The Ikea Effect
BY ABHIGYA ASMI / DECEMBER 11, 2021
The bias behind why we pay big corporations for our own labour.
onsumers are much more involved in the production process of goods thanks to technological advancements. Many companies now offer customizable menus, design kits, and personalised products, for individuals who desire to build their own items. This customisation creates a cognitive bias in which customers assign an exaggerated value to goods that they helped to create because it boosts their sense of self-efficacy, making them gladly pay for an incomplete product. This very human tendency to overvalue things that individuals partially create or personalize is called the Ikea effect. Companies, such as IKEA, Build-a-Bear, etc, have business systems that capitalize on customers paying for their own labour and have instead switched from considering customers as recipients of value to seeing them as co-creators of value.
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Though named after Swedish furniture company, Ikea, it wasn’t the first company to apply the effect. Betty Crocker instant cake mixes were introduced in 1950 to make life easier for the ordinary American homemaker by reducing the labour that goes into baking. Initially, it was a failure and underperformed in the market because it had the opposite effect on consumers as in the process it devalued the product's worth. As a result, after extensive research, they concluded that the recipe should call for the addition of one egg. This enhanced the baker's involvement in the product, resulting in its huge popularity.
Credits: Deed/CC/Flickr
This phenomenon works on the principle that convenience isn't everything. LEGO, the toy company, also adopted this effect as a turnaround tactic, allowing customers to contribute and vote on ideas they wanted to see added to the product line. They were thus able to reach new audiences and increase their popularity among adults as a result of this strategy.
Effort is often regarded as a cost in classical economics. If a consumer product requires effort, it should be priced lower than a similar product that does not require effort.
Effort is often regarded as a cost in classical economics. If a consumer product requires effort, it should be priced lower than a similar product that does not require effort. Accordingly, consumers should prefer to pay a lower price for the former and from the perspective of a rational consumer, it appears unreasonable to place a higher value on a substandard product over a higher quality product constructed by a professional.
Credits: Ruth Gwily via The Wall Street Journal
The Ikea effect proves the fact that the human brain is anything but rational. The overvaluation of self-assembled products is not just due to the benefits of customization but is linked to effort coupled with labour, which is invested in assembling the product successfully. As a result, this accomplishment fulfills a deep psychological need that tends to increase the product's value in one’s mind.
The Ikea effect is a way in which the company saves money on marketing and assembly costs. This allows for companies’ profit margins to increase which in the long run leads to economic benefits such as lowered average long run costs over the years and access to loans at much lower rate of interest. Many enterprises that profit from the Ikea effect have a reputation for being economical or cost-effective even though they charge unreasonably high prices for the products. The underlying bias known as "effort justification" is responsible for this causative relationship between effort and valuation.
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Credits: Handmade (by your customer) by Pablo Foncillas
Effort justification causes us to make an emotional rather than a rational decision. This attachment may result in discrepancy in a product's objective worth, causing consumers to prioritize brands/products that might not be serving their purpose. Thus, the IKEA effect also ensures brand loyalty. It makes consumers of a particular brand, hesitant to switch since they have contributed to the good purchased, instilling a sense of ownership and affiliation with the brand.
This effect applies not only to organisations but also to financial investments. When prices fall, shareholders tend to hold on to their shares for far too long out of fear of incurring losses. As a result, shareholders value their shares more, simply because they own them and have invested time and effort in them. The overvaluation that occurs as a result of the Ikea effect, has implications like sunk cost effects, which can cause investors to continue to devote resources in falling stocks in which they have been investing for quite some time or cause individuals to disregard their spending boundaries. This is a potential problem in modern investing where many investors like to do their own research.
The Ikea effect creates overvaluation of the product, but when it comes to attachment to the product itself, interestingly, this effect doesn't always guarantee commitment.
The Ikea effect creates overvaluation of the product, but when it comes to attachment to the product itself, interestingly, this effect doesn’t always guarantee commitment. According to a study, consumers are less inclined to value their products if they have to disassemble them later or if they are unsuccessful in creating them. Thus the consumers do not display psychological ownership if they don’t complete the product. One can thus conclude that the IKEA effect is not always about selling a good - but selling an experience. Apart from marketing a good, it in the process fetishes the labour that goes into the production of commodities. Selling labour as a business strategy, though a unique one can be seen as exploitative. In a way, the Ikea effect resonates with Stockholm syndrome where we can’t help but establish emotional attachments with the captor.
Keywords
The Ikea Effect, Build-a-Bear, Betty Crocker, mass customization, brand loyalty, rational consumer, overvaluation
References
Norton, M.I., Mochon, D., & Ariely, D. (2012). The 'IKEA Effect': When Labor Leads to Love. Journal of Consumer Psychology, 22(3), 453-460.
https://doi.org/10.1016/j.jcps.2011.08.002
Mochon, D., Norton, M.I., & Ariely, D. (2012). Bolstering and restoring feelings of competence via the IKEA effect. International Journal of Research in Marketing, 29(4), 363-369.
https://doi.org/10.1016/j.ijresmar.2012.05.001
Mortimer, G., Mathmann, F., & Grimmer, L. (2019, April 22). How the 'Ikea effect' subtly influences how you spend. BBC.
https://www.bbc.com/worklife/article/20190422-how-the-ikea-effect-subtly-influences-how-you-spend
Roberts, T. (2020, June 18). What is the Ikea Effect? Bloomreach. https://www.bloomreach.com/en/blog/2019/08/ikea-effect.html
Gearon, M. (2019, May 01). Cognitive Biases - The IKEA Effect. Medium. https://michaelgearon.medium.com/cognitive-biases-the-ikea-effect-d994ea6a28ad
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