Consider the Profit Potential of International Expansion

Many entrepreneurial, growing companies contemplate international expansion as a marketing and growth strategy. When developing a strategic blueprint to launch international business expansion, developing companies and their consultants must always consider the potential profit of that undertaking and weigh this against the potential risks before embarking on the effort. Calculating the profit potential clarifies the approach, especially when dealing with an expansion whose profitability can wildly vary under different scenarios. A product’s profit potential is the potential to generate revenue, which, after expenses, leads to net income, a projection, not a guarantee. For example, the simple profit potential is then:

100 units in inventory x (sale price of $5 per unit - expenses of $3 per unit) = $200 profit potential

?Put another way: ?I x (P-E) = PP, where: I = inventory or potential demand, in units, P = sale price per unit, E = expenses per unit, and PP = profit potential. Note that potential demand multiplied by the sale price per unit equates to expected, not guaranteed, revenue. Expected revenue less expenses, therefore, equals profit potential.

?Let’s delve deeper into this concept. By estimating future revenue, accounting for variable costs such as materials and labor, and factoring in fixed costs like market research and regulatory compliance, a company can calculate its gross profit margin. This metric provides valuable insights into the profitability of your products and services and requires taking the following steps.

?Step 1. Estimate Future Revenue

?Start by calculating the profits in the new market. Begin by determining the size of the market. Research figures of equivalent products and estimate the number of prospective customers deciding on the portion of the market niche you seek to net. You may be lucky enough to claim the entire market share but don’t overestimate your initial success. You will want to multiply your estimate by a price the market can tolerate, considering the prospect of domestic and international competitors, landed cost, respectable profit, and converting this price into its currency.

?Step 2. Estimate Your Variable Costs

?Variable Costs – are those monthly costs to you of the goods or services you’ll sell as part of achieving your sales estimate. They’re called variable, or sometimes incremental, because they go up or down depending on the volume of products or services you produce or sell. They commonly include:

1.?????? Direct materials – expense charges when you sell your products.

2.?????? Sales Commissions – charges an international representative earns on a sale.

3.?????? Billable labor - expense charges when the associated sales transactions are completed.

4.?????? Labor – costs incurred for employee labor based on the number of units produced.

5.?????? Tariffs – costs a foreign government applies to imported goods, if any.

6.?????? Packing - costs incurred to ensure delivery safely arrives for customer use.

7.?????? Shipping – depending on the Incoterm of sale, you negotiate with your customer for costs incurred by freight forwarders and actual transportation expenses incurred in delivering the product.

Step 3. Estimate Your Fixed Costs

?Fixed Costs – are business expenses which do not depend on the level of goods and services you offer. Initial operating costs distinguish international versus domestic markets. Researching the market will consume staff time if you don’t outsource market research. Research costs include those costs you incur in uncovering regulatory/legal issues, cultural behavior, translation, and finding the in-country support you might need, such as representation. If you elect to produce a product in-country, you’ll need to estimate and include the cost of assets and their operation associated with that effort.

?Step 4 Calculate Your Gross Profit Margin

?It’s also useful to know your gross profit margin. Gross profit margin measures the difference between the costs of producing a product or providing a service and what you’re selling it for. In short, it lets you know how profitable your products and services are.

?To get your profit margin, divide your estimated average monthly gross profit by your estimated sales. What’s a good profit margin? The answer varies across industries and your requirements. Without looking at the costs of a company’s overhead, such as marketing and administration, profit margins don’t give a complete picture of a company’s profitability. So, it is worth examining this aspect of profitability as well.

?To ensure you comply with government laws and regulations that govern exports, it’s best to work with a reputable freight forwarder, even hiring an in-company export control specialist, to avoid unconsciously making a prohibited export addressed by an export license. Violating export laws can subject your firm to severe penalties and fines you want to avoid.

Aspiring international entrepreneurs must approach the prospect of global expansion with diligence, foresight, and strategic planning. By understanding the complexities of international trade, conducting thorough financial analysis, and mitigating risks through informed decision-making, entrepreneurs can unlock the vast potential of global markets and position themselves for long-term success.

Raymond Hopkins is an award-winning business development and contract management professional.?He is the author of "Grow Your Global Markets" and "Offshore Riches." Based in Phoenix, AZ (USA), he helps businesses accomplish their goals and objectives at home and abroad. Contact him on LinkedIn, by email at [email protected], or by cell phone at 602-561-8586.