Have you ever created a list before visiting an Ikea store and walked out with a lot more than the items on the list? It happens to me every time. But I am sure I am not alone in this as many people fall into this trap. It’s estimated that 60% of Ikea purchases are impulse buys. And Ikea’s own creative director said that only 20% of the store’s purchases are based on actual logic and needs. In this story, we’ll understand Ikea’s Business Case Study and the secrets behind Ikea’s Billion Dollar Empire. We’ll also see how Ikea expanded to become the largest furniture retailer in the world.
In 2022, Ikea reported sales of $43.5 billion and hosted 822 million visitors in-store and 4.3 billion online platforms. But did you know almost 6% of Ikea’s revenue comes from its food court? IKEA’s founder says, “Hungry people buy less”. So, IKEA started selling food to keep people hooked at the stores! And Today,- 30% of people visit IKEA only for food, and IKEA food makes ~$2.5 billion in revenue! Today IKEA has 466 IKEA stores operating in 63 countries and almost 231K employees. While many people know that Ikea is the world’s largest furniture retailer, most people don’t know that it was started by a 17 years old boy in a storeroom. Hardly any people know that Ikea is a privately owned company. And until 2015 Ikea had not paid any taxes for 40 years.
The Beginnings
The journey of Ikea started in 1943 when a 17 years old boy named Ingvar Kamprad started printing catalogs to sell furniture. When people watched these catalogs, they liked furniture but no one was ready to buy it. And the reason was the furniture prices were too low and people thought that either the furniture quality is not good or the boy is a fraud. So in order to fix this problem Ingvar converted his storeroom into a furniture showroom. Now people can come to see the furniture before purchasing. And this turned out so good that there used to be a line in front of Ingvar’s showroom. And this was the beginning of IKEA.
Years passed and Ingvar opened multiple stores and as of today, IKEA is the furniture King of the world. But have you ever wondered how even after so much competition from big retailers like Walmart, Amazon, and local competition how Ikea has come to this level? It started as a low-budget furniture shop and still maintains this tag. But how does Ikea do this?
Low Price
You know Ikea follows a “price first, design later” principle. Whenever a piece of furniture is designed, the Ikea designers follow the reverse engineering process. They first price the furniture to meet the demand as per the region and then they start building the furniture. And once the product is ready to sell, they monitor the sales and the behavior of people toward the product. If the product is a hit, they will create variants of the product and reduce the price even further.
Ikea follows the “survival of the fittest” while pricing the items. If the product’s price can’t be reduced further most of the time they discontinue the product. But now you will ask how Ikea maintains this low-price strategy. Well, there are many things that Ikea does. But the main ingredient to meet this low-price strategy is their flat packaging.
After pricing of the furniture, when it goes for designing the main component is the logistics of the product. The designing of the product is done keeping the manufacturing, packaging, warehousing, and transit in mind. This packaging strategy not only saves millions of dollars for Ikea, but it also saves hundreds and thousands for the customers as well. Customers don’t have to hire third parties or Ikea services to ship and assemble the products. Packages are built so sleek that customers use their cars to load the furniture packages and assemble the products by themselves using the Ikea assembly instructions. Now some people might ask what if I don’t want to do all this on my own? So Ikea has an answer for you as well.
Ikea Effect
While the flat packaging is great for saving costs for Ikea and its customers. Many customers see it as a downside as now they have to assemble their own furniture. And while Ikea has partnered with other companies like- TaskRabbit in the US and UrbanClap in India, for the people who don’t want to assemble the product by themselves. But Ikea still wants its customers to assemble to love their products even more. And that’s what is the Ikea Effect.
General Mills Example
The Ikea Effect phenomenon is not new. This goes back to the 1950s, when our moms used to make the cakes spending hours in the kitchen. Sometimes it used to take more than a day. So in order to reduce this effort, a company named General Mills came up with the instant cake mixes. Now moms can just add water to these mixes and bake the cake. This was so easy and convenient but this product failed miserably.
Then General Mills did some studies and found that though the product was good the people didn’t take it in a good way. People thought it was an insult to the efforts that moms were putting in making the cakes and now any company is coming and replacing it with cake mixes. And there is no ingredient of mom’s love in this recipe. So now General Mills revised their product and instead of just adding water, they came up with a new product where moms have to add eggs, milk, and oil in the cake mixes and then bake it. Now this product was a big hit and is still in the market. And the reason is that now moms are putting some effort into cake preparation.
