4 If you are a price-simplifier, cutting your prices is the primary objective. But, like Ford, also increase your product’s quality, utility, and ease of use if this can be done without incurring extra costs.
The Billionaire Who Travels by Bus
Reach good results with small means.
Ingvar Kamprad
Ingvar Kamprad has furnished more rooms than anyone else, living or dead. He built up a company from nothing to being worth more than $40 billion. And he has done it all by simplifying.
Ingvar Kamprad was only seventeen when he founded IKEA as a mail-order company. Five years later he started selling furniture. The story goes that one day he couldn’t fit a table into his car, and a friend suggested removing the legs. Kamprad immediately had the idea of flat-packed furniture.1 He realized that half the sale price of a table was in the cost of transporting it. So if he could persuade the customer to do the final assembly — by engineering parts that fitted together easily and providing unambiguous instructions — he could cut his costs in half. It was a true epiphany.
The firm’s purpose is to sell stylish furniture at low prices. In 1976 Kamprad wrote The Testament of a Furniture Dealer, his firm’s Bible.2 The book stresses simplicity as the means to provide furniture at prices that are not just unbeatable but astounding. Yes, IKEA products should look good; yes, they should be as stylish as possible; yes, the firm builds extensively on the Swedish heritage of informal quality. But make no mistake, IKEA is founded on the idea that its goods should cost no more than half — and preferably a third — the price of equivalent furniture and furnishings. For example, in 1996, the company wanted to sell a mug for five kronor (about 40 pence or 55 U.S. cents). A large part of the cost was transportation, so IKEA found a way to fit 864 mugs on a single pallet. Even then, the cost was deemed too high, so the mug was redesigned in order to fit 1280 on each pallet. Eventually, through further redesigns, 2024 mugs could be loaded on to a pallet, reducing shipping costs by 60 percent.3
The obsession with target prices and economy comes directly from IKEA’s founder. Employees still talk about the time Kamprad attended a glittering event to collect a Businessman of the Year award. The security guards saw him arrive by bus and refused to let him in.4
How Can IKEA Be So Much Cheaper?
Much of the answer lies in those transportation costs. Consider that a table or a bookcase sold through a shop has to be transported at least twice and often three times — from the factory to a warehouse; from there to the store; then from the store to the customer’s home. IKEA eliminates most of this cost. Typically, its goods travel only once at IKEA’s expense — from the manufacturer to the store. And because the goods are in flat packs, they are much easier and cheaper to transport and to store than pre-assembled furniture. Of course, somebody then has to take the product to the customer’s home and assemble it there. But that person is the customer! We’ll come shortly to why customers are happy to do this.
First, though, we need to look at what else IKEA does to make its prices so attractive? If all there was to IKEA was flat-pack furniture, it would be easy to imitate. Indeed, many other stores now sell flat-pack furniture. But none has come close to emulating IKEA’s scale, success or rock-bottom prices. Why is that?
Part of the answer lies in the giant stores that IKEA has built on the edges of cities. These are far larger than its rivals’ equivalents in all of the countries where it operates. Another part of the answer is the way it organizes its stores. Right from the beginning, the stores were massive and featured a novel way of enticing customers past their wares — what IKEA cheekily calls “the long natural way.” This involves a steady progression, as though in a theme park, anticlockwise through the store. There are a lot of product categories, but relatively few products within each category. Instead of asking a salesperson for advice, customers must choose for themselves, helped by clear instructions, placards and a very well-designed, mass-produced catalog. They then take their purchases on a cart or in a bag to the checkout, and from there they take them home.
IKEA therefore obtains for itself and its customers five further cost benefits, over and above the transport cost savings:
One-stop shopping. IKEA covers just about every category of goods you need to furnish a home, from bedding and cushions to artworks. This is convenient for customers and also increases sales.
High sales per store, even relative to space, combined with lower premises costs as a result of being located outside the city center.
Low cost of sales staff as there are very few of them.
High sales per product stocked, by stocking a relatively limited range within each product category. The mugs may be cheap and cheerful, but don’t expect a huge choice of them.
By testing new designs in a few stores first, IKEA works out which lines will work and which will not, so it doesn’t order large quantities of goods that won’t sell and will have to be discounted (a common bugbear in the furniture trade).
Yet that is not all. At the heart of IKEA’s simple system is a different way of organizing its industry. IKEA is a retailer, but it also designs most of its furniture and selects its manufacturing partners carefully, giving them very large orders for only a few products. This lowers the furniture-makers’ costs dramatically; it also raises IKEA’s bargaining power. The manufacturers become part of the IKEA system.
The all-encompassing IKEA system is a lot simpler and more efficient than the traditional way of producing and selling furniture, which comprises a patchwork of mainly small furniture-makers, selling to small chains of retailers, with the difficult job of moving products to retail outlets sometimes handled by the manufacturers’ own small transport systems, but mainly contracted out to third-party logistics firms that are not specialists in furniture. Before IKEA came along, the furniture industry was a mess — highly complex and sub-scale in all three stages (production, retail, and distribution), with poor coordination across these stages.
Ingvar Kamprad gradually reconstructed the whole industry, just as Henry Ford did with the car industry. Both men developed new business systems that offered customers a much better deal — much lower prices and better value for money — by making their industries hugely more efficient. Cars and furniture are obviously very different products, yet there are common elements in what Ford and Kamprad did, elements that you can emulate if there is a chance to reconstruct your own industry:
Simple product design to eliminate unnecessary costs.
Limited product variety within each category, so more of each product line can be made and sold; as a result, stock-keeping costs are decimated.
Much greater scale.
Great reduction in cost at every stage of production and distribution. In Ford’s case, this was achieved through the assembly line, whereas Kamprad organized the functional equivalent of an assembly line within his stores, with the customer doing most of the “assembly,” both in the store and at home.
The beauty of Ford and Kamprad’s systems was that they became proprietary — peculiar to their own organization, excluding rivals. Once Ford had built the biggest factory in the world, there wasn’t space in the market for anyone else to follow suit. Once Kamprad had built his stores, nobody else could copy his system — the market in each location and overall was just not big enough. If he had moved too slowly, and an imitator had managed to out-IKEA IKEA by building a similar but larger system, Kamprad’s company would have foundered. But nobody