IKEA effect: Why it matters in business?

Do you know why cake mixes was not intially a huge success?

Back in the 1950’s Betty Crocker instant cake mixes were introduced for the first time. Contrary to the expectations of the company, the cake mixes received a lukewarm response. The reason was, customers weren’t happy with the fact that cake mixes made cake baking too dull and straightforward.

Upon receiving this response, Betty Crocker came up with a new idea. They made some changes in the recipe of the mix, and the new cake mix required customers to add an egg to the mix. This small change by the makers led to a fantastic response from the customers.

By allowing customers to add an egg to the mix made them feel that they had contributed something towards the making of the final product. Since then, cake mixes are as popular as ever. Now, as mouth-watering this story might seem, there are many layers to it, just like a cake! Read ahead and devour!

Index:

What do we understand by the IKEA effect?

There something very satisfying about making things on our own, or at least contribute to its making. The IKEA effect revolves around the same concept.

The effect describes how we humans have a tendency to value an object or thing more if we made or assembled it by ourselves. The IKEA effect is a cognitive bias named after Swedish furniture giant, where a customer values something more if they have made or assembled it themselves.

The Swedish manufacturer and retailer IKEA sells products that mostly require some sort of assembling. The effect underlines a cognitive phenomenon where a person places a higher value on or is more excited about a product or object that they have partially created, assembled, or personalized. Something that we observe in many products at IKEA. The IKEA effect highlights inflation in valuation due to the investment of labor.

Why do we have the IKEA effect?

The IKEA effect is quite unique. The foundation of the IKEA effect requires explicitly that a person makes or assembles something on their own. However, the effect may vanish if such a person is asked to disassemble that object. So, why does it happen?

We have a latent need to feel competent and productive:

It goes without saying, nobody likes feeling foolish or incompetent. As humans, we wish to feel sure and confident about the fact that when a task is being given to us, we handle it effectively and deal with any obstacle that may appear. Research and evidence suggest that self-efficacy plays a role in the IKEA effect.

Our perceived self-efficacy, our beliefs on our abilities to perform well and have control over our actions and lives are essential aspects of our mental well-being. These aspects make us better at coping with challenges, recover from setbacks and failures.

When we perform activities like cooking or assembling furniture, it uplifts our sense of self-efficacy. This is also a reason why we put more value on items that we have put together ourselves. In simple words, if we feel incapable of doing something, it increases our need and will to prove ourselves to be more competent and inflates the value of things we made.

We want effort justification:

Another aspect that leads to the IKEA effect is a cognitive dissonance, known as “effort justification.” When a person does something challenging, the basic premise behind it is that they wish to believe that there was a good reason to put in all that effort.

Thus, as a result, they add more value to the goal they are working towards. We assume ourselves to be reasonable and rational people who would not do something to waste our time or effort. So, why would a reasonable person make a chair on their own when they can buy it from the market?

The reason is, we make several unconscious mental adjustments and decide that our chair is more valuable than the ones in the market as we were more careful and quality conscious. This would make us feel that our effort was in the right direction.

We appreciate things that are associated with us:

As humans, we are confident in our own abilities, to think we are capable and dependable. This optimism that we have bout ourselves also extends to the things around us and the things we own. Thus, the IKEA effect might come into action as our confidence extends to the things we make, leading to us seeing them as more valuable and superior.

Why is the IKEA effect important?

The IKEA effect is very relevant today, as there is a shift from mass production towards customization and co-production. There is a sharp rise in “do-it-yourself” products in the market in recent days. These include meal kits, art features, decor and furnishing items, etc. Industries that produce such goods are expected to value around $20 billion by 2027. What could be the reason behind it? The IKEA effect!

This effect suggests that when you encourage people to participate in something, they will be more likely to consider it valuable. This is also why people are reluctant to change products and brands they are committed to, as they feel they are somehow connected to it or have contributed personally or financially.

The products, as mentioned above, make us feel self-confident, capable and leads us to believe that our efforts were in the right direction and worth it. Additionally, this leads us to put more value to its original value. It is on this premise that many companies do what they do and capitalize.

Moreover, with the help of this bias, manufacturers are not only baking their cake but eating it too. They have the customers doing most of the assembling work, being very happy about it and thinking they got a good deal.

How businesses can benefit from IKEA effect?

As customers are willing to pay more for the product which require DIY from their side, so it reduce assembling cost for companies and hence they can generate more profits.
Also, as products are unassembled so they are easy to transport and large quantity can be transported easily,hence companies can make more margins.

Impact of the IKEA effect on business:

Not giving value to effort and time:

The most vital impact that the effect has on a business is, we tend to value time and energy less. We are so motivated by our desire to be capable and effective that we do not understand that by making or assembling something, we are investinsug a lot of time and energy in it.

This effort and time could have been otherwise used more productively if we had gone for a pre-assembled product. The unconscious adjustment makes us ignorant of the time and energy being wasted. This becomes very crucial if you are a new business or a business running low on human resources.

Bad financial decisions:

It leads to a wastage of money. When we are ready to spend more on something that will require further efforts, as compared to a ready-made solution, we are wasting our finances due to our inherent bias. No business will be able to sustain itself in the long run if bad financial decisions are made.

Wrong valuation and prioritization:

The third and final impact is a mix of both the above-mentioned points. The IKEA effect will make us make wrong decisions, which can have serve implications on our business. Putting more value on things due to an inherent bias will make us make wrong and informed decisions.

Additionally, if we are reluctant to changing products and brands we are committed to, it can lead us to prioritize brands and products that might not be serving our purpose.

How to avoid the IKEA effect?

Do some research before you buy or invest in a product:

There is a strong possibility that products that require some assembling aren’t necessarily a bad choice. That said, when you have a business to run, you don’t have the time and energy to assemble things when you may get them pre-assembled. So even if something looks cost-effective upfront, you may end up spending more money and time on it.

Consider the value of your time and effort:

The IKEA effect can lead us to believe we are getting a good deal as we inflate the value of the finished product. But how long did it take you to build or assemble it?

Think of the product not just in terms of monetary investment but as an investment of time, energy, and effort. For every decision you make, consider your convenience along with the cost.

Get a second opinion:

The IKEA effect may alter our views of our work, making it difficult for us to see faults and mistakes. In addition, the bias leads people to overestimate their skills and the value of their work so much that they might consider their work equal, if not more valuable, than that of an expert.

So to deal with such overconfidence, make it a habit to consult others and take feedback from someone who isn’t directly involved with your work or goals.

A final word:

The IKEA effect shows how we put more value on things that we have built individually. This inherent bias can lead us to make bad choices for ourselves and our business.

So, to avoid the IKEA effect, allocate some time and research on other options and consider how a slight price difference is better than putting in hours to build something.

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What is the Availability Heuristic and how does it impacts your business?

What is IKEA effect?

The IKEA effect is a cognitive bias named after Swedish furniture giant, where a customer values something more if they have made or assembled it themselves.

Whats the example of IKEA effect?

IKEA’s effect requires explicitly that a person makes or assembles something on their own. eg DIY IKEA products.