1. Primary or Secondary Data:
Market screening needs exploratory research that depends upon gathering “secondary data”. These are data that have been compiled and published earlier, by someone else.
“Primary data” refers to the information that is collected by the exporter himself. This kind of information is required when secondary data falls short of the exporter’s needs, e.g. when researching a specific type of consumer about the acceptance of a specific product (in the third and fourth stage of export planning).
Secondary data can usually be found in public sources, like governmental databanks and, libraries in the target country or in the exporters’ country.
A surprising number of subjects have already been researched. Quantified macroeconomic data relevant to the market selection can mostly be found for. Most importantly, the data are usually exhibited in such a manner as to enable comparison. The Euro stats (European Statistics) have been designed that way.
Secondary research is cheap and fast gathering of all the information required and is just a matter of asking for it by letter, telephone, by computer or from behind the desk. That is why it is described as “desk research” (as opposed to “field research”, which requires going out to look for primary information, e.g. by interviewing or fact-registering).
Secondary data collection works fast and costs little. The disadvantage is that the data are not tailor-made for the specific purpose and that the information is neither exclusive nor a secret. Primary research will give the answers to a specific purpose, but such research consumes a lot of time and money.
Several thousand databanks are accessible on the Internet through a computer, which by means of a modem, where one can tap information of various kinds (including the Eurostats, the European Statistics, providing many data free of any charge except for the telephone costs). Although ‘surfing’ (browsing) may take time, once located, the data is available with a click on the PC mouse.
Having received the data, it will be necessary to list all information about the target countries. That is tedious work but any staff member can do it. Then the selection criteria have to be applied as described above. Some criteria which has relevance to the specific industry, or the manner in which the products are used can be added.
Based on the evaluation of each and every factor, the attractiveness of the market, can be judged, for e.g. by giving them a score (“very much the same as in own country, almost similar, somewhat different, and entirely different”).
The larger the differences, the lower the score. The result is a tentative list of countries, offering market potential, ranked according to certain estimation.
2. Estimating Market Potential:
Step-by-step the exporter should close in on his final customer. But can he actually be reached? And is the demand large enough to justify the effort? What competition will have to be faced?
These questions are important for deciding which market or market segment to export to. This guide will help answer the questions to enable establishing a “market potential.”
3. Market segmentation:
In the countries listed in the priority ranking, export markets in which a need for your product exists will have to be found.
A market, as defined earlier, is a group of consumers, sharing a common need for a certain kind of product or service.
A sub-division can be made within that group, splitting up the group into smaller groups, which share the need for a particular product. Such a sub-divided group is called a market segment. Segments in turn, can be sub-divided into even smaller parts called ‘niches’. In the present competitive times, most suppliers aim at such niches (assuming they can actually identify one) to penetrate foreign markets. Start small, is the motto.
In the early fifties, European housewives generally washed their laundry in tubs. They used solid bars of soap, smudging heavily. When the washing machines were introduced, the housewives needed a different type of soap, a low-smudging detergent, which was offered in powder form for easier administration. They formed a segment in the soap market. A new (sub) segment of market was formed.
Now-a-days, other segments still develop. For example, housewives who want strong detergents with enzymes to wash at lower temperatures (using less electricity), and housewives who want non-phosphate detergents (to protect the natural environment), or detergents to wash their modern textiles.
Such segments will always come up (and eventually vanish again). The manufacturers are quick to recognise new segments, because they constitute new market potential. One of the most challenging and creative tasks for the market is to identify such segments. That is called “segmentation”.
The “trick” of segmentation is finding a balance between competitiveness and profitability. This means that the segment should be:
i. Large enough to ensure a good return on (marketing) investment,
ii. Small enough to enable the supplier certain domination over his competitors. In that situation he will be a trend and price-setter. If he is the first to recognise and exploit the segment, the supplier can probably obtain such a position.
So the supplier will not only be looking for markets, but will also have to identify relevant market segments and niches. “Relevant” means: fit for your specific product(s). In practice, segmenting will be combined with the identification of a possible importing buyer.
