Named after one of the biggest furniture brands in the world, the Ikea Effect is a phenomenon wherein customers place higher value in products, if they themselves have contributed to its creation or modification process. The term was coined by Michael Norton, Daniel Mochon and Dan Ariely. The name was chosen on the basis of the fact that furniture from this global giant typically requires one to assemble the pieces for the final product.
General Mills, a North American food company, introduced instant cake mixes in the early 1950s to simplify the work of American homemakers. These mixes considerably reduced the preparation process, providing time to pursue other activities. Initially, however, homemakers were hesitant to use this creation, making this mix unsuccessful. Ernest Dichter, a psychologist and marketing consultant, looked into the matter. His assessment revealed that consumers were feeling guilty about not participating in the preparation process; it was made too easy to be deemed valuable. Dichter proposed a minute modification that was adopted by the company, and it proved to be a complete game changer. Manufacturers altered the recipe and it involved the customers having to add an egg to the mix. Cake mixes became extremely popular and took off in the market.
Customers took to mixes after the introduction of the new step of adding an egg. This was because customers place a higher valuation on self made products. The inclusion of one more step which personally involved the customers in the preparation process, changed their approach towards this product. The feeling of having contributed played an integral role in the product’s success.
A Market Trend
Almost seven decades after the introduction of these cake mixes, the concept of “do it yourself” and involving labour in a process has become an established marketing tactic. Realising that infusing the task with labour is crucial, food and grocery brands are using the Ikea Effect to their benefit, in order to broaden their customer base. Brands like Knorr were founded with the core philosophy of simplifying the preparation process while involving manual labour. The German food and beverage brand’s mission is to provide delicious and nutritious foods at home. It gained popularity because it was a ready to make mix which involved the customer in the process, by requiring the addition of boiling water to the mix. The company realised the potential of ready to eat foods in terms of the demand and growth opportunities, and made a wise decision to incorporate it into their brand ideology. Not only did this help them grow, but also provided the firm with a strong marketing strategy and point of contention. Other brands such as Nestle's Maggi and Yippee function similarly in the market.
A Consumer’s Perspective
Research indicates that labour is central to people's well being, and that the feeling of productivity is an important goal to be accomplished. Although people rank their jobs as their least pleasurable activities, they also rate them as among their most rewarding ones (White and Dolan 2009). This ironic link is explained by the justification of effort involved. Incorporation of labour induces a feeling of productivity, and the effort justification helps customers place a higher value on products involving the Ikea Effect. It is a cognitive bias that reflects a link between perceived effort and product value. This journey from labour to love explains the higher valuation. When consumers assemble a piece of furniture or prepare food using ready mixes, it boosts self-efficacy. Additionally, it fulfills a deep psychological need, which explains why we see items that we put together ourselves as so much more valuable than they actually are. Due to this effect, customers tend to spend more on products which involve them engaging in work. The higher price is justified by the fact that consumers are paying not only for the product, but also for the experience.
Implications for an Organization
This phenomenon is extremely beneficial for the companies because in recent times, companies no longer view customers as recipients of value, but as co-creators of value. It allows companies to increase their profits by charging high prices, even though the customer is involved in putting the product together. Companies such as Ikea and Build-A-Bear, centre around this philosophy. Meal kit companies like Blue Apron and Hello Fresh in the U.S.A are growing at a rapid pace, and are expected to reach a valuation of $20 billion by 2027. Companies employing this technique earn profits because the perception of getting a good deal is created in the customers’ minds. On the other hand, the Ikea Effect contributes to certain pitfalls which are often overlooked by organisations. These include sunk cost effects, wherein the management continues to devote resources to failing pre-existing projects reducing the scope for innovation. It also creates a situation wherein a company doesn’t adopt ideas from elsewhere. This is because managers value their idea, a product of their own labour, as higher valued compared to an idea adopted from elsewhere.
Around the Phenomenon
An ever prevalent phenomenon, the Ikea Effect is not unavoidable. Research can help consumers make informed decisions without being led astray. While options that require self assembly aren't always a poor choice, one shouldn’t purchase such products simply because they think it is cost-effective. The quality can be compromised and while it may appear as less expensive, its upkeep can often cost a lot more. Another simple way is to compare the product cost with the value of your time. For example, a ready to eat meal may be cheaper than eating out but it would also require more of your time. The consumer must decide whether the slightly reduced costs compensate for the time that could otherwise be utilized for another task. The Ikea effect tends to create biases in people's minds as they over-value their labour. Another simple strategy to avoid this would be to ask for a second opinion, preferably from someone who can provide a non-partisan perspective.
A concept more human than financial, the Ikea Effect sees real life examples in well established brands globally, bringing brands like LEGO and IKEA to the limelight. This phenomenon is becoming increasingly relevant as there is a shift from mass production to customisation and co-production of value. As the global economy has shifted its focus towards manufacturing, companies too have shifted their focus from selling products to selling experiences. Keeping this in mind, the relevance and power of the Ikea Effect is being better understood, analyzed and applied so as to improve customer satisfaction and enhance overall experiences.