IKEA Business Model: 6 Ways IKEA Unique Model Makes Money
IKEA business model
When you talk of getting the exact furniture that meets the size of any apartment of your choice at the most affordable price and without compromising quality, which brand comes to your mind? IKEA I guess. Yes, IKEA is that furniture brand that combines affordability with easy design concept that gives you the DIY option at all times.
It is the world’s largest furniture retailer with a portfolio of over 12,000 products, 1,350 suppliers from around 50 countries, the company does an annual sales of $43.5 billion in 2022.
But maybe, you are not too conversant with the brand IKEA, nor do you know much about IKEA business model, that is what this post is all about.
What is IKEA?
It is a Swedish multinational furniture retailer that has become synonymous with affordable furniture, functional designs, and minimalist aesthetics. It was founded in 1943 by Ingvar Kamprad from a town called Agunnaryd. In fact, the brand name IKEA is an initial of the founder’s names – Ingvar Kamprad, his family farm – Elmtaryd and his home town – Agunnaryd.
The company has a unique business model that has contributed significantly to its success over the years. In this blog post, we will explore the IKEA business model and how the model has made IKEA one of the most successful retailers in the world.
IKEA Business Model – How it Works
As a multinational furniture retailer IKEA business model remains a very unique one. And here’s how it works:
- Design: IKEA’s in-house designers create furniture and home decor that is stylish, functional, and affordable. They use a combination of cost-effective materials and production methods to keep prices low, while also incorporating eco-friendly and sustainable design principles.
- Production: IKEA works with a network of suppliers and manufacturers around the world to produce its products. These suppliers are carefully selected based on factors such as quality, sustainability, and price.
- Distribution: Once the products are produced, they are shipped to IKEA’s central warehouses, where they are stored until they are needed by individual stores. IKEA uses a sophisticated logistics system to ensure that products are delivered quickly and efficiently to stores around the world.
- Retail: IKEA’s stores are designed to provide customers with a unique shopping experience. The stores are typically large, warehouse-style buildings that feature displays of furniture and home decor. Customers are encouraged to explore the space on their own, with the help of maps and signs.
Key Components of IKEA Business Model
IKEA is a global furniture retailer that operates on a unique business model. As we look at how IKEA works, it is also important to understand the key components of IKEA business model:
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1. Product design and development
The first key component of IKEA business model is product design and development.
IKEA designs and develops its products in-house, using a team of designers and product developers. The company focuses on functionality, affordability, and sustainability in its designs.
2. Flat packaging and self-assembly
The second of the key components of the IKEA business model is flat packaging and self-assembly. IKEA’s furniture is designed to be shipped and sold in a flat-pack format, which reduces transportation costs and makes it easy for customers to transport the furniture home themselves. This approach allows IKEA to offer furniture at a lower price point than traditional furniture retailers, which is a significant competitive advantage.
Self-assembly is another essential aspect of the IKEA business model. By allowing customers to assemble the furniture themselves, IKEA reduces labor costs and passes those savings on to the customer. This approach also allows customers to feel a sense of pride and accomplishment when they complete the assembly, which strengthens their connection to the product.
3. The showroom experience
The showroom experience is another critical component of the IKEA business model. IKEA stores are designed to be a destination, with large, sprawling showrooms that allow customers to explore the full range of products. Customers are encouraged to touch, feel, and interact with the furniture and accessories on display, which helps them envision how the products might look in their own homes.
The showroom experience also includes a cafeteria-style restaurant, where customers can enjoy a meal or snack while they shop. This approach encourages customers to spend more time in the store and provides an additional revenue stream for the company.
4. Economies of scale
IKEA’s massive scale is another key driver of its success. The company has over 400 stores in 52 countries, and it uses its size to negotiate favorable terms with suppliers and manufacturers. IKEA is also able to spread its marketing and distribution costs over a large number of stores, which reduces its overhead costs.
The company’s size also allows it to invest heavily in research and development, which helps it stay ahead of competitors and introduce new products that resonate with customers.
5. Supplier network
Another key component of IKEA business model is the suppliers network. IKEA works with a network of over 1,500 suppliers around the world to manufacture its products. The company has strict quality and sustainability standards that its suppliers must meet.