The logical question regarding market entry will be: Can the market be entered with these products? Is it possible to gain physical access?
This question should be answered easily, but in practice there may be problems.
Most countries have an extensive set of regulations concerning products that can be imported or not. To find out if the supplier’s products are included, he could start with referring to the import statistics of the countries on his priority list. They will tell if products in the interested product category have been imported before. That knowledge will give a foothold.
As pointed out, the product classification (9-12 digit) number of the product should be known, according to the official Customs Tariff Nomenclature in Europe that is the Harmonised System, also known in most developing countries). The classification number can be checked out by (any) customs.
The import statistics can be obtained at any national Embassy or Consulate or through Internet or Export Promotion Councils. N.B. Do not put the import statistics away yet. They will be needed again soon when estimating market sizes and trends.
After having established that imports which have been registered previously, the Import Regulations of the target country should be consulted. The Import Regulations will be explicit (though complicated). They will tell whether or not a given product is allowed to be imported and under what conditions.
The conditions (“tariff barriers”) can be:
i. Import is only allowed when a certain levy (import duties) is paid.
ii. Import is only allowed up to a certain maximum volume (“quota”).
iii. Import is only allowed when originating in a certain country (e.g. as described in the Generalised System of Preferences).
These conditions should be registered carefully. May be, your TPO (Trade Promotion Office) can be of help. These may be needed for future planning, for instance when calculating the market price.
Import duties can be very effective barriers, impeding undesired imports. So are the quota conditions, mentioned above. The GSP and similar preference systems are not meant to impede, but to promote imports (mainly from specified developing countries).
Trading will meet many other barriers, apart from duties. They are called “non-tariff barriers.”
Best known are the regulations regarding the protection of the health and safety of the (European) citizens and their (natural) environment. These regulations are reflected in product norms and standards.
Although their explicit goal is to protect buyers and users of the products, their effect can lead to frustration of imports. For foreign suppliers, they can pose tremendous problems, like being forced into (expensive) product adaptations and threatening the operational profit.
The CBI Green Buss database can provide valuable information on environmental aspects which might become barriers, if the supplier is not aware of the implications.
He will often be confronted with internal taxes, like “sales tax” or “value- added tax (VAT)”. They increase his market prices, but since they rule all products’ trade they do the same for the competitors’ products too.
In some industrialised countries there are strict phytosanitary rules for import products, requiring a long quarantine period in expensive storage facilities. Sometimes the packaging and labelling should confirm to certain regulations, or the distribution of the products is limited or traditionally regulated, like in Japan.
It will prove difficult to find out which non-tariff barriers face the suppliers products. He must find out about them before deciding to enter the market.
His trade representative abroad or his Embassy may be able to identify them. Organisations like the CBI usually know about them and research them frequently, sector by sector (“Environmental Quick Scan”).
Having researched the tariff as well as non-tariff barriers, the exporters will be able to establish market accessibility.
5. Market Size:
Once it has been found out whether or not the exporter can enter the market, he will now want to assess if the market is big enough to promise a return on the investment. In this case, the “market” is the consumes total demand, either evident or potential. It is necessary to estimate its size (in value and/or in volume).
At the same time, a supplier will be interested in the way the demand is growing or decreasing. So, next to size, he should assess the market trends.
Assessing market size:
Many markets have been researched before. There may be market surveys available.
The Export Promotion Councils/India Trade Promotion Organisation, DGCI&S surveys give relevant though condensed information on total market size (in volume, as well as in value), market trends, growth patterns, identification of buyers, frequency of purchasing, market segments, distribution channels, etc.
Such information is required when designing a personal export marketing plan.
There are two ways of assessing the market size.
a. By analysing Government statistics
b. By totalising customer demand or consumption
Theoretically, most markets can be quantified (in volume as well as in value of total units purchased) by adding local production to total imports per annum and deducting exports and unsold stocks.
Apparent consumption = import + local production – export – unsold stocks.
