📺 Can Kogan Compete on 'Cheap'? 💸
Diving deep on Kogan's strategy as a low cost player
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This week we discuss Kogan, the Australian e-commerce business. Kogan started as a retail business but has expanded to become a full-stack consumer business.
In this week’s episode, we cover:
Kogan and how the founder, Ruslan Kogan, started the business
Kogan’s competitive advantage and its choice to be ‘cheap’
Kogan’s product expansion and its strategy for future growth
And Kogan’s competitors and differentiation within the ‘cheap’ category
What is Kogan?
At its core, Kogan is an e-commerce business that sells consumer goods online through their website. Kogan was started in 2006 by the founder, Ruslan Kogan with the aim of disrupting the consumer technology market in Australia.
He found that the cost of buying an LCD tv was about a 1/3 of the manufacturing costs and wanted to start a business that provided consumers with technology at a much lower cost base.
Kogan has now since expanded into a full-stack consumer business, offering a suite of products from their roots of consumer electronics, to energy, credit cards, mobile connectivity, home loans, insurance and travel.
Over the past five years, Kogan has managed to have their cake and eat it too - they’ve outpaced the market and grown at 24% CAGR (comparatively the market grew by 14%) and improved profitability by 7pp. At the moment they're an almost $500m in revenue business but are pursuing an aggressive growth strategy.
What is Kogan’s strategy?
Source: Fresh Capital analysis (if you can call it that)
The traditional school of strategy outlines that business compete on two basis; on price or by offering a differentiated product. This means that you could either win by offering a commoditised product at a low price, or a differentiated product (often at a higher price). This frame has was developed by the strategist Michael Porter and has been applied and refined over the years but still holds true.
Historically, Kogan competed on price - they attracted customers because they were the lowest cost provider for televisions and other consumer electronics. As a consumer, if you’re choosing between a TV for $500 from a named brand like Sony, or a $300 TV from Kogan - if you’re not fussed about the brand name and just want a tv, you’re going to pick Kogan.
This choice to be the ‘low cost’ player has created a particular reputation for Kogan, and one that Ruslan Kogan has done by design - his driving motivation to start the business was to sell products at a lower price, and Kogan has taken this ethos and held it true as the foundation of their business.
Since then, Kogan has evolved from its traditional roots of being a consumer electronics e-commerce business and evolved into a ‘full stack’ consumer business.
Tell me more about this phrase you’ve just made up, ‘full stack consumer business’
Pictured: Lack of focus and product discipline or well-oiled consumer machine?
When we say ‘full stack’ consumer, we’re referring to Kogan’s current strategy of being the place for all things that would be required by your everyday consumer.
As a consumer living in the 21st century, you’re faced with a number of problems that you need to solve:
Who do I choose to be my energy provider?
What is the best credit card for me?
How do I choose insurance?
Which phone and internet provider should I go with?
Where should I put my super?
Who will offer the best home loan?
Solving them problems for a consumer generally leads to two great outcomes for your business:
A recurring revenue stream (they generally pay these things monthly)
Strong customer stickiness (for the above things its unlikely you’ll change providers once you’ve chosen)
In the image above, you can see that Kogan has started to expand into a number of different products and services, and shifting away from selling consumer electronics. This shift in their product mix is great for Kogan, it provides them with an avenue to grow their revenue and further scale their business without the need to hold or sell more products. This point here is so important because it solves a particular tension Kogan has with its current business. As a consumer electronics business, Kogan could only grow revenue in two ways:
Increasing the price of their products (not an option)
Selling more products (same type or a different type)
And they’ve chosen the second type, and doing so they’ve managed to expand and find areas of growth without needing to invest heavily in owning or managing inventory and staying as an e-commerce business.
Going back to their reputation as a ‘cheap' and low cost provider, Kogan knows its customers are price sensitive, they want the cheapest price. And they also know that customers need more than electronics, they need insurance, and Super and energy all the other things a consumer needs. So by branching out into these new verticals, they have leveraged their brand and reputation to generate more money out of their existing customer base.
So when we describe Kogan as a ‘full-stack’ consumer business, we mean it solves problems on the ‘back end’ of a consumer (things like insurance, energy etc) that you don’t see but you need to keep the lights on for your life (literally and figuratively), and on the ‘front end’ of a consumer (clothing, electronics, furniture), the things you show other people in your life.
But why target ‘cheap’ customers and where do they find them?
The median income in Australia is about $43,000 a year. When you consider the number of people in Australia, that is a lot of potential customers who sit within that range and a standard deviation of it.
Targeting customers who are price sensitive means that Kogan has a large addressable market size (if you assume people with lower incomes are generally more price sensitive). Kogan knows exactly how to market to these customers - they just want the lowest price. Knowing this characteristic about their customers has gotten Kogan into trouble recently, with Kogan recently being fined for ‘misleading and deceptive conduct’, but overall, targeting these customers means Kogan has room to grow its business within Australia.
Finding these customers is something Kogan has been exceptionally good at doing. They’ve acquired three businesses in the last five years:
Dick Smith - paid $2.6m for a customer base of 1.3m ($2 per potential customer)
Matt Blatt - $4.4m for an undisclosed number of customers
Mighty App - $127m for almost 1m customers (1x revenue price tag)
Acquiring these businesses gave Kogan access to over 2m potential customers - this is really interesting and a great use of money by Kogan because almost 70% of their website traffic comes from free marketing. By buying these businesses to acquire their customer list, Kogan increases its web traffic and its customer base with minimal effort.
Having this customer list enables Kogan to do email blasts and send deals / offers to their customer base (who we know are incredibly price sensitive), and combine these things with ‘Live Price’, ‘Limited Time Deals’, ‘Social Proof’, and other methods to play into the psychology of discounts and consumer behaviour. Kogan even rearranges the front page of their website to show you a unique set of deals based on the data they have on you, in order to incentivise you to buy something.
All of this crescendos into Kogan’s strongest offering - Kogan First.
Kogan First is a subscription service, similar to Amazon Price, that lets Kogan users get access to even more deals, exclusive specials and so forth. By paying a small price of $50 a month, or $12 monthly, you get access to all these benefits, which means, Kogan further monetises its ‘cheap’ customer base. By playing to their reputation of being the low cost provider, Kogan has created an engine for revenue growth that scales without the same inventory overheads of a traditional e-commerce business.
So what’s your overall verdict on Kogan?
Overall we think Kogan is a great growth story and watching it expand into other verticals has been interesting. It has invested for profitable growth and looks to continue its growth trajectory in the future.
During our podcast episode, we dive into a heated discussion on Kogan and its competitors, alongside what we’ve written here. Dan was firmly against, while Albert was enthusiastically in the for column. So if you’re interested, check out our latest episode on Kogan!
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