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The IKEA Effect: The Economics of IKEA

Recently, my mom had me and my brother put together some IKEA furniture…new year, new organizers, new furniture.  Building and putting together the pieces was quite fun and a welcome break from all the schoolwork, until 10,000 KALLAX shelves later, my fingers were screaming for a break, and I was ready to call it a day!

 

I can’t help but think, though, what is IKEA’s secret sauce?  It’s a massive company financially, literally, and figuratively and the blue and yellow brand can be found anywhere in the world.  IKEA, a Swedish company (with amazing Swedish meatballs!), was founded in 1943 by Ingvar Kamprad.  IKEA is an acronym for Ingvar, Kamprad, Elmtaryd (the farm on which Ingvar grew up), and Agunyard (a nearby village).  Ingvar started the company as a mail-to-order business, but as the business grew, shipping became costly as well. Gillis Lundgren, a vital member of IKEA, couldn’t fit a table in his car so he thought that maybe he should just cut off the legs.  From this, the idea of “flatpacking” was born, which meant all the pieces come packed in a flat box, unassembled, but complete with all the pieces. This is the cornerstone of IKEA’s successful business model.

Flatpacking for IKEA meant lower storage costs, lower shipping costs and increased availability of products.  It also meant that consumers help themselves to products in their warehouse (which reduces the need for many employees).  This means that prices are kept low for consumers since they would need to help themselves and assemble the items they purchased themselves.  Self-assembly is a byproduct of the flatpacking system.  But I wonder, does that make IKEA more or less attractive to consumers? 

 

Apparently, self-assembly is what makes loyal IKEA customers even more loyal to the brand.  And there is a name for it:  the IKEA Effect.  Behavioral economists define the IKEA effect as the cognitive bias where people tend to place more value on things they helped build or create.

Michael Norton first coined the term IKEA effect in 2012, in his paper, “The IKEA Effect: When Labor Leads to Love.”  It’s a seminal paper that explains the phenomenon and at the same time led to ideas on how companies can leverage on this cognitive bias.  He found that the effect is only apparent on “the successful completion” of labor.  So, if the person is left unsatisfied by the outcome the IKEA effect fails to produce the intended effect.  This is where IKEA is so successful—its instructions are simple and clear, and all the pieces are meant to fit perfectly, leaving the consumer satisfied and fulfilled.

 

What’s the behavioral economics behind this bias? Competence allows us to feel satisfied when we have a certain sense of control, and being involved in the process of building gives us just that.  Moreover, we tend to assign a higher value to something when we put more effort on it.  This idea of effort justification extends even to relationships. The endowment effect also contributes to the IKEA effect when there is a certain sense of connection to the item that we help build.

 

The IKEA effect has been used in different applications: from brownie mixes, to kids cooking their own vegetables, to Subway’s model of building your own sandwich.

IKEA has managed to build a very loyal customer base because of the connection that consumers have to the home furnishings they helped build.  Moreover, IKEA has learned to adapt to the times by offering an efficient and tasty food court featuring Swedish goodies, delivery service and assembly service.  Moreover, who can resist the very Swedish names that IKEA has assigned to its products?  In fact, IKEA, has created a name bank in case you’re looking for some unique names for your baby.  Olga, Egon, Ingeborg, Ulrik anyone?


The Gist…

·      IKEA has one of the most successful business models around: flatpacking

·      Flatpacking has led to the company’s model of consumer self-assembly which in turn creates a positive connection to the product and the brand: The IKEA Effect

·      IKEA effect is a cognitive bias where consumers attach a higher value to a product they helped build or create.  The more effort exerted on a product, the higher the value we assign to it.

·      The IKEA effect can be used as an effective tool to create customer loyalty, and is being used by different companies, like ready to cook meal kits, cake mixes and even building your own sandwich companies like, Subway.


























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