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.

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

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"