Have you ever breathed a sigh of relief, smiled wide and felt a sense of accomplishment after completing a puzzle? Not just puzzles, have you ever baked a cake and ended up valuing it more than a ready-made one? If your answer is yes, then you have experienced what one calls, “The IKEA Effect.”
As you may have already guessed, the name comes from the Swedish manufacturer and retailer IKEA, who sell ready-to-assemble furniture. The core of the IKEA effect lies in the claim that ‘Labour leads to love’ which, when simply put, means that the greater the amount of effort we put into creating something, the greater is the value it holds for us. Evidently, the company makes extensive use of this idea. While the general belief is that asking people to assume production costs would lead to a decrease in demand as they would not be willing to pay as much, the IKEA effect proves otherwise.
The effect was introduced by Michael Norton, Daniel Mochon and Dan Ariely in their 2012 paper which observed its evolution. They first saw it occurring when instant cake mixes by the famous brand Betty Crocker, in the 1950’s, failed to please its customers and thus, faced resistance in the market. An innovative product that many foresaw to be revolutionary, ceased to do so as it was revealed that customers found the baking process too easy with Betty Crocker’s mixes. The marketers of the company acted upon the advice of psychologist Earnest Ditcher, and added a personalized touch to the process by making customers add an egg to the mix. A change this minute led to people feeling more involved in the production process which, subsequently resulted in increased valuation of the final good.
In order to make sense of the why and how aspect of this effect, we need to familiarize ourselves with other cognitive biases that are closely affiliated to it, even exerting an influence on it to a certain extent.
The first such phenomenon is the Endowment Effect, something we encounter on a daily basis, which simply states that if we own a product, we tend to value it more. Possession of an item leads to its overvaluation from the owner’s end, to a level that may be more than the item’s market value. Due to this, we desire a higher sum of money whilst selling it, than we would be willing to pay to purchase it, had it not been owned by us. This can be better comprehended with the help of an example:
With the onset of thrift stores, many people choose that as an option to sell their clothes. A pair of worn jeans that should ideally cost Rs. 700, should sell for no less than Rs. 1000 according to you, as you own it and thus, overvalue it. This is where the endowment effect is seen to be working. On the other hand, if you were the buyer purchasing the same item, you would not be willing to pay more than its market price, which is Rs. 700. The same concept can be seen when people purchase or sell pre-owned cars.
A second cognitive idea which forms the foundation of the IKEA effect, is Effort Justification. This dissonance simply states that after we complete a difficult task which requires immense hard work or sacrifices on our part, be it physical, mental or economic costs, we justify all the effort put into it by believing that the task was worthwhile, even when in reality that may not be the case. In fact, the higher the level of difficulty or sacrifice made, the higher is the value assigned to it. The human mind attempts to justify the time and effort put into a task by believing it holds much importance.
An amalgamation of both the effects forms the crux of the IKEA effect, which IKEA, the company heavily relies on. With respect to the endowment effect, the IKEA effect uses the idea of being victim to an irrational belief that tricks us into upholding the value of our own work over that of others. Additionally, keeping the effort justification bias in mind, the IKEA effect borrows its idea of justifying the effort put into creating an object by believing the object is worth it. The key here is that it has proven advantageous, making the multinational company the world’s largest retail seller. The company saves extensively on its production costs by making its customers assume those, all while subconsciously assisting them to value the product more.
Norton et al validated their ideas through various experiments. The most crucial one constituted two groups – the first included people who were instructed to completely assemble a piece of IKEA furniture, while the second group was instructed to partially assemble the same. Expectedly, the individuals in the first group were willing to pay more for the furniture than the second, as they had exerted greater amounts of time and effort on the same, subsequently growing the value they had for it. Stating the findings of another experiment, people showed eagerness to pay 63% more for furniture created by them, than pre-assembled furniture. Moreover, amateur creations made by customers still hold more value in their eyes, than expert creations.
With a world as fast paced as the one we find ourselves in, it would be foolish to hold people’s tastes and preferences constant. It is now, more than ever, that we see the need for customizations arising, so as to meet the varying requirements of all. Thus, we have seen a rise in the Do-It-Yourself products which allow for shape, size, colour and many such customizations instead of having to settle for pre-assembled goods. In terms of food, a new trend in the US sees certain companies such as HelloFresh which send pre-portioned ingredients to customers which assists them in making a ‘home-cooked’ meal, even though it is only partially so. The convenience and illusion of eating a home-cooked meal which is healthier than that of restaurants, even pushes people to pay more. The effect has gained such immeasurable fame in this industry, that it is expected to turn into a $20 billion dollar industry by 2027.
Another example I stumbled upon is that of home-bakers sending partially-prepared cupcake boxes to their customers. While the cupcake is already baked, they add a piping bag filled with the customer’s choice of icing as well as a bag of sprinkles for decorative purposes. Interestingly, these partially-prepared boxes which promote the DIY idea are priced higher than a box of fully made cupcakes. Hence, it is evident that the IKEA effect can be capitalized from. Lower or no production costs coupled with people’s willingness to pay more forms the profitable foundation most companies rely on.
The famous American do-it-yourself company, Build-A-Bear, which made a revenue of $339 million USD in 2020, also strategizes using the IKEA effect. It keeps its customers involved right from choosing the type of bear or mascot they wish to build, stuffing it, adding a sound effect, giving it a scent and even naming it. The entire process is designed to smartly make customers assume production costs. However, the sentimental value attached to the creation makes people pay as high as $50 which is roughly Rs. 3700 in Indian currency, much higher than what a normal stuffed toy would cost.
An added benefit of the effect can be seen when it is applied in the workplace for higher employee engagement. By placing challenging tasks in front of them, rather than easy and monotonous ones, helps in increased interest and engagement. Additionally, ideation and brainstorming sessions before assigning tasks or projects and giving due credit, assists employees in feeling more attached to the end results, as ultimately, labour leads to love.
– Khooshi Parikh (Writer, Econ Declassified)
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