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IKEA :How to grow sales by 200% using Pricing STRATEGIES?: Business Case Study — Transcript

by Think School · 2,418 words · 368 segments · language en · Watch on YouTube

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0:00hi everybody ikea is one of the most
0:02innovative companies of the 21st century
0:04and the most astonishing thing about
0:06ikea is that in spite of furniture being
0:09a highly localized business ikea has
0:11been the pioneer in turning the
0:13furniture business into a global success
0:16and today ikr draws in a revenue of 45
0:19billion dollars from 445 stores spread
0:22across 30 countries
0:24and what's more important to note is not
0:26the growth of the company but the fact
0:28that ikea taught the world how to use
0:30the most powerful psychological tactics
0:33to exponentially increase sales and
0:35today you are going to learn one such
0:38strategy that makes ikea stand apart
0:40from the competition and no matter which
0:42business you are in no matter which
0:44field you are in you can use these
0:46powerful psychological strategies to
0:48double your profits at zero cost the
0:51question is what is this strategy how
0:53does it make ikea stand apart from the
0:55rest of the competition and most
0:57importantly how can you use them to
1:00double your profits this video is
1:02brought to you by a special announcement
1:03from the think school community but more
1:05on this at the end of the video
1:08the answer to this lies in a fascinating
1:11experiment conducted by dan ariely with
1:13the students at the mit
1:15in the first iteration dan went to his
1:17class of 100 students and asked them to
1:19choose between two subscription plans
1:21for the international magazine called
1:23the economist now let's do this
1:25experiment together so you tell me which
1:26one of these options would you choose
1:28okay so the three options were the
1:31digital version for 59
1:33the print version for 125
1:35and thirdly the print plus digital
1:37version for the same 125
1:44as it turns out 16 students wanted the
1:47digital version zero percent wanted the
1:50print version for 125
1:52and 84 of them chose the print plus
1:55digital option so for the second
1:57iteration he makes a small change he
2:00thought since nobody is buying the
2:02second option then why keep it there in
2:04the first place right so he removed the
2:06125 print option and presented the same
2:09question to another class of 100
2:11students now technically by eliminating
2:14the option that nobody chose the results
2:16are not supposed to change right
2:19well guess what
2:20in the second scenario the results
2:22changed drastically and this time only
2:2532 percent of the students opted for the
2:27print plus digital version and 68 of
2:30them opted for the just digital version
2:33subscription
2:35and that is when dan realized that there
2:37was something magical about this
2:38unnecessary option that made such a huge
2:40difference in the choice of the
2:42customers
2:43and that is what we call as the decoy
2:46effect the decoy effect says that
2:48consumers change their preferences
2:50between two options when presented with
2:52a third option which acts as an
2:54unattractive option just to make the
2:57other options look extremely lucrative
2:59now when i say decoy effect most people
3:01think about the popcorn example wherein
3:03in the movie houses
3:05you get popcorn of small medium and
3:07large at a price of 300 rupees 650
3:10rupees and 700 rupees and because of the
3:12decoy effect people tend to choose the
3:14700 rupees option now although this is
3:16technically correct it is the worst
3:18possible example to use why
3:21because if you look at the underlying
3:22message that is being communicated to
3:24the customers
3:25this is what the options indirectly tell
3:28the customers option a overpay for the
3:31popcorn option b
3:32extremely overpay for the popcorn and
3:35option c extreme overpay for the popcorn
3:38with a little extra popcorn
3:40and the basic flow over here is that the
3:43prices over here can in no way justify
3:45the value for the popcorn therefore by
3:48default making the purchase of that
3:50popcorn becomes a painful experience
3:54this is the reason why we often feel
3:56guilty for buying popcorns and if you
3:58are a person like me you and i we will
4:00not even think about buying a popcorn at
4:02the theater
4:04now when this is done in a close and
4:05compulsive environment like a theater it
4:07will definitely work but if the same is
4:09done in the free market
4:11this strategy will backfire in a
