BUSINESS

How does IKEA manage to keep prices low

IKEA is a leading home furnishing brand with a strong international presence and a huge customer base. However, apart from being a brand of affordable home furnishing products, IKEA is also an innovative brand that focuses on maximizing customer satisfaction through democratic design. The concept of democratic design is the core element of IKEA’s value proposition which includes form, function, quality, design, value and sustainability at affordable prices. However, despite the great product quality and excellent designs, the company continues to keep the prices low.

Its lower prices and great product quality continue to amaze customers worldwide. One of the main factors driving its popularity and success globally is its pricing strategy. Ikea is also great in terms of marketing. However, the core strength of the company is the economic pricing of its products that continues to draw customers in huge numbers to its stores.

IKEA sells an extensive range of home furnishing products at relatively affordable prices. The full range of IKEA products includes around 9,500 products, and each year, the company introduces around 2,000 new ones. However, despite the growing competition and increasing prices of raw materials and labor, the company has optimized its sourcing and manufacturing to keep prices under control. How IKEA manages to keep prices so low has fascinated individual customers and businesses both. However, some of the secrets behind its excellent cost management strategy are well known.

How IKEA keeps prices low
IKEA Spring Catalog 2020 Cover.


Designed for lower prices:

The main source of IKEA’s popularity is the pricing of its products. Its lower prices have helped the company build favorable buzz and gain customers’ trust globally. Keeping prices low is IKEA’s core philosophy since it wants its products to remain within everyone’s reach. According to sources, the prices at IKEA are near half of its competitors.

The product design process at IKEA plays a central role in controlling the prices of its products. IKEA does not make products that it will have to price higher. In that case, it will have to move away from its core philosophy and Ikea may also start losing customers apart from hurting its image. Instead of making products first and pricing them later, it works backward. The company first sets the prices and then checks if it can build the product at this price.

The company’s entire value proposition rests on its pricing strategy since the company wants to make everyday life better for everyone. It is why it sets the prices first and then begins the design process. The focus of the company is affordable, modern, and stylish furniture. However, the work at Ikea begins with affordability and not with style. So, only the products that fall within the right price bracket pass the test and reach the design stage.

The design process at IKEA is called democratic design and includes form, function, quality, design, and sustainability at affordable prices. IKEA sets the prices that it wants to sell its products for and then designers and suppliers together start working around the design and composition of the product. The question that the designers ask themselves before starting the design process is if there is a better way to make the same product to sell at lower prices.

IKEA has kept challenging itself to bring better products to the market at lower prices, and over time it has mastered the art. It develops the price tag first and then makes the product fit in that price tag. However, this is just one aspect of its business strategy because IKEA has managed to save costs in other areas of its business operations as well and passes on the benefits to its customers.

Producing in Bulk: Economies of Scale

IKEA does not make just a few pieces of each design since it will not sustain its business model. Instead, the company produces in bulk, which means everything that IKEA designs is created in hundreds or thousands to keep prices under control by achieving economies of scale. Bulk production allows the company to receive discounts on production, and thus the company manages to keep costs lower. So, the products that grow in popularity and whose demand rises experience a price decline. The company starts producing more of them and can keep its profit margin on each unit low while also achieving bulk sales and higher revenue. It produces and sells in bulk. When you produce in bulk and source raw materials from the same suppliers, you get price discounts for purchasing in bulk. On the other hand, when products gain popularity and sell in huge volumes, even lower margins can lead to huge profits.

Durable and light yet low-cost material:

IKEA describes on its website how the company makes products and the types of raw material that the company uses to create those products. While the company uses durable and lightweight material, it is not costly. IKEA innovates in all aspects of its business and design innovation is a key factor that helps it with price control.

Across a large number of its furniture, IKEA uses what it calls board on frame construction. This kind of construction uses a layering of sheets of wood over a honeycomb structure. Such a construction gives the furniture a strong and yet lightweight structure. While this construction is lightweight, strong and cost-effective, it is also environment-friendly. Such design innovations have helped IKEA manage prices as well as be more sustainable in its manufacturing operations. IKEA uses this construction in many of its products like the LACK table from 1980. The company also focuses on the efficient utilization of raw material as well as waste minimization to keep product costs low.

IKEA saves on sales and shipping:

Managing lower prices requires a focus on every aspect of your business where there are chances to reduce costs. Marketing, sales, and transportation are also potential areas with hidden costs for retail businesses. However, IKEA has managed these aspects of its business also quite well in order to minimize costs and keep prices low for customers.  First of all, it does not keep as many staff as the other retailers inside its stores. However, every type of information that you may need related to the product is available with it including prices and other specifications. In case you need support inside the stores, IKEA staff is available to handle your queries.

The company saves on transportation with the help of flat packaging. IKEA packs everything flat which means more furniture can be packed into trucks and transported from the warehouses to the stores. Other areas where costs are minimized or eliminated include delivery and assembly of furniture. Self-assembly allows IKEA to remove the costs associated with assembling furniture. Customers pick up the furniture from stores and therefore they do not pay the hidden costs associated with free delivery. However, in case someone needs help with assembling furniture then one can hire from Task-Rabbit.

IKEA is very different from ordinary furniture businesses. It has evolved continuously to achieve scale and expand globally. The IKEA franchise system has enabled faster international expansion for the company. Furniture prices are something that IKEA has always kept trying to bring down. Once an item has been designed it does not mean that its prices cannot be lowered in the future. IKEA continuously works on the design and construction to find out if any change can help it improve quality and bring prices lower.

Moreover, if a particular item grows highly popular and sells more then IKEA is again able to lower its prices by producing more. On several furniture including the EKTORP sofa, the company was able to reduce prices just by flat packaging. IKEA has adopted a large number of business practices that enable cost efficiency and drive profitability.  Another important aspect of its business is social and environmental responsibility. The company strives for cost-efficiency in every stage of production from forestry, sawmilling and board manufacture to furniture production, while also taking social and environmental responsibility seriously.