Why Is IKEA So Cheap? | IKEA Business Model (2019)

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IKEA business model

IKEA is known as that Furniture store where you get economical furniture for all your needs. And it reaches your home in a flat pack DIY system to suit the current apartment size needs. How convenient?

For those who still don’t know what I am talking about, here’s a brief idea on what exactly is IKEA:

IKEA is the world’s largest furniture retailer. The company got its name from the initials of Ingvar Kamprad (Founder) Elmtaryd (his family farm) Agunnaryd (his hometown) and was founded in 1943. IKEA began with sales of pens, wallets, jewellery with the primary concept of meeting customer demands at affordable prices.

Five years into the business IKEA brought in furniture. Since then IKEA furniture has seen a meteoric rise to become a household name. With 424 IKEA stores and operations in 52 different countries, IKEA furniture is now a well-established multinational brand.

If IKEA was a mainstream furniture manufacturer it probably wouldn’t be where it is right now. The company is known for its flat-pack furniture system. An idea that was developed when a carpenter removed the legs of a table for easier transport.

Since then IKEA has been keen on developing furniture that anyone could assemble in their own household.

How Does IKEA Fare In Numbers?

IKEA had a global revenue of 38.8 billion Euros in 2018, an up from 36.3 billion in the previous year.

With 12,000 products in its product range, there are literally thousands of options to choose from. IKEA has around 1350 suppliers from around 50 countries that fit the requirements of this massive chain.

Even though the operating profit of IKEA in 2018 saw a 26% drop, IKEA is looking at new avenues and markets to explore.

The IKEA Smart Secret

IKEA is owned by the INGKA (Ingvar Kamprad) foundation. INGKA is actually one of the world’s largest charitable organizations. But why would IKEA be owned by a charitable non-profit organization?

This began when IKEA management figured out that transferring the ownership to a charitable organization in the Netherlands would help it achieve three goals: Reduced taxes, impossible to make a hostile takeover and a privilege to perform as a non-profit organization.

Moreover, the intellectual property is held by another company. This is all done to have minimal taxes. (and it works).

How IKEA Works

Volume Of Sale

IKEA primarily believes that the higher the volume of business, the higher the profit, the lower the cost. Thus, to reap benefits of this cyclic process, IKEA begins with low cost on furniture and strategically places itself in cities with a population over 500,000. They simply play with the economics of scale. Thus IKEA is able to provide cheaper furniture over your standard furniture manufacturer.

Shipping Cost Elimination

Just like Aldi, IKEA also believes in saving non-essential costs using genius strategies. The company uses the flat pack system to its advantage. Since the furniture packs up in a box that looks identical to your flat screen TV system they can ship more furniture in a single shipment as the compact arrangement makes fitting more furniture in less space viable. And the end assembly is done by the consumer so it is a win-win scenario.

Hybrid Material

IKEA uses hybrid materials like medium density fiberboards and laminates to have a strong structure at a cost and weight less than that of wood. This helps reduce their pricing for the final product.

Lesser Skilled Carpenters

IKEA believes in a strong R&D team which cuts costs and finalizes the design as per requirement. They are constantly involved in making the set cheaper and easier to put together. Thus the design they pick out usually is replicable and is done in a CNC machine and not by the custom carpenter. This is another cornerstone in putting down the cost of the set.

Specific Market Research

IKEA came up with the legacy products in the foreign market, but soon they realized that the sales never met the expectations. IKEA definitely had cheap products but didn’t fit up to the consumer’s needs. That is when IKEA shifted its focus to the needs of their consumers. IKEA began having a proper feedback loop where they realized the needs of the local markets they are targeting in.

For example, the consumers in the US wanted larger beds and furniture since they had ample space and consumers in Japan wanted modular furniture to fit in their compact houses.

IKEA figures out what furniture is it going to sell before entering any market.

Private Franchising

IKEA takes an annual franchise fee of 3% of all sales made from the stores that franchise the brand. Unsurprisingly, this franchising business model results in a lot of money for IKEA.

Distribution Channel

IKEA has more than 1400 suppliers in 52 countries and more than 40 distribution centres in 16 countries. IKEA has a strong foot in supply chain management as it manages the supply from far off countries. 60% of IKEA’s suppliers are from European countries and the rest from China and other local markets.

The whole idea of having a wide supplier channel lies with the ideology that IKEA believes in an upfront price limit to the required furniture. It believes in a socially responsible and environmentally friendly way to develop furniture. This being said, it boasts a furniture range consisting of 60% of the products made of recyclable materials and 10% of furniture made totally from recycled materials.

Suppliers and distributors contact each other to have a ready stock at all the IKEA stores. IKEA believes in take and go and thus always has inventory ready.

In A Nutshell

IKEA has a massive network of suppliers who they deal with to create their desired products in exceptionally low costs which in turn works for them as their profit is covered in volumes of the business. Further, their innovate flat packing of the furniture saves their packaging and shipping costs helping them minimize the expenses.

IKEA business model revolves around the basic rule of marketing: Meeting needs profitably and thus is able to dish out significant profit by their basic yet widespread model.

Why is IKEA so Cheap?

IKEA is a well-known furniture store, popular because of their sturdy designs, and their affordable prices. The quality of their products has customers wondering how IKEA’s furnishings are so cheap. Here’s the answer:

They Decide the Price of the Item Before they Make it

Before an IKEA product is made, its price is determined by IKEA. The designers then use this price to choose materials and budget on how to finish the project with the predetermined price. This helps the designers establish a sturdy plan while maintaining a specific budget.

They Use Cheap, but Sturdy Materials

IKEA uses inexpensive materials with a quality vibe. They often use wood, plastic, and glass to keep the design cost down. They hollow out the wood to reduce the amount of material they use. They also use the concept “board on frame,” which is the idea that they fill the empty spaces in their furniture pieces with cardboard.

They use an efficient design with these materials to make a long-lasting product. They also try to use renewable and recyclable materials.

Customers Assemble the Furniture Themselves

IKEA furniture is sold boxed with simple instructions. Customers are expected to put their furniture together themselves. This eliminates the cost of delivery and labor. Cutting out those costs severely decreases the price of the furniture. This caters to people who frequently move, or are renting a place. It is easy to set up and easy to take with them.

Their Pieces are Simple

Most of IKEA’s furniture is created from simple designs focused on sustainability. These designs are often re-used and provide a layout for future designs. Because of this, they can use similar materials or the same materials on various items.

They’re Always Striving to Be Better

IKEA is an affordable store because it wants to be an affordable store. The company is always looking for ways to reduce the cost of their products. This is reflected in their business model.

The idea is that they want “to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

They Make their Products in Bulk

As mentioned before, many of IKEA’s materials can be used on more than one product. Because of this, they’re able to make their products in bulk. They can buy more supplies at once and then sell more products in-store.

They then thrive to use all the materials they have leftover so as to not waste anything. They become valued customers with suppliers and get deals because they buy so many products.

They Package their Products Efficiently

In addition to making products that are easy to set up by oneself, IKEA saves money on packaging, too. Their products are packaged flat. This helps save money on transporting products. This also means there is room for more products in the store.

These reasons are what make IKEA’s furniture reasonably priced and sustainable.

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