Question

IKEA, the Swedish furniture retailer, has been able to sell its products at a price that is generally perceived to be lower than its main competitors. IKEA insists that even though their prices are lower than most of their competitors, they do not compromise on quality and their products are highly fit for their intended use. IKEA uses prices that end in .99 (such as 4.99). It also uses price referencing where a reference point is provided for the customer to understand the price advantage (for example 'New lower price of 3.99; previous price was 5.99'). IKEA frequently uses major price cuts and large discounts on its wide range of merchandize to attract large number of customers and generate -l-WOM promotion. IKEA offers different pricing options where customers can buy furniture without delivery or assembly, with delivery but not assembly or with both delivery and assembly. IKEA also offers price incentives on full set. For instance, a lower price for a complete bedroom furniture set as compared to single item purchase (for example a double bed only). Hence, IKEA focuses on selling flexibility and gives choices to its customers in terms of how they want to buy. Mostly this flexibility relates to delivery, furniture assembly and payment.

From the perspective of IKEA 's pricing strategy, discuss: (t) Key characteristics (at least six) related to pricing and key considerations in a strategic approach to pricing that are looked into by IKEA when they are developing and formulating their pricing strategy. (ii) Which pricing strategy (the most suitable) should IKEA follow to deliver maximum value to its customers? Clearly explain the appropriateness of the suggested pricing strategy in relation to IKEA'S business philosophy.

Answer 1

Ans KEY characteristic:

IKEA used reference price , its a price which consumers are willing to pay for any commodity at a particular time. So they used this price by which consumer can get surplus.

IKEA price are lower then its competitors and quality is not compromised for increasing consumer so by this also consumer can get surplus in accordance with their prices.

IKEA used price cut strategy for consumers

For sale maximisation they used discount offer more quantity then its competitors.

IKEA keeps their customers first i .e, they uses strategy by which consumers can buy maximum amount they want.

IKEA uses price strategy:

They used the sales maximization objective in which they can earn revenue more then the company whose motive is to profit maximization. In profit maximization objective firm will charge their price when marginal revenue is equal to marginal cost while in sale maximisation they set price less then marginal revenue for increasing their customers. They will earn profit by selling more and more output by increasing their customers. By following this strategy they will provide maximum value to their customers.