, the need for localization is usually driven by double-byte character support as much as local language user interfaces. The publisher needs to retain rights to the modified source code and any documentation created, though it isn't unusual for the localization partner to insist on a reverse royalty in the event of early termination. With exclusive distributors and localization partners, agreements must include minimum sales commitments. You need to think through the early exit options for these kinds of contacts. In Japan, the most successful localization distributors have seen their US partners acquired all too frequently, and will insist on strong and long agreements.

Sell through a subsidiary

This is a local sales and support office operating as an arms-length business unit. You have most control, but this is usually more expensive and complex than adding a US sales office. You'll need to hire local staff with market and industry expertise. This creates the most long-term value. In many countries there is a pool of experienced local country managers. It is usually best to work with someone who's "been there, seen it, and done that." Ask to see the T-shirt!

Sell through a joint venture company

Where the investment and commitment to a market requires close cooperation between the manufacturer and local distributor, a joint venture company (JVC) may be a good choice. If the exit terms are clearly defined, then this path can initially deliver significantly better results than a subsidiary.

If you use this model in the US, it is extensible to certain international markets. It will work successfully in Europe and certain Asian and South American markets.

As Holroyd suggests, identification and vetting of the right potential partner can be accomplished by word of mouth and a request for references from both the subject and their clients. Trade shows and related industry venues provide another opportunity to meet or at least research possible contacts in new or established markets. Other options include referrals from business partners or more targeted matchmaking services offered by the US Commercial Service through its global network of offices. Local experts in the information technology field will work with US firms to develop the proper profile for the targeted partnership and then work to identify suitable candidates.

Holroyd’s analysis finishes with some common-sense recommendations to consider as a company creates and effectively manages its international sales channel.

1. It's often difficult and sometimes dangerous to have a US VP of sales manage international channels, but usually this is the easiest option. The need for extensive travel and the complications of local agreements and purchasing procedures make it important to dedicate management resources to these markets early.

2. You must also consider your own company's exit strategy. If – as is common in these difficult days – it's through acquisition, try and create international channels that can be delivered to a larger acquirer in a state that is ready to merge with their local operations.

3. During the early stages of developing international business through distributors, it is NOT a handicap to only speak English. When selling direct it will limit the markets you can address. But later, you will hire management that is fluent in the local language.

4. Make sure you check the references of local management hires very carefully. Try and get US references, too. Stay in touch with your local offices and the employees; if the local manager leaves, you'll want the rest of the staff to stay!

5. Remember that the distributor has costs to recover and needs to be profitable, too. In software, for example, distributors are looking for discounts of 20-50% off US list. The nature of the channel and the value added by the distributor will determine the correct level. Look at your own cost of sales and marketing. If 40% of your costs are sales, it's unlikely the distributor can do much better.

Key elements

The key elements for success focus on doing your homework, being aware of resources that can assist you, developing a strategy and employing both flexibility and commitment in its execution. Growth opportunities will come to those firms best placed to meet the challenges.

Scott Goddin is director of the Portland US Export Assistance Center (www.buyusa.gov/oregon) and has been working in international trade with the US Department of Commerce for over twenty years. He works with Oregon and Southwest Washington high-technology companies to develop international markets. Specifically, he helps them to design market-entry strategies; find and evaluate distributors, VARs, or agents; evaluate product or service delivery methods; and “internationalize” their companies. During his career, Scott has worked as a US trade negotiator working on Asian market access and standards issues for US high-tech and communications companies and intellectual property rights issues in Korea, Taiwan and China. Scott has served in temporary assignments as a Commercial Attaché at American Embassies in Seoul, Taipei and Nairobi and has managed the office in Portland supporting local Oregon firms since 1997. The main portal for export assistance is www.export.gov. He can be reached at Scott.Goddin@mail.doc.gov.