Most companies carefully analyze their input costs and the prices of their products

They know if the price is too high, customers will go to competitors; if the price is too low, the company won’t be able to cover the cost of making the product. A company must also know how its customers will react to particular pricing strategies. Understanding these factors has been a key factor in IKEA’s success.

Extreme Pricing and Cost Management at IKEA^*

IKEA is a global furniture retailing industry phenomenon. Known for products named after Swedish towns, modern design, flat packaging, and do-it-yourself instructions, IKEA has grown into the world’s largest furniture retailer with 355 stores in 29 countries. How did this happen? Through aggressive pricing, coupled with relentless cost management.

Steve Allen/Allen Creative/Alamy Stock Photo

When IKEA decides to create a new product, product developers survey competitors to determine how much they charge for similar items and then select a target price that is 30% to 50% lower than competitors’ prices. IKEA calls these “breathtaking items.” With a product and price established, IKEA determines the materials to be used and selects one of its 1,002 suppliers to manufacture the item through a competitive-bidding process. It also identifies cost efficiencies throughout design and production. All IKEA products are shipped unassembled in flat packages, because shipping costs are at least six times greater if products are assembled before shipping.

IKEA applies the same cost management techniques to existing products. For example, one of IKEA’s best-selling products, the Lack bedside table, has retailed for the same low price since 1981 despite increases in raw material prices and wage rates. Since hitting store shelves, more than 100 technical development projects have been performed on the Lack table to reduce product and distribution costs and maintain profitability.

In response to changing shopping habits and a shift to online sales, IKEA is now turning its focus to new digital commerce solutions, including virtual reality, and providing delivery and assembly services for customers at an affordable price. Doing so while aggressively managing costs is consistent with the way IKEA has operated for more than 75 years. As founder Ingvar Kamprad once summarized, “Waste of resources is a mortal sin at IKEA. Expensive solutions are a sign of mediocrity, and an idea without a price tag is never acceptable.”

Like IKEA, managers at many companies, such as Amazon, Unilever, and Walmart, are strategic in their pricing decisions. This chapter describes how managers evaluate demand at different prices and manage customers and costs across the value chain and over a product’s life cycle to achieve profitability.