The past couple of decades have revealed many different ways to make money through e-commerce. The ability to scale almost infinitely saw the birth of Amazon, which took on bricks and mortar retailers with a gigantic product range. Dollar Shave Club captured huge market share by working lean and going direct to consumers.
Kogan.com, founded by entrepreneur Ruslan Kogan as a small business in 2006, leverage these ideas and more.
For Kogan, the internet didn’t just offer unlimited shelf space, huge reach and more efficient distribution. It offered a greater relationship with the consumer, where the back and forth could help him create a smarter and more reactive business. Initially, it also offered much lower barriers to entry.
“The reason it started as an e-commerce business is because it couldn’t have started as anything else,” Kogan told Business Insider.
“The internet shatters barriers to entry in industries. To start the business that I had in mind — cut out the middle man, get a private label that uses the same or similar components to the big brands, and sell it direct to consumer in a way that is more price efficient, is actually possible online.”
“The business started out with no capital so the internet actually enabled the business to start.”
If you’ve ever walked past a construction site in a shopping centre you’ve gotten a taste of the barriers in traditional retail. Establishing a market presence is really just the first step in a whole series of costly and timely endeavours that find you with a limited amount of shelves, tradeable hours and goods. And no matter how well all this comes off, you’re left with considerable overheads to compete directly with the big guys, who boast economies of scale.
This isn’t necessarily so on the internet. The economics for small businesses are completely different.
“You can very cost efficiently set up a website, set up marketing campaigns, explain your proposition and start saving people money,” says Kogan.
“If I were to go bricks and mortar, it would mean retail agreements and leases and loads of capital requirements in terms of holding stock in hundreds of stores, marketing campaigns and things like that. Whereas online the message is able to propagate efficiently and cheaply. And that shatters the barriers to entry in industries.”
The secret sauce
In 2006 Ruslan Kogan quit his job and started Kogan.com out of his parents’ garage. His idea was to sell private goods — things manufactured by third parties, but with the Kogan branding. At the time this kind of big-ticket online purchase was still nascent. Even modern behemoths like Amazon were mostly shipping huge quantities of low-cost items like books — but using the internet’s ability to feature gigantic selection.
“If you look back in history, catalogue shopping existed for a long time and the internet just made this more efficient and consumer-friendly,” says Kogan.
Until then, this was what a lot of e-commerce looked like. They were online versions of mail order catalogues. What Kogan wanted to do was build on the other key feature of the internet — insight. By engaging with consumers and using the data naturally captured on the internet — what people are searching for or talking about — Kogan could build a unique online business.
Critically, greater internet speeds allowed for the more storage, sharing, and processing of data in real-time.
His small business was something between a manufacturer and a retailer but with a whole load of data-driven insights that could deliver exactly what customers want without a lot of waste.
“For our private label products we do need to manufacture them. We do need to understand what the demand is for the products, what the price points are, find an efficient way to make them and then to get to them to the consumer for a better price than they can find anywhere else,” says Kogan.
“The way the internet helps with the private label product is to very easily and correctly analyse demand. So it gives us tools to survey customers. To be in touch with them on social media. To look at search statistics about what people are searching for. To understand exactly what people are looking for, what they want to see in a product, and then to very quickly find a way to be able to manufacture that product and deliver it to consumers.
“We’ve got very accurate statistics on what people actually want. And by being able to service demand in that manner, we can make a business model that is a lot more efficient.”
“Typically, businesses who don’t accurately predict and who don’t use that level of statistics are left to making purchase decisions based on gut feel.”
Building it out
Kogan has come a long way from a simple website. It recently floated with a market capitalisation of more than $160 million, with revenue projected to top $240 million in the 2017 financial year.
Kogan has largely accomplished this by building a company and culture around his original insight: that the connections and scaling power of the internet are incredibly valuable, especially if you can move quickly on the insights.
Every part of the business, from the sourcing teams to marketing, is built around the idea of best exploiting these connections, teasing out whatever knowledge they can, and acting on it.
“Every single person person that we recruit, whether they are in the marketing team or IT team or in the call centre, they need to sit a logical and analytical reasoning test. We’ve got analytics as part of our culture. We, as a business, act on stats,” says Kogan.
“We’ve got people sitting there looking at trends, analysing data, analysing Google search statistics, and trying to find the trends of what are people actually searching for, in what proportions. For each 40 inch tv we manufacture how many 32inch tvs should we manufacture, is there demand for this product? Are people searching for this?”
“We often make the joke that we are statistics business masquerading as a retailer.”
With the connection, data, and processing power of the internet at everyone’s fingertips, it’s a thought-provoking statement for any entrepreneur.
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