ikea-effect

IKEA Effect And Why It Matters In Business

The IKEA effect is a cognitive bias that describes consumers’ tendency to value something more if they have made it themselves. That is why brands often use the IKEA effect to have customizations for final products, as they help the consumer relate to it more and therefore appending to it more value.

Understanding the IKEA effect

The IKEA effect is named after Swedish furniture giant IKEA and their range of iconic flat-pack furniture and home décor.

But the effect itself has been used in marketing consumer goods since at least the early 1950s. During that time, Betty Crocker instant cake mixes began to appear on supermarket shelves. Consumers were initially wary of these products, believing that it made the process of making a cake too simplistic. 

Upon this realization, Betty Crocker changed the recipe so that consumers had to add an egg. This simple change in the process meant that consumers felt they had contributed some effort to the final product. Some 70 years later, cake mixes are as popular as ever.

Implications of the IKEA effect for business and marketing

To harness the benefits of the IKEA effect, businesses should keep these principles in mind:

  • Consumers are often willing to pay more for a product if it means that there is some assembly required, creating a win-win scenario. Businesses save money on marketing and assembly costs, thereby increasing profit margins. Consumers do most of the assembly work, feel more empowered, and believe they received a good deal as a result.
  • Businesses that sell products such as Lego which facilitate personal expression will benefit the most. But the IKEA effect is nonetheless significant in less-customizable products. For example, some clothing companies are now selling made-to-measure attire by allowing consumers to become more involved in the tailoring process. 
  • Value is derived from self-efficacy, which is a person’s belief in their ability to succeed in a given situation. It is therefore prudent for businesses to find a balance between value and effort. Returning to the cake mix example, we saw that consumers equated too little effort with product value. However, a product that requires too much effort reduces self-efficacy and is also likely to be judged as low value.

Potential disadvantages of the IKEA effect

In the software development industry, the IKEA effect can cause developers to become overly attached to their creations and become sensitive to criticism. Ultimately, software development companies can become myopic toward product development and marketing, hindering growth, and innovation.

For certain businesses or industries, the IKEA effect may simply be unsuitable. Large companies such as McDonald’s would become inefficient during peak periods if meals could be customized ad nauseam. 

The same can also be said for logistics. DELL is a terrific example of a company adding customization to a generic product line by allowing customers to “build” their PCs. However, few businesses could absorb the logistical inefficiencies associated with this level of consumer involvement in the manufacturing process.

Key takeaways

  • The IKEA effect describes the tendency for consumers to place more value on something they have created themselves.
  • The IKEA effect has significant benefits for businesses who can charge more for products that require some degree of consumer involvement. Both factors contribute to increased profit margins.
  • The IKEA effect can cause myopic business practices in the software industry. Furthermore, it will not be suitable for large organizations that place a high value on efficiency during periods of high demand.

Connected Business Concepts

Heuristics

heuristic
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Bounded Rationality

bounded-rationality
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Second-Order Thinking

second-order-thinking
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

lateral-thinking
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Moonshot Thinking

moonshot-thinking
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

biases
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Dunning-Kruger Effect

dunning-kruger-effect
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

occams-razor
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Mandela Effect

mandela-effect
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What is marketing can be associated with social proof.

Read Next: Biases, Bounded Rationality, Mandela Effect, Dunning-Kruger Effect, Lindy Effect, Crowding Out Effect, Bandwagon Effect.

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