IKEA Business Model: Secrets to keeping its prices so low

18 May 2021  Read 5229 Views

When people shop online, the first thing they do is apply the price filter from low to high. What if you don't have to do it anymore? Just visit IKEA if you are searching for home appliances. You will get the lowest-priced products there. They make it possible by doing anything to reduce their costs. 

Want to know how they manage to do so? Read the article below. 

IKEA: About the Company

Founded in Sweden in 1943, IKEA is a multinational conglomerate that deals in ready-to-assemble furniture, kitchen, and home appliances. You will be amazed to know that the company's founder, Ingvar Kamprad, was 17 years old when he founded the company. Yes, you read it right! Our Gen-Z is busy scrolling Instagram at that age. 

Here's another fun fact. The company's name is derived from the initials of the founder Ingvar Kamprad, the farm Elmtaryd and the village Agunnaryd where he was born.

Anyways, IKEA is considered a revolution in this sector. Modern designs, simplicity, cost control, research, and development: you name it, IKEA has it. These moats have helped them to expand their business in more than 30 countries. Its business has grown to such a level that they are considered the largest user of wood in the retail sector.

Business Model: The Secret behind Low Prices

The company follows the cost-leadership business model. So, their priority is to minimize the price so that it becomes affordable to all. And it has succeeded in doing so, that too without compromising with the quality. You can consider IKEA as the Xiaomi of the home appliances industry. (disclaimer: not a promotional campaign) 

Here are the secrets which help them to keep their prices low:

1. IKEA designers work around the price of a product

IKEA has become a household name due to the pricing strategy. The product designers play a vital role in doing so. They follow the democratic design and make products that are affordable to everyone. Although they prioritize price over other factors, it doesn't mean that other factors like quality, sustainability, and design are compromised. 

Usually, companies decide the price after producing the product. But they take the road less taken, i.e., they fix the price beforehand and then analyze if they can make the product at that price. But it doesn't stop them from diversifying their business. What if we tell you that they deal in over 12000 products?

Just imagine -

2. The type of material used

IKEA uses durable and lightweight material. But it is not costly. If you don't believe it, you can visit their website to get information about the type of materials used. What's more, they continuously innovate the design. It helps in price control. In 2010, it changed the design of its Ektorp sofa, which led to a reduction of 14% in the retail price!

In the case of furniture, the sheets of wood are layered over a honeycomb core. It is durable and lightweight. At the same time, it is cost-effective and environment-friendly. Also, the company focuses on efficiency in the utilization of resources. It helps in minimizing waste and keeping production costs low. 

So, they can price their furniture lower, following the overall business strategy of the company.

3. Economies of Scale due to bulk production

Everyone knows that the best way to increase profits is to minimize costs. It is due to today's competitive world that companies cannot increase the price as they desire. IKEA follows the same approach. So, they produce in bulk to achieve economies of scale, which in turn helps in keeping the costs low. Its mass production is evident by the fact that it consumes 1% of the total commercial wood consumption of the world! 

That is why the popular products experience a further price decline, despite the increasing demand. They increase production and can reduce the profit margins on these products. It helps in increasing revenue and reducing material costs at the same time. So, they can earn higher profits even at lower margins. Due to this, their revenue has been increasing at a CAGR of 5%. While its competitors like Walmart witnessed 1.5% growth over the past years.

4. Savings in packaging and marketing

The majority of you would have seen the ads of Cred. How can anyone forget those mesmerizing ads? But they burn a hole in their pockets. According to reports, they spent Rs 727 per rupee they earned! Can you imagine how significant their marketing expenses would be?

But that is not the case with IKEA. Everything they make is packed flat. After all, why would people care about the packaging when they can get the same product at a lesser price? It helps in reducing the storage and transport costs, which finally reduces the end price for the customers.

What's more, the company saves on employee expenses as well. They don't hire a store associate at every store. Instead, they display all the relevant information on the price tag itself. It helps in saving the employee costs, making the end price cheaper for the customers.

5. Assemble-It-Yourself Strategy

IKEA takes the cost-saving one step ahead. You can even assemble their products yourself, which feels like a challenge and a good deal for the customer. You can save money and experience the feeling of Do-It-Yourself. It also helped people to generate income by putting their assembling videos on YouTube. A win-win situation, isn't it?

If you are too lazy to do the same, you can hire someone from TaskRabbit, their partner. It costs you money but can save your time and effort. After all, time is money.

6. Saving in Shipping Costs

If you have read till here, you would realize how unconventionally IKEA works. But they don't stop here.

The customers have to take the furniture themselves. It may hurt some customers. But a rational man like you should know the objective of this strategy. It helps in reducing the delivery charges or 'the hidden charges' of free delivery. It was found that the cost of shipping the IKEA sofa was as low as $20, compared to $500 incurred on shipping a sofa in the US. That is the reason why 16% of people in the US purchased more than 1/4th of their furniture from IKEA.

7. Entry into the food industry

You might be wondering why a furniture-maker runs one of the biggest restaurants in India? The answer is you. If you are visiting a store, it is only natural to get hungry while shopping. But what if you can get rid of your hunger there itself? You will remain there longer, right? 

The same was the case with IKEA. They entered the food industry to increase customer retention. To their surprise, they observed that 30% of customers went there just to eat. Like other businesses, they adopted the principles of sustainability, quality, and low prices. Gradually, they became Sweden's largest exporter of lingonberries. 

Closing Remarks

IKEA has followed some unconventional business strategies that other companies would hesitate to adapt. But this led to the company's publicity, besides fulfilling their primary aim of minimizing the costs.

The franchise system also facilitated their expansion globally. Although cost-efficiency is the primary focus, they are second to none in terms of social and environmental initiatives. 

If there is something you need to drive home from this article, it's… never forget that cost minimization is the principal focus of the business (and personal finance as well). So, try to take inspiration from IKEA's business model if you want to become a cost leader in the industry.

Anyway, what's one thing that intrigues you the most about Ikea's business model? Let us know in the comments below

About the Author: Prasuk Jain | 45 Post(s)

Prasuk is an inquisitive and tenacious person with a mix of enthusiasm and a positive attitude, currently pursuing CA. 

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