Price Optimization: What Banks can Learn from IKEA about Pricing

     

When I was sixteen, I was an exchange student in Malmo, Sweden for the summer. My host family took me to IKEA decades before the now familiar Blue and Yellow building appeared on our shores. I couldn’t put my exact finger on it, but I knew something really special was going on there, and it started my life-long fascination with IKEA which includes shopping at IKEA in at least 4 countries. 

Price Optimization: IKEA heart.jpgAt the heart of the IKEA concept is “democratizing design” by ruthlessly driving cost down in everything from sourcing and product construction, to flat pack shipping. According to a recent article on FiveThirtyEight.com, IKEA now determines the fate of 1% of the entire planet’s lumber production. Let that soak in. It’s an astounding figure. This isn’t furniture production or the output of an industry. This is the effort of just one company, a company that has virtually no competitors for its particular focus.

IKEA for flat pack design furnishings is the marketplace. IKEA thus sets the rules for how its marketplace works. As a general rule, they try to reduce the price of their products by 1% every year. This has resulted in some extraordinary modern furniture bargains, that many of us have in our homes, but the prices don’t go down everywhere. As FiveThirtyEight.com’s Oliver Roeder reported, when the US’s prices go down, Canada’s prices tend to go up. This is based on market dynamics that IKEA determines results in different consumer price elasticity in Canada.

For banks, fine tuning pricing with different consumers is clearly coming to the forefront as banks begin to adopt consumer goods practices to price more effectively and drive more revenue which is core to how we at Nomis help banks. IKEA_inventory_management.jpgBut, IKEA’s lessons on the cost side of the equation are also interesting to banks. One could argue as a marketplace of one, they have the ability to let market forces determine what they do is a very pure way. As Roeder shared, they quickly drop products that don’t sell well and thus never get to economies of scale. More interestingly, they also drop products that never achieve cost reduction targets perhaps because one part continues to rise in price or they cannot figure out how to make it more cheaply. When you think about a bank, you could easily imagine banks adopting the IKEA model. If a product doesn’t sell well, drop it fast. If you can’t figure out how to reduce the cost to serve over time, refactor the product or drop it and develop something else.

Dan Ariely.pngAnother IKEA story caught my attention this week from the research of Dan Ariely, the famous behavioral economist in a replay of one of his TED talks in which he talked about his research regarding how people value goods based on how much they invest in it. I don’t want to steal his thunder related to how he conducted the experiments to uncover this insight, but suffice to say we all love products more that we are personally invested in. When you get that particle board flat pack shelf home and you follow the wordless bubble person’s efforts to show you how to wield the included Allen wrench to bring to life your product you become invested in your creation despite of any frustrations you might have had along the way. You love that thing more than other things where you had no investment.

Let’s translate that to banking. When a customer visits a branch or calls a call center or hits a website they want to find solutions that meet their needs. Banks too often have “one size fits all” products with no options, despite the fact that options do exist like the term, bundling with other accounts, impound choices on mortgages, and changes one could make to other types of outstanding debt. In our work with banks, we help them empower the front line with the options and any provided discretion to help tailor the offer to the customer. Through this dialogue with the customer, they become more invested and thus more engaged in the process. In addition to the forces Ariely talks about in jointly crafting the solution, people also certainly like to talk about themselves and their needs and know that someone heard them and is responding.

swedish-meatballs.jpgSo on the surface it’s not easy to see the connections between a Swedish furniture giant and the banking industry, but if you think of banking as commerce where offers and products are consumed through market mechanisms, it makes sense to think about how cutting edge retailers engage the public, engender loyalty, and keep them coming back for repeat purchases. It may be time for bankers to head down to their local IKEA for a plate of meatballs and a moment of strategic zen amongst the throngs of loyal customers to contemplate your next market move.

Learn more about Price Optimization.

REFERENCES

http://fivethirtyeight.com/contributors/oliver-roeder/
http://www.hbs.edu/faculty/Publication%20Files/11-091.pdf
http://fivethirtyeight.com/features/the-weird-economics-of-ikea/

About The Author

Ken is our CMO at Nomis Solutions.