However, when working through the official trade statistics, it is known that:
1) It is hard to recognize a specific product category, since the data seem too general
2) Some data are based on strange common denominators for volume or weight that it is possible only to rely on the data indicating total value
3) Data on domestic production are very hard to obtain.
Therefore, a desk research should always include the analysis of customer demand, if only to verify an “educated guesswork.”
All industry information found should be checked. Most industry sectors are represented by a certain organisation. These organisations usually publish production figures as well as total consumption data, mainly in value (price at wholesale level).
Occasionally, the national governments publish data on some of their markets. These could be retrieved via official channels, by asking the local TPO or commercial attaché.
Specific industry sector data can be obtained from the sector organisations or found in trade or business magazines.
If a company is a supplier of industrial goods, components or if it wants to offer its production capacity on the basis of subcontracting or licensing the prospective customer might know the market’ size.
Industrial suppliers know that their market potential is often based upon “demand”. This means that their customers need the suppliers’ products for manufacturing their own products.
The demand for the latter products determines the demand for industrial goods. So if the “original demand” can be established, then the derived demand for the goods can be estimated.
6. Market Trends and Patterns
Knowing the size of the market is a vital piece of information. However, at least another six months of lengthy preparations is needed before entering the market, so there is a need to know how large the market might be in the future. Knowing which way the trend of the market develops is vital to the planning.
Therefore, it is necessary to estimate the market size for the next three to five years. From historical data, one could try to extrapolate the future trends, i.e., growth, stabilisation or decrease.
Products in western markets, particularly consumer products, tend to “grow old” quickly. The product life cycle is short. The product that is fashionable today, can become old-fashioned in a few years, sometimes even months (garments, handicraft).
The product might have a tendency to grow old soon. The market may be declining too fast to be attractive. So it is better to be careful.
Industrial goods, on the other hand, tend to have longer-lived markets (unless a product is supplied to fast-developing high-tech industries, like the computer industry).
Offer potential, but they will attract strong competition, especially when the market is big. Price levels tend to decrease. Yet, there could still be room in the market when the possibilities of finding new segments are considered, by offering a competitive advantage.
Probably indicate saturated demand. Many competitors are active, though some may already have had to withdraw. Prices are under constant pressure. Promotion is heavy. Such a market is not easy to penetrate, unless a competitive price is offered.
Most markets in Europe are stable, because of saturation of the needs of a non-growing population.
Offer hardly any profit potential. It will cost too much to maintain a position in the market and still earn money.
This is just a generalisation. Nevertheless, it suggests that it is important to carefully assess the trend of the market, in order to make the right decision of entering a market or not.
Probably the most relevant pattern for market selection is geographical. This is directly related to the physical distribution, and the logistics of your export products.
That refers to the actual location of the demand. Is the market concentrated in a certain area with the target country? Are the customers living or buying in a specific territory well distinguishable from other areas?
In a large country like Germany there are several concentrations of buyers, mainly in the heavily populated areas (Ruhr area, Bavaria etc.).
Industrial developments usually attract more people in the area. Sometimes, industrial buyers show a similar pattern, when most industries are situated in a commercially strategic area (like in Free Trade Zones, Industrial areas etc.).
The industrial and consumptive concentration zones in Europe cover part of the South East of England, the Benelux, Northern France, the French Grenoble area, Western and Southern Germany, North East Spain and Northern Italy.
The recent membership of Sweden and Finland means that this industrial ‘hot spot’ area will extend into Scandinavia. Commercial links are being forged between the EU and associated countries in Central Europe and some Mediterranean states.
In smaller countries, like the Netherlands, it can be safely assumed that the market is spread across the entire country (with a slight preference for the western part, covering the three largest cities of Amsterdam, Rotterdam and The Hague, together forming Randstad).
The reason to focus on this geographical pattern is that it is important to know in advance what distances have to be covered by the products, to reach the customers. Geographical concentration can be advantageous for distribution.
The first competitive battles in Europe will be fought with the weapons of logistics (as it is less expensive and it is easier to control timely deliveries).