Expansion Guide II.: How to choose products and set prices when expanding

Published
3/24/2022
Author
Expandeco
Reading in
10 minute

Expansion is a series of tactical steps that won't happen overnight, but neither are they rocket science. In part 2, we'll go through how to build a product portfolio for a new country, and we'll also be discussing pricing, profit, and margins in e-commerce expansion.

How to choose products for a new market

We already know that expansion is not a copy paste of what works seamlessly at home. That way, you don't copy your 20,000 white goods products and then when you expand into Romania, you find that there is absolutely no interest in some brands of washing machines or microwaves, while the popularity of such products is held by those brands for which you couldn't even find proper suppliers at home.

What are the most purchased categories of goods across countries?

In the Czech Republic, it's not just about electronics anymore; according to Martin Slavětínský from Heureka Group, the leaders include children's goods (bobsleighs, sleds and Lego), clothing and fashion (shoes, earrings, women's trousers, children's gloves), furniture (mattresses, office chairs, garden houses, water barrels), hobby and pet food and, of course, sports equipment.

Slovakia was similar, with children's goods (prams were the most popular), clothing and fashion (tracksuits), furniture (interest in curtains, candles, rattan garden furniture), hobby (fishing), home and garden (saunas, work boots, grinders), sport (dumbbells, weight benches), and erotica. Electronics grew, but it did not become the top category. The Eta brand does not have as much potential in Slovakia as it has in the Czech Republic; there is more interest in the better-known LG or Samsung.

In Hungary, the range of goods bought online is increasing dramatically. The strongest were electronics, books, erotica, and musical instruments. In particular: tyres, microphones, vacuum cleaners and electric vacuum cleaners, Lego, garden houses, fryers, electric toothbrushes, boilers and perfumes.

Romania recorded interest in tyres, stoves and heaters, laptops, graphics cards, dishwashers, smart watches and cultivators.

In Bulgaria, hobby, home equipment, children's goods and electronics performed well. Bulgarians were specifically interested in phones, perfumes, smart watches, graphics cards, air conditioners and BBQ grills.

Slovenia has a small market of over 2 million inhabitants. In terms of e-commerce, the leading products are sports, garden equipment and outdoor goods (chainsaws, swimming pools, light sensors, electric scooters).

Croatia shows a year-on-year growth of up to 100%. It's a green field, where electronics was previously the strongest, but now the biggest interest is in things related to tools and building materials, as well as terrarium accessories, plumbing, and the overall hobby segment.

Which brands are successful in the Czech Republic, Hungary, Romania and the Adriatic?

The overview shows that strong categories are repeated across these countries, but the brands and products are diametrically opposed. For example, robotic vacuum cleaners: in the Czech Republic, iRobot ruled for a long time, but it was replaced by Xiaomi in combination with Sencor and Tesla. On the other hand, established brands such as Samsun and Rowenta are not doing too well. In Hungary, the duo of Xiaomi and Samsung leads, in Romania and Bulgaria it is Xiaomi and Sencor, and in Slovenia, Xiaomi and private brands like Lidl dominate the market.

If we look at the wearable electronics category, for example, the Hungarian customer is loyal to a few of the biggest brands (Xiaomi has over 30% of the market, followed by Samsung and Apple) and if you want to approach them with a new product, you will have tougher starting position. "In this case, I recommend paying attention to the right price range," clarifies Martin Slavětínský, the Business Intelligence Analyst at Heureka Group, "most customers are focused on the categories of very affordable or premium watches." In the Czech Republic, on the other hand, there is a large selection of brands (Amazfit, Garmin, Apple, Samsung, Huawei, etc.) and a broad-minded customer who is open to purchasing a new brand that no one else offers. A large part of the population focuses on cheaper products in the category between CZK 7,000 and 10,000.

How to choose products for a new market?

When selecting a product portfolio for a foreign market, you should base it on two variables: the behaviour of customers in that market and the portfolio of your competitors.

"As a first step, find out the best-selling brands in your category and what share they hold. Look at the specific product mix and reflect customer behaviour (price, category, brand)," Slavětínský adds.

"You can also expand with brands that the market doesn't know yet, which means you have no competition in the category. However, you need to count on a longer take-off and a higher investment in brand awareness," suggests Tomáš Vrtík from Expandeco, another option that is quite common.

For example, an AEG washing machine, which is ranked first, fourth, sixth and ninth in searches in the Czech Republic, appears in the top ten only once in Hungary and not at all in Romania.

How to specifically select products for expansion

  1. Look at your current portfolio and focus on the products that bring you the most sales and be sure to localize those first (the Pareto rule, that about 20% of the products make 80% of the performance, may apply).

  2. Map the competition in as much detail as possible. Compare their products and prices with yours. Filter out the products where you have good prices and good margins and include those as well.

  3. The third filter is keyword searchability.

"If you see, for example, that a given brand does not generate interesting volumes within Google data, I recommend not to get into such products," adds Filip Minár, giving as an example a Czech company in the cosmetics segment expanding into Romania, "they sell well known brands, but they are just resellers and do not have high margins. On the other hand, their own products, on which they can build their margin and brand, are not interesting to Romanians because local customers put status first in their purchase decisions."

How to reach out to customers in a foreign market

According to Slavětínský, price plays a primary role in the customer's decision-making process. As a model example, he mentions electric scooters, which in the Czech Republic are most popular in the cheap to medium price level.

"In Hungary we see a difference - the greatest interest is in the cheapest category, but the customer skips the cheaper middle (compared to the Czech Republic) and focuses on the more expensive middle," says Slavětínský.

In Croatia, the mid-range offers are spread out, the market is fragmented and much more challenging to reach a large part of customers. The business intelligence specialist then adds that in addition to price, the comfort of delivery, shop ratings and reviews are gaining in value across markets. "But even then, price is still at the end of the decision-making process." It's useful to gain insight into buying behaviour of your target country to expand in terms of price. You may be a premium brand in one market but in another market, the situation may be different.

Pricing during expansion

You will use the price sensitivity levels of customers in each segment not only in product decisions, but logically also in pricing.

What does expansion pricing mean

Simply, it's about setting the prices for products obtained from your supplier to your end customers in a way that is ultimately profitable for you. You know from experience in your home market that in reality this means quite complex balancing and strategizing, including working with discounts, promotions and so on. Also, nowadays, so-called dynamic pricing is becoming more and more widespread, which incorporates the current demand for goods from you and your competitors, inventory, and other factors.

What affects the margin in e-commerce

Margin is affected by the sum of factors: the cost of business, the country's tax burden, the cost of logistics and the cost of marketing. It largely depends on if you are a retailer or a direct producer.

You can start with the tax burden of the margin by simply looking it up. There is a standard and reduced tax for each country. In the Czech Republic, for example, the standard tax is 21%, in Hungary 27% and in Germany it is 19%. "Always check whether your products do not belong in the reduced tax. This often includes categories such as food, health, books, dietary supplements and others," recommends Filip Minár, Head of Sales at Expandeco. He recommends reading the details in the Mazars guide.

In terms of the tax burden of storage and transport, you need to answer questions like: what is the average order value? What is your percentage of returns and why do they occur? What products do you get the most returns on? Also keep an eye on how your competitors have this area covered.

DOWNLOAD A PDF WITH A FULL LIST OF QUESTIONS AND FACTORS AFFECTING E-COMMERCE MARGIN

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