Would you buy a TV before it’s been made? Kogan thinks you will

This week, Australian startup Kogan launched in the UK and announced LivePrice, a new pricing model that sees consumers paying for products before they’re even manufactured.

Ruslan Kogan has made a name for himself in Australia by allowing Aussies to buy direct from the factory, therefore cutting out the middleman and in doing so being able to offer prices considerably lower than the competition.

Kogan doesn’t just cut out the middleman, it produces its own branded consumer electronics (like TVs) and white goods (like microwave ovens and vacuum cleaners) and has them manufactured, often in the same factories as other leading brands using the same technologies. Kogan currently stocks around 100 items in Australia.

The only trouble with this is that there may be a wait to get the product you want as it hasn’t been made yet, so the site publishes an “expected dispatch date” which is of course reliant that the goods have been made, shipped out from the factory in China and then delivered to a distribution point in Australia.

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Kogan utilises social network sites like Facebook and Twitter to work out what customers want and then goes off and builds products. If it’s a high-end LED, TV it may use a panel from Samsung and a tuner from LG, but Kogan will pick and choose what’s best for the product and the consumer, i.e. a high end product can be made from best-of-breed parts and, as it’s assembled and tested in a factory in China, it may actually be coming out of the same factory as an original branded product.

By getting customers to choose the products, Kogan sells in volume and it’s all about high volume and low margin.

UK Launch

Kogan’s UK presence is a limited launch with 11 items (TVs, a video camera and 2 SatNavs). The SatNavs are identical apart from one is UK-only and the other is for UK and Europe. The UK site will get more products in-line with the Australian site soon and Kogan fully expect to extend to more territories too.

Kogan is again trying to undercut the competition by using high quality parts and selling direct in the same way as in Australia. However, dispatch dates for most products are early next year so they’ve missed the Christmas shopping rush (unless a confirmation notice is good enough as a present for your loved ones).

LivePrice – paying for goods before they’re made

Though the launch of the UK site is important, the actual announcement concerned a new system Kogan calls “LivePrice“. This is a system whereby the price varies depending on when the customer purchases the product.

Normally a manufacturer has to get finance which pays for the materials used to make the product, then ship them to China, assemble and test them and send them to a distribution point. This all has to be paid for in advance and as everyone knows borrowing money costs.

Kogan is now trying to remove the borrowing aspect, by getting the customer to pay up-front, before the product is even manufactured. This pays for the materials, shipping, assembly etc. The earlier in the process that the customer commits to buy, the cheaper a product is.

So, a high-end LED TV may cost £400 if the customer elects to commit to buy as soon as the product’s announced, but by the time it’s stocked in a warehouse ready for delivery it may cost £530. So the customer gets £130 off the end price (which Kogan says is already market leading) by taking the risk of buying early, generally a couple of months before the product is ready. The interest lost by the consumer buying early is much less than the discount but Kogan has less risk in manufacturing the product. If things do go wrong the customer can still get their money back.

Though Kogan says LivePrice’s structure is transparent, it doesn’t publish the algorythms behind it – that’s their ‘secret sauce’ – but it should work across all their product lines.

Will LivePrice take off?

It’s a clever model which adopts crowd sourcing for product selection and now adds crowd funding. If enough people do buy into it, it means Kogan needs very little external financing (and financing these days is expensive) so they can keep prices low. However the model depends on lots of early buyers in order to get the big discounts.

Though Kogan does make high quality products, the question is whether their name is good enough against the traditional consumer electronics giants. Would you buy a TV from Kogan or a similarly spec’ed but higher priced version from say Samsung?

Maybe in these economically hard times people will and Kogan could be on to something.