Table of Contents

Case 1: How IKEA Designs its Sexy Price Tags

Introduction ………………………………………………………………………………….. 3
Company background ……………………………………………………………………….. 3
Competitive priorities ……………………………………………………………………….. 3
Process for developing new products ……………………………………………………….. 4
Creating exceptional value for the customer ………………………………………………... 6
Criteria for selecting a site for IKEA stores ………………………………………………… 7
Conclusion ……………….………………………………………………………………….. 7
References ………………………………………………………………………………… 12
Case 1: How IKEA Designs its Sexy Price Tags
Introduction:
According to its company website, the goal of IKEA is to provide “affordable
solutions for better living.” The company achieves this goal by offering a wide
range of furniture and household goods at low prices. These prices appeal to a
wide market, particularly those just starting their own homes and families. As the
website states, the company’s focus is “young people of all ages.” IKEA has
seemingly achieved the impossible, creating a range of products attractive to
consumers worldwide and has applied a formula for presentation and sale of those
products.
Company Background:
Ingvar Kamprad founded IKEA in Sweden in 1943 as a mail order company. The
company founder was a man of vision and a supporting philosophy: he wanted to
promote the “democraticization of consumption” by offering furniture and
household goods at prices everyone could afford (Thinking and Acting Strategically,
n.d.).
IKEA still operates under this premise today. The company takes a
straightforward approach to the furniture business, by starting with developing
furniture with the price tag in mind. The IKEA way is to maximize the use of raw
materials in order to fulfill their customer’s needs and preferences while offering
quality products at an affordable price. With this philosophy as its guiding
principle, the company has expanded from a mail order business to 231 retail stores
operating in 24 countries with 522 million customers per year (www.IKEA.com).
Competitive Priorities:
The top competitive priority for IKEA is keeping prices low. The company’s mantra
is “low prices, but trendy with meaning” (Prasoona, 2002). The goal of the
company is to sell inexpensive household items without making the customer feel
cheap. The company aims to sell products similar to competitors, but at prices 30-
50% lower. And while the competition’s prices tend to rise over time, IKEA reduces
prices annually (Chase, Jacobs and Aquilano, pg. 131).
In addition to low prices, IKEAs corporate culture is to be stewards of the
environment and to eliminate waste. IKEA works to ensure that products and
materials are adapted to minimize any negative impact on the environment and are
safe for customers from a health perspective. As part of their business model, the
company insists on keeping costs low and tries to use resources wisely when
designing new products. By using renewable and recyclable materials in their
products, the company appeals to young buyers and green consumers
(www.IKEA.com). The company also eliminates waste by continually redesign its
products to lower shipping costs and maximizing shipping and storage space.
Process for Developing New Products:
With the price tag taking center stage in IKEAs philosophy, the company develops
products in a seemingly backward product development process from traditional
business. The development process begins by picking a price, then choosing a
manufacturer, followed by designing the product, shipping the product and then
selling it.
As mentioned earlier, pricing is key at IKEA. IKEA product managers us a five-point
pricing structure to identify holes in the company’s product line. The group then
identifies the appropriate materials, design, suppliers and most importantly, how
much to charge for the product. IKEA has three basic price points: high, medium
and low (Zeller, 2002). In addition, IKEA is a price leader through a number of cost-
reducing strategies including, large quantity purchasing, discovering ever cheaper
suppliers and markets, low-cost logistics, and a do-it-yourself approach to marketing
and distribution (Thinking and Acting Strategically, n.d.).
The second phase of the IKEAs new product development is choosing a
manufacturer. IKEA designs, but doesn’t manufacture and a key strategy of IKEA is
to leverage cheap labor. Once the price is determined, a manufacturer is selected
before the product design is finalized. The company purchases products for a wide
range of sources. And while the company fosters competition among suppliers, it
also treats them as long-term business partners. IKEA keeps manufacturers
operating at capacity to ensure high volume and lower unit costs (Prasoona, n.d.).
IKEA Engineering employs technicians who are ready to give suppliers technical
advice to reduce costs and improve quality. IKEA is involved in all aspects of their
suppliers manufacturing to include leasing equipment to suppliers to providing
frequent advice in an effort to increase production quality and reduce costs
(Thinking and Acting Strategically, n.d.).
Next in new product design is designing the product. After the price and
manufacturer are determined, the company utilizes international competition to
select a designer to design the product. The company provides only a brief
description, price, functionality and materials to be used. Materials are selected
based on cost-effectiveness to keep production costs low. The company then
selects the design that most closely mirrors the company’s price-quality
parameters.
Most important in the design concept was keeping prices low while producing
product consumers wanted. Ingvar Kamprad, IKEA’s founder, said, “To design a
desk which may cost $1,000 is easy for a furniture designer, but o design a
functional and good desk which shall cost $50 can only be done by the very best.
Expensive solutions to all kinds of problems are often signs of mediocrity” (as cited
in Zeller, 2002).
Shipping plays an important role in IKEAs product design. In an effort to eliminate
waste, the company pioneered the idea of “flat.” IKEA products are designed to be
shipped disassembled. The flat package serves two purposes. The first is to lower
shipping costs by maximizing the use of space inside shipping containers. This
concept allows IKEA to use a 65% fill rate for all shipping containers (Chase, et al.,
pg. 132). The second purpose is to allow consumers to transport most of their
purchases in their own vehicles, saving delivery charges.
The fifth step of the IKEA design process is to sell the product. IKEA stores are self
serve and consumers become part of the sale process. The company asks
consumers to select and retrieve products from a self serve area, self-deliver the
products to their homes and assemble the furniture themselves. The self-serve
concepts contribute to the company’s low price philosophy.
Creating Exceptional Value for the Customer:
Shopping at IKEA is a family experience. The stores allow parents to shop without
the distraction of children by offering safe, secure and supervised playgrounds for
small children and video rooms for older children free of charge. To facilitate and
encourage extended stays, the company also offers oversized shopping carts and
restaurants or cafes (Thinking and Acting Strategically, n.d.).
The layout of the store also provides value to the customer. The store is laid out to
guide shoppers through a deliberate feeling of home where they are free to get
comfortable and imagine their surroundings. Information kiosks provide home
decorating tips and color coded tags provide suggestions for product uses and
mixing products (Chase, et al., pg. 133). As an added service, customers are
provided with pencils, tape measures, and note pads to assist them in their
purchases.
Finally, while IKEA doesn’t offering delivery under normal circumstances, the
company will provide delivery at the customer’s cost and provides trucks for rent.
In addition, the retailer will provide assembly at the customer’s home, for a cost.
Criteria for Selecting a Site for IKEA Stores:
IKEA has constructed its own distribution and retail network, most near container
ports and major truck and train routes. Retail locations are located outside of city
centers where rent is lower; adding to the company’s cost savings. Retail locations
offer plenty of free parking available for customers (Thinking and Acting
Strategically, n.d.).
Conclusion:
IKEA has seemingly achieved the impossible, creating a range of products attractive
to consumers worldwide and has applied a formula for presentation and sale of
those products. The philosophy of the company is to provide furniture and
household goods at prices everyone can afford. The company does this by
designing new products around the price tag, creating long term relationships with
manufactures, designing products based on price and functionality, reducing waste
in shipping and manufacturing and involving the customer in the sale of products.

References

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