4:13terrible way and if you give your
4:15customers this kind of a painful
4:17experience while paying for your product
4:19the customers will never buy from you
4:21eventually it will result into extremely
4:23heavy losses so the question over here
4:25is what exactly is the right way to
4:28apply the decoy effect
4:30and that is where ladies and gentlemen
4:31ikea's genius application comes in
4:34to tell you about it this is how ikea
4:36applies the decoy effect ikea places
4:39three cabinets for you cabinet a b and c
4:42a cost forty dollars b cost sixty
4:44dollars and c cost sixty five dollars
4:47option a is a very small cabinet with
4:50very smooth movement but it's got very
4:52small space plus the material used would
4:56be very ordinary option c will be a
4:58large cabinet with premium handles
5:00premium material and most importantly it
5:02will offer a large storage space along
5:05with that you will also get a 10 worth
5:07of compartment as complementary if you
5:10buy option c
5:12and then you've got option b which is as
5:14large as c but it is made out of
5:16ordinary material does not have premium
5:18handles and you will not get
5:20complimentary compartments
5:22and here's where the catch comes in
5:24if you look at the underlying message
5:26that ikea is trying to communicate using
5:28its products here's what they say
5:30option a says here's a budget product
5:32with a great value for money option c
5:34says here's a premium product plus large
5:37space plus delightful complimentary
5:39product so very very high value for
5:42money and lastly you've got option b
5:44which is almost the same price but
5:46without premium build quality without
5:48complementary compartments so not so
5:51much of a value for money as compared to
5:54option c
5:55so this way option b acts as the decoy
5:58so that when you compare option b with
6:01option c
6:02option c looks like an amazing deal now
6:06while most sellers only think about the
6:07people who directly buy option c
6:10ikea understands that a 22 year old boy
6:12who just moved into the city will not be
6:15able to afford a 65 product which is why
6:18he would buy the 40 product
6:20but when he does ikea wants to make sure
6:23that he does not regret the purchase
6:25so even though it's a low margin product
6:28in the race of upselling ikea will never
6:31ever try to rip off its customers who've
6:33got low purchase power and the best part
6:35is the decoy effect over here doesn't
6:37just make option c look great it also
6:40makes option a look great because the
6:42customers feel like they would have
6:44overpaid by choosing option b which is
6:4650 more costlier as compared to option a
6:50so by default the budget buyer buys the
6:52smaller drawer set and the premium
6:54customers they buy the 65 product why
6:58because they compare it with the decoy
7:00and this clean execution of the decoy
7:02effect gives the ikea brand three
7:05wonderful superpowers
7:07number one irrespective of their
7:09purchase both types of customers get
7:11value for their money secondly the
7:14premium customers have been tactfully
7:16influenced to buy the 65 product and
7:19because the 60 product was such a bad
7:21deal the premium customers actually feel
7:24very good about the purchase and most
7:26importantly when the 22 year old boy is
7:29extremely satisfied with his 40 purchase
7:32tomorrow when he grows up and makes a
7:33handsome income he will again choose
7:36ikea but this time as a premium customer
7:39because he was given the value for money
7:41that he was promised even at the 40
7:44price tag therefore customer retention
7:46of the ikea brand increases by a large
7:49extent
7:50this is how you actually apply the decoy
7:52effect
7:53so while most sellers often use pricing
7:56strategies with the sole intent to
7:57upsell the ikea team constantly keeps
8:00learning and carefully deploys its
8:02strategies in a way that it drives
8:04profits but at the same time it retains
8:07its brand value
8:09and the most amusing thing over here is
8:10that ikea does this literally for every
8:13single one of its 12 000 products
8:15starting from affordable drawers all the
8:17way up to the premium beds and even
8:19wardrobes now again this might look very
8:22easy to some people but here's something
8:24that nobody will tell you if you take a
8:26step back guys you will realize that it
8:28is extremely difficult to maintain this
8:30fine balance between profit and brand
8:32value especially when you're as big as
8:35ikea with 4 45 stores spread across 30
8:38different countries with 2.1 billion
8:40visitors who are coming from different
