When you think about buying furniture, what is the first thing that occurs to your mind? For most of us, the yellow and blue IKEA logo is the initial image that springs to mind. In 1943, a 17-year-old named Ingvard Kamprad founded IKEA, which was financed by a present given to him by his father for performing well in school. Today, IKEA stands as one of the strongest players in the furniture retail market . Its innovative methods have enabled it to establish a brand worth $40 billion USD in a market that is traditionally seen as a "not-so-scalable business." What is the secret behind this Swedish multinational that drives people insane with its products?
1. Labour Leads to Love:
To better appreciate this phenomenon, consider another case study conducted by Harvard Business Review in the 1950s. During this historical period, moms in American society would bake cakes for their children as a sign of their love and loyalty to the family. The caking-making procedure was time-consuming and laborious at the time. This task might take up to a day to complete. At the time, General Mills decided to launch a product that would reduce the effort necessary to bake a cake. For this purpose, they launched a product known as 'Instant Cake Mix', wherein all ingredients were supplied in a packet, and all mothers had to do was mix some water, heat in the oven, and the cake would be ready in a few hours. From a theoretical standpoint, this product appeared to have a tremendous number of sales because it made the consumer's life much easier by lowering efforts, saving time, and delivering much higher quality cakes. However, contrary to the company's projections, this product was a massive flop. After conducting extensive study, the corporation discovered that they made a critical error in developing the product by failing to account the customer's conscience and psychological elements. Mothers saw this quick fix as an insult to the time and work they had put into their gesture of affection. The amount of work was proportionate to the degree of love that the mother felt for their family in their hearts, just as hand-written birthday cards have considerably more worth than SMS wishes. This result taught the business world one of the most important lessons for building a successful brand: no matter how inefficient the system is, no matter how tedious the work is, no matter how bad the product is, if a person has put forth the effort to bring about the output, that person will have an extraordinary sense of value towards that product, regardless of how stupid the product appears to others.
This is the exact same dynamic that IKEA used to develop such a vast brand. When we look at the supply chain of a conventional furniture manufacturer, it involves stages:
i. Product manufacturing and assembly
ii. Product delivery to the store.
iii. Product storage at the warehouse
iv. Furniture delivery to the consumer's home.
This lengthy procedure necessitates a significant number of vehicles for transportation, as well as a substantial amount of capital for such a supply chain. However, IKEA packs its furniture in such a way that it may fit within the consumer's vehicle. This is due to the fact that IKEA furniture is not sold assembled. They are sold in parts, and it is the customer's responsibility to assemble them in the desired positions. Customers developed a sense of value for their IKEA furniture as a result of this. This was not the only advantage the company gained by executing this methodology. It made the company's supply chain incredibly cost-effective. Because IKEA furniture is not assembled, they may maximize truck occupancy, something other furniture retailers cannot do because their assembled items are at danger of damage if no space is left in the vehicle.
The Decoy Effect:
The Decoy Effect implies how, when faced with a choice between two options, the inclusion of a third, less appealing option (the decoy) might impact our impression of the original two options. Assume you decide to have some popcorn at the movies. You should grab a medium-sized bag because you're pretty hungry. When you get at the concession counter, you notice that the small is 3 USD, the medium is 6.5 USD, and the large is 7 USD. You don't actually need a whole large bag of popcorn, but you purchase it anyway because it seems like a much better deal than the medium. The crux of the decoy effect is that the target and competition must asymmetrically dominate the decoy in at least two properties—call let's these A and B. This suggests that the target is ranked higher than the decoy on both A and B, but the rival may be higher on A but lower on B. In this situation, you, the consumer, are weighing your alternatives in terms of size and price. The huge popcorn serves as the objective, while the mini serves as the competition. Because the medium popcorn is asymmetrically dominated by the other two, it serves as a decoy. It is larger than the small, but it is also more costly, thus it is only somewhat superior. The big, on the other hand, includes more popcorn and costs just slightly more than the medium. Making it more affordable per unit.
IKEA employs this decoy approach quite successfully. For example, it will present you with three cabinets, let's call them A, B, and C, each of which costs $40, $60, and $65 USD. Cabinet A is a compact cabinet with fluid movement, however it only has a little space.Furthermore, the material utilized is very ordinary. Cabinet C is a very large cabinet with quality handles and premium material, as well as plenty of storage space. In addition, if you purchase cabinet C, you will receive a free compartment worth $10 USD. Cabinet B is the same size as cabinet C, but it is built of common material without any premium handles and does not include any complementary compartments. IKEA is communicating to their clients with this strategy that cabinet A is a budget product with great value for money, and cabinet C is a luxury product with a wide area and wonderful complementing goods, giving it a very high value for money. When it comes to cabinet B, the corporation depicts it as not being a good value for money because it is almost the same price but lacks superior quality and complimentary compartments. This way, B acts as a decoy, so that when the customer compares option B with C, cabinet C proves to be a far better value for money deal.
This is how a 17 year old turned a small store in Sweden to a mulitnational furniture retail giant!
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