Lesson
And this takes us to the most important lesson from human psychology no matter what the result is, if as humans we put effort into doing something we’ll develop a value towards that product. And IKEA applies the same phenomenon to their furniture assembly, termed DIY or Do It Yourself. When customers are putting efforts into loading and unloading the products from IKEA to their homes and then doing the assembly. In the end, they will value this product. And once they develop this value system they will repeat it and IKEA will benefit from the increased sales.
Decoy Effect
Ikea uses the most powerful psychological tactics to exponentially increase their sales and make them stand apart from their competitors. One such strategy that Ikea uses for pricing its products is called the Decoy Effect. The decoy effect says that the customers change their preferences between 2 options when they are presented with a third option which acts as an unattractive option only to make the 2nd option look extremely good.
To understand this with a simple cabinet example from Ikea where Ikea places 3 cabinet options for you. The first cabinet costs $60, the second one costs $90 and the third one costs $95.
The first one is a small cabinet, with a small space, has a smooth movement, and is built with ordinary material. The third one is a large cabinet with large storage and premium hands, built with premium material, and comes with a complimentary compartment that is worth $10. And, then there is the 2nd option which is as large as the third one but built with ordinary material and no premium handles and no complimentary compartments. So this 2nd option doesn’t have a value for money as compared to the 3rd option and here it acts as a decoy.
And on the one hand, it makes the 3rd option look like an amazing deal, it also makes option 1 look great. Studies have shown that the decoy effect can increase retail sales by as much as 14% and Ikea uses this phenomenon in many of its products to increase its sales.
Ikea Maze
When retailers design their stores, they make sure that the floor plan is easy to navigate and that the products are easily exposed to the customers. But Ikea goes one step further. I am sure you must have seen the one-way path in the Ikea stores which lead us to experience the entire store starting from their second-floor living room furniture to the workspace and kitchen tour towards the dining, bedroom, and kids room designs. Which then takes us to their first-floor home decor and lighting section.
Gruen effect
Ikea makes the design of the store in such a way that it makes us forget the main items of our original planned list and we get lost in the Ikea maze. While designing the stores Ikea not only does the analysis of all their sections, they also check their most and least sold items. And then creates their sections such that the least sold items get more exposure. This psychological effect is called the Gruen effect and leads to impulsive buying.
On top of this Ikea uses the familiar positioning of the items as it’s in our homes. They place mirrors in between so that we can see ourselves in those mirrors and get a feeling of belonging in that place. In between the sections they place the cheaper items like light bulbs, pillows, slippers, and some toys and teddies for kids to buy. Though these are low-margin items for IKEA, if you multiply it by the times these items are sold, it becomes a huge amount.
Also, the Ikea food court adds more volume to customer spending. And though Ikea food court runs on no margin to a very low margin, it adds almost $2.5 billion in their annual revenue. According to a study on shoppers, researchers found that those who ate at the food court spent 2 times more on home furnishings than those who didn’t.
Controversies
Despite being the market leader in the furniture business, Ikea has been in many controversies.
Wood sourcing practices
Ikea has been criticized for its Wood sourcing practices. They have faced allegations of financing the government to get illegal timber wood from the forests. Ikea was also criticized after a few incidents were reported of the Ikea’s Malm chests tipping over which resulted in injuries for young kids. In fact, 2 deaths were reported in 2014. After which Ikea along with US Consumer Product Safety Commission issued a warning to secure the drawer chests firmly to the walls.
Biased Branding
Ikea has been also criticized for biased branding and advertising including not depicting women in its instruction booklets.
Hiding Taxes
Apart from all this many people and small businesses have criticized Ikea for not paying enough taxes. In 2015, Ikea paid the taxes for the first time after a 40-year-long Swiss tax exile. In order to avoid wealth taxes in Sweden, Kamprad moved from Sweden to Switzerland in 1973. He spent more than 40 years there building the IKEA empire. If you don’t know, Switzerland is a well-known European tax haven, where federal income tax does not exceed 11.5% and the wealth tax varies around 1%, depending on the Swiss canton. Hence, Kamprad was obliged to pay significantly lower taxes than he would have paid in Sweden.
Apart from this Ikea channels the money through the non-profit INGKA Foundation owned by a trust company. Although it’s a very simplified explanation of the over-complicated legal structure of the company. As per the company officials, this structure is designed to protect the control of the company from outside parties. But knowingly or unknowingly everyone knows it’s for tax avoidance and makes IKEA the 3rd largest charity in the world, only 30% smaller than the Bill and Melinda Gates Foundation.
Well, That’s about Ingvar Kamprad & IKEA business. Let me know what you think about it in the comments below.