8:42cultures from all across the world and
8:44the only reason why they're able to
8:46execute this strategy is because of
8:47ikea's powerful philosophy of democratic
8:50design and lifelong learning culture
8:52every time ikea enters a country the
8:54ikea team specifically studies every
8:57little aspect of that place starting
8:59from the average balcony size all the
9:01way up to the average spoon size
9:04this is done just so that ikea could fit
9:06into the cultural framework of any
9:08country therefore even when you apply
9:11this strategy always make sure that you
9:13constantly keep learning about the
9:15customer's reaction and keep a very
9:17close eye on the customers culture
9:19purchase power and their spending habits
9:22because only then you will be able to
9:23understand how to strike a balance
9:25between profit and brand value and this
9:28brings me to the most important part of
9:29the episode and that is as a businessman
9:31or a business woman what is the
9:32step-by-step process to apply the decoy
9:35effect and what are the study materials
9:37to help you dive deeper into the
9:38superpower of pricing meanwhile if you
9:41are someone who wants to learn how to
9:43tell powerful stories like we do at
9:45think school i would highly recommend
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10:50the live session moving on to the
10:52application here are five very very
10:54important steps that you need to follow
10:56when you apply the deco effect to your
10:58products step number one do a thorough
11:01research and find out which is the most
11:03popular and profitable product in your
11:05store step number two if it is a premium
11:08product find a budget substitute for the
11:10same product such that people who cannot
11:13offer the premium one can still fulfill
11:15their need with a budget product why
11:18because budget customers will soon
11:20become your premium customers therefore
11:23engaging with them should never ever be
11:26underestimated
11:27step number three would be to create a
11:29decoy and the point to be noted over
11:30here is that your decoy must not be a
11:33degraded version of your premium product
11:35however the premium product should have
11:38a way better offering than your decoy so
11:40if you're selling drawers it's okay to
11:42have a non-premium material but it
11:44shouldn't be like the drawers are rigid
11:46and they're very badly functional why
11:49because people even the decoy is going
11:51to reflect your brand value so always
11:53try to make the premium product more
11:55attractive with complementary offerings
11:58rather than purposefully degrading the
12:00decoy step number four would be to price
12:02your products in a way that the premium
12:05product looks way better than the decoy
12:07and the budget product or option a looks
12:10like the obvious choice for the
12:12customers with a lower purchase power
12:14this way your high margin product will
12:17become extremely lucrative driving very
12:19high sales and at the same time the
12:22budget customers will also be very happy
12:24to get the value for their money in fact
12:27those people will be even more happy
12:29because they didn't have to pay 50 extra
12:31just to get a bad deal on the decoy
12:34and lastly do not add more than five
12:37products and make sure that the price of
12:40the decoy is very close or even equal to
12:43the premium product now the disclaimer
12:45over here is that in the green for more
12:47profits please don't misuse the decoy
12:49effect because people always remember in
12:52the free market the customers are just
12:54one step away from leaving you forever
12:56this is how ladies and gentlemen you can
12:58apply the decoy effect to your products
13:00and when done right it can increase both
13:03your conversion rates and your profit
13:04margins by a large extent
13:07meanwhile if you are someone who wants
13:09to dive deep into the philosophies of
13:10pricing and consumer psychology i would
13:13highly recommend you to read this book
13:14called misbehaving by richard thalor
13:16which has now become my standard
13:18recommendation and the second book is
13:20this book called nudge written by the
13:21same author that's all from nice after
13:24today guys if you learned something
13:25valuable please make sure to the like
13:27button in order to make youtube baba
13:28happy and for more such insightful
13:30business and political case studies
13:31please subscribe to our channel thank
13:33you so much for watching i will see you
13:35in the next one bye bye
13:41[Music]

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