Entrepreneur Insight

What Every Small Business Needs to Know Before a Market Expansion

Whether it’s expanding in your industry vertical, or introducing new products, here’s what to consider.

A market expansion can be a make-or-break moment for your small business. Once you’ve achieved consistent momentum with your current customers, there’s a natural tendency to look at where else you can take your brand, and what products or services you might add to your offerings.

But expansions can fail without proper planning, so don’t rush into this decision. The following steps will help you lay a strong foundation from which you can grow your business regionally, nationally and even globally.

Start with feedback from your current customers

Before you can take advantage of new markets—indeed, before you can identify opportunities in those markets—you need to understand your strengths. Your idea of why your company is succeeding might be different from your customers’ perceptions, so find out why they keep coming back (or not). Obtaining their feedback may reveal strengths and potential product lines you hadn’t considered, allowing you to refine and strengthen your expansion strategy.

One way to gain customer feedback is through short, direct surveys. Your instinct might be to incentivize participation through promotions, gift cards or money. But Trevor Wolfe, founder and CEO of feedback management company BigTeam, recommended leveling with people instead.

“I think one of the mistakes is just to generically send a link and say, ‘Hey, I’d like your feedback,’” Wolfe said. “But if they actually explain, ‘Hey, I’m looking for my next phase of growth, I’m looking to expand, I’m looking into other territories to launch the business, I value your patronage and I’d really like your feedback…if they explain the request for feedback is sincere and that they’re going to actually use the feedback, that is often enough of an incentive.”

You can also offer early access to new products as a thank you for people’s time. But the key is to treat your customers with respect and emphasize that element of the relationship, rather than making the survey request purely transactional.

Identify your new market

There are four different types of market expansion approaches from which you can choose, said Brian Cairns, CEO of ProStrategix Consulting:

1. Vertical markets, in which you’re already established within an industry (for instance, selling paper supplies to schools puts you in an education vertical)
2. Geographic markets
3. New products and services
4. Adjacent markets, in which you can leverage your company’s current capabilities into success in a new industry

“The first question you have to ask is, ‘If I’m going to expand, what makes the most logical sense for me from a cost standpoint, and from a profit standpoint and a revenue standpoint, as well?” Cairns said.

The expansion should build on what’s already working in the business. Cairns gave the example of a restaurant owner looking to expand or open his or her next eatery. “For that restaurant, it’s probably not going to be able to go from Italian to Chinese,” he said. The owner might have the business side down, but not the competencies to brand and produce Chinese food. Instead, the owner might look at the make-up of the current restaurant’s loyal clientele, look for other geographic areas with similar demographics and establish a new business there.

(Photo credit): Gettyimages.com/Sam Diephuis

“The first question you have to ask is, ‘If I’m going to expand, what makes the most logical sense for me from a cost standpoint, and from a profit standpoint and a revenue standpoint, as well?"

-Brian Cairns

Research the legalities

Before you commit to an expansion, make sure you understand all of the legalities surrounding your industry and your tax obligations in the new market. To continue with the restaurant example, Cairns noted that a restauranteur looking to expand from New York to New Jersey would need to research the latter’s licensing requirements and other laws surrounding food service. They may vary from those in New York, and non-compliance could cause the new business to shut down before it’s gotten off the ground.

Regardless of industry or expansion type, you must also ensure that you’re prepared to follow all labor and tax laws. Importantly, you want to understand the legal and tax landscape before the expansion, so you can hire the appropriate experts and consultants.

This is equally true with international expansions. You really need to be clear on the laws in the foreign country in which you plan to do business, including tax laws and regulations around trade and business relationships.

Prepare your finances

If you need to apply for a small business loan for the expansion, be thorough in preparing your presentation, especially if you’re a young startup with limited financial history. Newer businesses must be able to show a strong business plan and make the case for why the expansion will be financially viable, said Allen Lin, a vice president and SBA loan officer at East West Bank.

There are several types of financing available for small businesses, including those for import and export strategies, such as letters of credit and short-term financing for the purchase of foreign goods. But lenders want to see that you understand your market and that there’s a good chance you can fulfill the strategy you’ve outlined for them.

Say you want to sell your product in China. Ideally, you or your joint venture partner will also have a history of doing business in that market. According to Lin, banks look for an established relationship to protect their own investment, but to protect borrowers, as well.

“If the borrower doesn’t have any previous experience or a relationship with the foreign buyer…they have high risk, because when they ship out the product, they don’t know whether the foreign buyer will pay them or not, so they create a risk [for themselves] and the bank,” he said.

A long-standing relationship with buyers and a track record of doing business in the target market reassures the bank that you’re likely to get paid and are therefore likely able to repay your loan.

Customize your marketing content

To reach—and, more importantly, convert—clients and customers in new markets, you must speak to their particular circumstances. Content is a great way to do this. Fortunately, it’s possible to leverage existing content into your target expansion areas.

If you’ve written, say, an e-book that’s done well with current clients, build on that to create a version for your expansion market. Update the insights and include references based on the context of who the new customers are, taking into account regional trends and cultural preferences.

“You want to customize and tailor [your content] as much as feasibly possible,” said Bryan Hanley, head of client strategy at Digital Mark 360, a digital marketing and business optimization firm. He offered the example of a moving company that wants to expand into neighboring states to grow its geographic footprint.

“The product is the same everywhere, right? However, each of those states probably has different nuances, different interstate transportation laws. Maybe one state has more apartment buildings, maybe one has more rural areas,” Hanley said. “You want to customize it for each state because that’s going to make the customer feel like you can handle what’s going on.”

The same mentality applies no matter what type of expansion you’re initiating. You are pursuing new clients, and you need to gain their trust. Demonstrating that you understand where they’re coming from and emphasizing their pain points is key to achieving that.

Don’t spread the company—or yourself—too thin

Cairns cautioned against investing so many resources in the expansion that there’s nothing left over for the existing market.

“It’s important to keep enough [financial] reserve and [to understand] the full and entire cost of that expansion,” Cairns said. But you also need enough personnel to maintain the current operation while you focus on the expansion strategy. Cairns said business owners often make the mistake of assuming they can manage it all on their own and not putting someone in place to ensure continuity with what’s already working.

“Most of your attention is going to be on the new location, so who’s going to be picking up the slack in the old location because you’re not going to have the time to be there?” he said. “It’s just a lack of awareness that you’re going to need to backfill yourself.”

Expanding to a new market could take your small business to new heights, but it won’t happen overnight. Take the time to study the opportunity, and prepare the company to take advantage of it. When it comes to growth, you want to be thinking long-term so your organization can prosper for decades to come.

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