A good way for companies to expand is by exporting to new markets. By exporting, companies can enter new markets, gain market shares and offer their products or services to a much wider range of potential customers.
The two main ways of exporting are called Direct Exporting and Indirect Exporting. Both of these ways have their benefits and disadvantages. Businesses wanting to expand into new markets should consider these methods and their advantages to make an informed decision about which route to take.
Direct Exporting
Direct exporting is the sale by an exporter directly to an importer in another country without using a middleman (another person or organisation) to handle the transaction. The exporter is responsible for handling the sales process, the logistics of shipping, distribution abroad and collecting payment.
The advantage of direct exporting is that no intermediaries such as importers, agents or distributors need to be paid for their services. The disadvantage is that the exporter has to arrange everything himself. To have an advantage of low cost per product, large shipments usually need to be made. If products need to be serviced or returned, the costs are usually much higher than when exporting indirectly through a local partner.
With Direct Exporting, Exporters usually interact directly with the customer and avoid possible confusion with a middleman as well as extra costs. Direct Exporting requires dedicated staff, a lot of knowledge, time and energy.
For exporters just starting out, it can be difficult at first to introduce products into foreign markets. They need to forge their own partnerships and relationships.
In the event that the export business does not go as planned, the exporter can withdraw from the foreign market without prescribing excessive loss, as direct export does not use a contract with an intermediary.
Reasons for choosing Direct Exporting
Direct Exporting can be a good approach if your company:
- Wants to maximise profits or market share
- Has the required skills, knowledge and finances
- Has enough personnel to perform time consuming tasks
- Is targeting an accessible market that is similar to the home market in terms of regulations and customs
- Is experienced in international trade
- Is comfortable with a substantial element of risk
- Is interested in a long-term growth in an international market
Advantages and Disadvantages of Direct Exporting:
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Advantages |
Disadvantages |
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Higher profit margins |
Greater financial risk |
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Greater control over all transaction processes |
Exporter needs to handle logistics on their own |
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Direct contact with customers |
Requires more time, effort and staff to organise |
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Independence from foreign partners |
Customer base and relationships need to be built by the exporter |
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Higher customer trust in the exporter because of direct contact |
Requires quick responding times to customers communication |
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Quicker feedback from customers |
May require response to technical questions and on-site setup and training |
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Developing a better understanding of foreign markets |
More accountability – If something goes wrong, it will usually be the exporter’s fault because there is no intermediary |
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More flexibility in redirecting and improving marketing efforts |
Exporter may have insufficient knowledge or foreign markets and cultures |
Indirect Exporting
Indirect exporting involves the sale of goods or services to an intermediary who later resells them either to importing wholesalers or to customers. Indirect exporting can also mean that the exporter sells to the buyer through a locally based intermediary, such as an export trading company or an export management company.
With indirect export, the collection from the foreign customer and the coordination of shipping logistics are usually omitted. This saves the exporter from having to carry out the organisation and processes for this. However, the exporter loses part of the margin to the importer or distributor or has to pay a commission to an agent.
The intermediary role is usually played by one of the following two types of companies: Export Trading Companies (ETC) and Export Management Companies (EMC). ETCs buy products on behalf of their clients, while EMCs simply manage transactions. ETCs assume some risk by buying inventory, while EMCs usually do not hold inventory of their own.
Reasons for choosing Indirect Exporting
Indirect Exporting can be a good approach if your company:
- Wants to increase profits or enhance cashflow
- Wants to sell a product (Indirect Exporting is normally not suitable for companies selling services)
- Does not have the capacity or skills to do Direct Exporting
- Is willing to make product adjustments according to purchasers (intermediates)
Advantages and Disadvantages of Indirect Exporting:
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Advantages |
Disadvantages |
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More market coverage possible |
Lower profit margins |
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No or few extra staff required |
Dependence on foreign partner |
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Use of agent’s market access and distribution channels |
No direct customer contact, No relationship with clients |
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Smaller financial risk |
Less control over pricing and representation |
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Intermediary/ agent does most of the work |
Difficult to learn about the market if exporter is not hands-on |
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No exporting experience required |
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Conclusion
The choice between indirect and direct exporting is comparable to the choice between selling through an agent or through an own sales force in domestic marketing. Companies may, for example, export directly to large markets while exporting indirectly to small markets.
To decide which type of export business to start, exporters should research relevant points that influence the decision. It is beneficial to be informed about:
- The company size
- The demand for products overseas
- Unique selling points
- Whether the market is already saturated
- How much time, resources, and money can be invested
- Expected return of investment
- Exporting experience and knowledge
- Risk tolerance
Whether your business should export directly or indirectly depends on a variety of factors. Both types of exporting have their advantages and disadvantages. The optimal choice depends on the type of company, the target market as well as the company’s preferences regarding management, time, control, pricing, margins etc.