What are the three key mistakes digital companies do when expanding?

What are the three key mistakes digital companies do when expanding?

The digital world moves extremely quickly. 10 years ago there were zero smartphone owners in the world. Facebook was a small start-up whereas Uber and Airbnb did not exist. Today there are more than 2 billion smartphone owners who fuel an $88 billion app economy. Merchants operating in the digital economy must spot emerging trends and stay ahead of the curve if they wish to continue operating successful businesses. Otherwise, they end up in a situation described by Ernest Hemingway:

"How did you go bankrupt?"

"Two ways. Gradually, then suddenly."

The growth of the digital industry has today shifted into emerging markets. Internet accessibility in markets like India is accelerating while it is slowing down in mature economies. Affordable Android phones make digital entertainment accessible to more people than ever - average device cost has declined 50% since 2010 while income in markets like India have almost doubled.

But when talking with digital content merchants, we still often hear objections to entering these markets and misunderstandings on how to do business in them. Here are the three most common perceptions that are often not correct.

Emerging markets have little potential for us.

The most common misunderstanding about emerging markets is that it is not possible to earn money there because of low income and lack of access to payment methods. But such assessments are often based on our previous experience with the market, with the perception solidified in our mindset and little motivation to review it.

However, consider the following: Indonesia’s GDP per capita has grown 110% in 10 years. 22% of Indonesians currently own a smartphone, 37% will own one by 2019. While it is true that access to traditional payment methods is lacking (credit card ownership will reach around 4% by 2019), paying online is available to most of the population through alternative payment methods, e.g. carrier billing.

So while some markets might seem unattractive because of their profile in the past, markets change and digital merchants should review the situation from time to time. Most often, the situation is reviewed when another company proves that it is possible to make money there. But waiting around for this can be a significant risk.

Our competitors will validate the market and then we will beat them with a bigger marketing budget.

One way to validate a market is by having your competitors do it, see if it works out and then attempt to duplicate their success. But this rarely works and waiting around sets any company back significantly. There are numerous examples of this happening in the digital industry:

Uber launched in 2009 and has raised over $8 billion in funding, but only launched its service in China 4 years later. By that time, its local competitor Didi Chuxing had already been operating in the market for a year. In 2016, Uber sold its China business off to Didi Chuxing.

Netflix expanded globally to 130 new markets in the beginning of 2016, after 9 years of operations in Western markets. Netflix has grown its subscriber base since then by 11 million people, but this is distributed across the entire world. Meanwhile, in South-East Asia its competitor iflix has added over 2 million users by focusing on just 6 countries in the region.

Facebook launched in 2004 but opened an office in Russia only during 2010. Meanwhile, its local competitor VK had already been operating in the country for 4 years. Today, VK is the #1 site in Russia by traffic, while Facebook is positioned at #68.

People in emerging markets are ready to consume digital services today, not until merchants figure out whether the market is finally ripe for entering. If you don’t provide the service, someone else will and entering the market later while being behind will be a lot more costly.

We plan to enter emerging markets with strategy that has worked for us elsewhere.

Using strategy and tactics from existing activities can only be applied to new markets if the conditions in that market are the same. Unfortunately for digital merchants, emerging markets are very different from the US and Europe where their existing user base is located. Three key differences make it difficult to use the same approach for these new markets:

Income: The gross national income per capita of the United States is 34x bigger than in India, which means people have much less income to spend less of on digital services and entertainment

Internet access: Technical infrastructure providing access to the internet in emerging markets is less advanced, which means users are able to consume less digital content and at lower speeds. Due to the lower income, people are also less averse to using their mobile data connections.

Payment methods: Only 2% of Indians own a credit card and most other emerging markets have card ownership in the low single-digits as well. This means relying on collecting payments through your existing payment methods will prove highly inefficient.

These three factors mean digital merchants need to find alternative solutions to user acquisition and monetization in emerging markets. Fortunately, there is a large marketing and payment platform operator present in all emerging markets. You guessed it, mobile operators. While the reach of banks (and traditional payment methods) is limited in these regions, mobile operators are often the biggest consumer-facing businesses in their respective market. Not only do they have the marketing channels to reach these users, they also have carrier billing to collect payments from them.

It’s no surprise then that companies like Spotify, WhatsApp and many others have built their emerging markets strategy on the basis of working with mobile operators. Bundling deals, enabling free data to users for their services and collecting payments are all things that can be done in partnership with mobile operators.

As emerging markets continue to grow, digital merchants can afford to ignore them less. Even when immediately not deciding upon expansion into these regions, gathering information and understanding how local people behave differently from the audience you are used to is the key to future growth.