Finally on the key components of IKEA business model is its commitment to sustainability. The company has set ambitious goals for itself, including sourcing 100% renewable energy and becoming a circular business by 2030. IKEA also designs its products with sustainability in mind, using materials that are renewable, recycled, or recyclable.
This approach resonates with customers who are increasingly concerned about the environmental impact of their purchases.
IKEA Business Model – The Value Propositions
As a retailer you don’t make a profit of $13.7 billion by chance. For perceptive, Walmart, the world’s largest company by revenue and incidentally a retailer makes about $13.6 billion in profit. So to hit this level of success IKEA business model offers a very compelling value propositions that easily endears households and companies to them. And here are the key value propositions of IKEA:
IKEA’s products are designed to be affordable and accessible to a wide range of customers. The company achieves this through its flat-pack furniture and self-assembly model, which reduces transportation and labor costs. IKEA also uses cost-saving measures in its production and supply chain to keep prices low.
IKEA’s products are designed to be functional and practical, with a focus on solving common household problems. The company’s in-house design team creates products that are versatile and adaptable to different spaces and lifestyles. IKEA also offers a range of storage and organization solutions to help customers make the most of their living spaces.
IKEA has made sustainability a core part of its business model. The company uses sustainable materials in its products, sources 100% renewable energy, and has set ambitious goals to become a circular business by 2030. IKEA also encourages customers to live more sustainably by offering products and services that promote eco-friendly practices, such as LED light bulbs and recycling programs.
IKEA focuses on creating stylish, functional, and affordable furniture that appeals to a wide range of customers. They achieve this by using a combination of cost-effective materials and production methods, as well as efficient supply chain and logistics systems.
IKEA’s furniture is designed to be shipped in flat-pack boxes and assembled by customers themselves. This reduces the cost of transportation and storage, and also allows customers to take their furniture home with them immediately, without the need for delivery.
Large Store Format
IKEA’s stores are large, warehouse-style buildings that are designed to offer customers an immersive shopping experience. They showcase a wide range of furniture, accessories, and household goods, as well as provide customers with inspiration for home decor.
IKEA Business Model – How it Makes Money
IKEA business model provides a couple of ways through which the company makes money. Ranging from the sale of a wide range of furniture, home decor, and household goods through its brick-and-mortar stores, online channels, and catalog IKEA business model offers a variety of revenue options. Here are some of the key ways IKEA business model generates revenue:
1. Furniture sales
The primary source of revenue for IKEA is the sale of its furniture and home goods. The company offers a wide range of products, from sofas and beds to kitchenware and textiles. IKEA’s products are designed to be affordable and functional, which has helped the company attract a large customer base.
2. Food and beverage sales
IKEA operates restaurants and food markets in its stores. These stores offer Swedish specialties like meatballs and lingonberry jam. Such food and beverage sales provide an additional revenue stream for the company and equally help attract some customers to its stores.
3. Service offerings
IKEA offers a range of services to its customers, including delivery and assembly. Customers can choose to have their furniture delivered directly to their home, and IKEA also offers assembly services for an additional fee. These services generate revenue for the company and help make the purchasing process more convenient for customers.
4. Online sales
IKEA also generates revenue through its online sales platform. Customers can browse and purchase products online, and choose to have them delivered or pick them up at a local store. The company has invested heavily in its e-commerce platform, which has helped drive online sales.
5. Supplier network
While not a direct source of revenue, the suppliers’ network is an important part of IKEA business model. By working with a large network of suppliers, IKEA is able to negotiate favorable terms and ensure that its products are manufactured to its quality and sustainability standards. This helps the company offer affordable prices to customers while maintaining high quality standards.
6. Franchise Fees
IKEA operates as a franchise, which means that each store is owned and operated by a separate franchisee. As part of the franchise agreement, franchisees pay fees to IKEA for the right to use its brand, business model, and products.
IKEA Business Model – Key Business Strategy
The key business strategy of the IKEA business model is to provide affordable, functional, and sustainable furniture and home goods to a wide range of customers. Here are some of the key components of IKEA’s business strategy:
Cost leadership: IKEA has positioned itself as a cost leader in the furniture industry. The company’s products are designed to be affordable and accessible to a wide range of customers.
