The ‘IKEA Effect:’ Behind the Company’s Unique Business Model | WSJ The Economics Of

(lighthearted music) - You know they don't tell you, "Don't lay on the bed. " You're supposed to lay on the bed. - [Narrator] If you've ever visited an Ikea, you've likely encountered their store's endlessly winding floor plan.

This layout can be confusing, but that is by design. Ikea may be the biggest furniture retailer on the planet but it's certainly not conventional. The Swedish furniture giant asks its customers to build their own products and it stores and distributes those products in minimalist flat packed boxes.

So, how have these retail strategies, as well as their famous Swedish meatballs contributed to the company's runaway success? This is the economics of Ikea, a look at the innovative business practices that have transformed modern life. - [Sarah] When you step into an Ikea, you immediately sort of are put into this maze like path of different rooms.

- [Narrator] Ikea's store layout is a fixed path design which means there's a designated road that all customers must follow that guides you through the store in one direction. - [Sarah] It's not a grab a carton of milk and get out kind of store, it's the opposite of that. It's very much set up to spend a day, think about rooms you know, dream about what you really want your bedroom to look like.

- [Narrator] The floor plan of most Ikea stores resembles a maze that curves about every 50 feet to keep customers curious about what comes next. Since an average Ikea store is around 300,000 square feet or five American football fields, that means a lot of walking. - An Ikea is to some frustratingly winding but really it's laid out as an experience to get you to buy more.

(drill buzzing) - [Narrator] Ikea is famous for putting its customers to work. Unlike most furniture retailers that sell products preassembled, many of Ikea's pieces have to be built by their customers. But why?

As many couples and their therapists will know building your own Ikea cabinet can be challenging. - The big idea behind the Ikea effect is consumers are more attached to have more positive feelings towards objects or things that we've put effort into. And that we actually think that they're more valuable because of that.

- [Narrator] The term Ikea effect was first coined in 2011 by researchers who noticed a similar phenomena in other products and businesses. When instant cake mixes were first introduced in the 1950s they didn't sell well. - And then they said, "Let's add a fresh egg.

" It was this idea that we wanna feel like we're just participating enough to not feel guilty about taking a shortcut. - [Man] When you make a cake from a mix which do you want? A fresh egg cake or a cake made with dried eggs?

A higher, lighter, tastier cake, why fresh eggs of course. - The idea that we should love building products isn't necessarily what Ikea intended. - [Narrator] If you've ever shopped at one of Ikea's massive warehouse stores you're likely aware of the unconventional product names but what you may not realize is that in creating these items Ikea sometimes comes up with the price tag first.

- So we have a classic example that they could talk about all the time is the $1 light bulb. But they had this idea that a $1 LED light bulb, you know this new type of light bulb would be hard to achieve, but if they could achieve it, lots of people would buy LED light bulbs. So they just sort of designed backward with the price point in mind.

- [Narrator] That obsession with low prices is a large part of why Ikea is the world's largest furniture retailer. Today, Ikea has 445 stores operating in 52 countries. - You know obviously if you go into a student dorm room, you're gonna find a lot of Ikea, but you'll also find some Ikea products in a wealthy person's home.

And that's really what they're going for. - [Narrator] Today, Ikea is the very definition of mass market appeal, but when the company first began as a Swedish mail order business in 1943, well-designed furniture tended to be expensive. And as a result out of reach for most, or seen as a serious long-term investment.

Ingvar Kamprad, who founded the company as a teenager, pushed forward the idea that furniture could be flat packed to massively reduce the cost of shipping and transportation. - So flat packing is really the largest arguably Ikea invention that really led to the company's growth. And the idea is that instead of buying, you know, a piece of furniture I'll put together, it's deconstructed into a flat pack, where you can fit more in a truck.

You can fit more in the Ikea warehouse and you can also get it in your car. And the trade-off is you know you put it together at the end. - [Narrator] Flat packing is a practical aspect of the philosophy that has long guided Ikea's success called democratic design.

- It's this idea that everything is imbalanced both price, form, function, the aesthetic, the sustainability. - [Narrator] This vision to create a better everyday life for the many people was sent forth more than 30 years ago by Kamprad in a manifesto now presented to every Ikea employee. - And they talk about it almost religiously, and fundamentally it's this idea that when designing a product they think about it can't just be really cool looking, it can't just be functional, it has to be all of those things.

- [Narrator] So despite the long shopping trips and the DIY, customers can't seem to get enough of Ikea. Perhaps it's as simple as labor leaves to love.