Simplify. Richard Koch
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understood how it worked, it was too late for them to imitate it.
How IKEA Seduces Its Customers
IKEA would not make so much money without getting its customers to lend a hand. So how does it manage to convince those customers to do so much hard work? And why do they put up with it?
A very low price — less than half the price under the traditional system — is the obvious answer. This is also the correct answer. But it is not the whole answer.
If price were IKEA’s only appeal, it would have far fewer customers. If you walk through an IKEA store, you will see not only hard-up students and young married couples, but also plenty of well-heeled people. You don’t even need to go into the store — just wander around the parking lot and you’ll see plenty of Volvos and 4×4s and BMWs, not to mention a small number of Bentleys and Jags. But you may need to go into the store to understand why. If you look at the shoppers’ experience, you’ll soon realize that, although IKEA asks a lot of its customers, it gives back a lot too — advantages you won’t find in a typical furniture store.
IKEA increases the usefulness of its products and its shopping experience by offering a one-stop solution. A visit to the store can be a day out for the whole family — there are play areas for children, and inexpensive restaurants.
Then there is the art embodied in the products. We define art as anything that is emotionally appealing or attractive that cannot be reduced to hard economic usefulness. IKEA’s products meet this definition by being well designed and stylish.
IKEA also increases ease of use for its customers. The stores are easy to find — with their colossal yellow-and-blue signs — and have ample, free parking. There is a more extensive range of stock sitting within the store than elsewhere. And the vast majority of items can be taken away immediately — no waiting for delivery.
For many customers, these advantages of shopping at IKEA — quite apart from the low prices — balance or even outweigh the disadvantages (mainly the time and effort that the IKEA system demands). But this is where Ingvar Kamprad was particularly cunning. If you scrutinize the non-price advantages, you notice one thing in common: they are all either relatively cheap to provide or even generate extra profits for IKEA. A few jugglers or magicians across a large crowd don’t cost very much per head, and if they draw in a few more families they more than pay for themselves. The restaurants make a profit. If the play area for children encourages a young couple to stay longer in the store, they will likely end up spending more. Good design costs no more than bad design. Signage serves as cheap advertising, usually seen from a nearby motorway or main road. The land on which each store is built is usually cheap, often bought in an area where there are no neighboring shops, so the parking lots don’t cost much. There’s plenty of stock in the stores, yet because they attract a huge flow of customers, inventory is actually higher than in traditional stores.
While it offers these low-cost (or profit-making) benefits to its customers, IKEA has deliberately chosen not to provide certain typical — high-cost — industry services. For instance, if IKEA had lots of well-paid salespeople swanning around its stores, the cost would bite badly into profits. If the furniture was not self-assembly, its cost would almost double. One of Ingvar Kamprad’s key principles is “Reach good results with small means . . . We have no interest in a solution until we know what it costs.”5
Like Ford, Kamprad was a price-simplifier. A common tactic in price-simplifying is to cut back certain expensive services and to compensate for this by lavishly providing low-cost (or, ideally, profit-making) services. As we’ve seen, that is exactly what IKEA does.
The overriding objective is to cut prices yet offer “cheap” or “free” benefits to draw in more customers. These benefits can be categorized as ease of use, greater usefulness, and art. These provide a template for any simplifier to dream up cheap or free advantages for their customers. The other principal weapons in the simplifier’s armory are ingenuity, scale, seeing the business from the customers’ perspective (IKEA is very good at this), customer segmentation (selecting the target market carefully and knowing who is within it and who is outside it), and being extremely hard-nosed about cutting any non-essential features that cost extra or complicate the business system.
Yet the big test of any new system for a simplifying firm over the long term is whether it can be imitated or improved by a rival. If the new business system is bold enough, if it eliminates traditional benefits that the customer is willing to forgo in exchange for large price cuts, and if it provides other benefits that are both cheap and unique, then the risk of imitation or supersession falls dramatically. Market share provides the final bulwark against this risk. If, like IKEA, you can win more than half of the relevant market (self-assembly furniture, in IKEA’s case), and be ten times larger than any rival, you are likely to be secure unless a rival spots a different way to discount prices again. In IKEA’s case, this seems highly unlikely.
IKEA invented the flat-pack furniture market and has provided elegant, inexpensive furniture to tens of millions of customers.
IKEA is the world’s largest furniture retailer, with annual sales in the region of 29 billion euros. In its core European markets, IKEA is nearly ten times larger than its nearest rival.
While the industry has grown by 2 percent per year, IKEA’s growth has been 14 percent.
IKEA is highly profitable, with operating margins over 15 percent — more than double the rest of the industry. We estimate that the company is worth $47 billion.
1 IKEA proves that, with imagination and the right template, prices can be more than halved — in its case by between 50 and 80 percent.
2 Ingvar Kamprad constructed a new business system based on self-assembly of furniture, stylish product design, giant stores, massive volume of sales per product line, and control of third-party manufacturers, who were integrated into the IKEA system. Can you think of a new business system for your industry that could enable you to cut prices by more than 50 percent?
3 IKEA integrated its customers into the production and retailing system, persuading them to do much of the work. Again, is there a parallel with your own industry, or could there be?
4 Customers play ball not just because of extremely low prices but also because IKEA offers them advantages and an experience that other retailers do not. Are there ways in which your firm — or a new venture — could offer customers advantages that would not cost you very much, or would even increase profits?
5 IKEA’s system now appears to be impregnable because the firm’s market share and very high sales levels protect it from imitators. This was not inevitable, however: if a quick-thinking rival had been fast enough to imitate IKEA’s system and implemented it outside Sweden. So, if you invent a way of price-simplifying that works, be sure to roll it out internationally before local rivals have a chance to copy it.
A designer knows he has achieved
perfection not when there is nothing left
to add, but when there is nothing
left to take away.
Antoine de Saint-Exupéry1
Three men created this golden icon, which is recognized and loved (and hated)