Product design and development: IKEA has a strong focus on product design and development. The company’s in-house design team creates products that are functional, aesthetically pleasing, and sustainable. IKEA also uses customer feedback to inform its product development process.
Flat-pack furniture and self-assembly: IKEA’s products are designed to be sold in a flat-pack format, which reduces transportation costs and makes it easy for customers to transport the furniture home themselves. IKEA also designs its furniture for self-assembly, which reduces labor costs and allows the company to offer its products at a lower price point.
Showroom experience: IKEA stores are designed as showrooms where customers can explore the full range of products. The company encourages customers to touch, feel, and interact with the furniture and accessories on display. IKEA also offers a cafeteria-style restaurant in its stores, which provides an additional revenue stream and encourages customers to spend more time in the store.
Online sales: In addition to its physical stores, IKEA also offers online sales through its website. Customers can browse and purchase products online, and choose to have them delivered or pick them up at a local store.
Sustainability: IKEA has made sustainability a core part of its business strategy. The company uses sustainable materials in its products, sources 100% renewable energy, and has set ambitious goals to become a circular business by 2030.
IKEA Business Model – The Competitors
IKEA has a number of competitors in the furniture retail industry. Here are some of the main competitors:
Wayfair is an online retailer that offers a wide range of home goods, including furniture, décor, and appliances. Like IKEA, Wayfair focuses on affordability and offers a large selection of products.
West Elm is a furniture retailer that offers a range of modern and contemporary furniture and home goods. The company focuses on quality and design, with a range of mid-to-high-priced products.
Pottery Barn is a furniture and home goods retailer that offers a range of classic and traditional designs. The company focuses on quality and craftsmanship and offers a range of high-priced products.
Crate & Barrel
Crate & Barrel is a furniture and home goods retailer that offers a range of modern and contemporary designs. The company focuses on quality and design and offers a range of mid-to-high-priced products.
Ashley Furniture is a furniture retailer that offers a range of affordable and mid-priced furniture and home goods. The company has a large selection of products and a focus on affordability.
Room & Board
Room & Board is a furniture retailer that offers a range of modern and contemporary designs. The company focuses on quality and design and offers a range of mid-to-high-priced products.
Even Amazon and Walmart can also be classified as competitors of IKEA as those brands also offers a wide range of products that include furniture.
IKEA Business Model – What is Unique About Its Approach to Business
The uniqueness of IKEA business model in its approach to business is no different from the points we found about its value propositions and business strategy. But for emphasis, I will go over them again to highlight its importance. Here are some of the key factors that set IKEA apart from other furniture retailers:
Flat-pack furniture and self-assembly: IKEA’s flat-pack furniture and self-assembly model is one of the company’s most distinctive features. By designing products to be sold in a flat-pack format, IKEA can reduce transportation costs and make it easy for customers to transport the furniture home themselves. The self-assembly aspect also reduces labor costs and allows IKEA to offer products at a lower price point.
Showroom experience: IKEA stores are designed as showrooms where customers can explore the full range of products. The company encourages customers to touch, feel, and interact with the furniture and accessories on display. This approach to retail has helped IKEA create a unique and engaging shopping experience that sets it apart from other furniture retailers.
In-house product design: IKEA has a large in-house product design team that creates all of its products. This allows the company to have more control over the design process and ensures that all products are consistent with the company’s values and design philosophy. It also allows IKEA to respond quickly to changing trends and customer needs.
Sustainability: IKEA has made sustainability a core part of its business strategy. The company uses sustainable materials in its products, sources 100% renewable energy, and has set ambitious goals to become a circular business by 2030. This commitment to sustainability sets IKEA apart from other furniture retailers and has helped the company attract a loyal customer base that values eco-friendly products.
IKEA Business Model – A Wrap
The IKEA business model is a combination of flat packaging, self-assembly, the showroom experience, economies of scale, and sustainability. By leveraging these components, IKEA has been able to offer affordable furniture that is both functional and stylish, while also creating a unique shopping experience that encourages customer loyalty. As the company continues to expand globally and invest in sustainability, it is likely to remain a leader in the retail industry for years to come.
Overall, the IKEA business model brings revenue through a couple of ways but most notably through the sale of products.
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