Thursday, November 16, 2006

IKEA Doesn't Follow the Textbook Example

Here is an article that discusses IKEA's unique policy on selling umbrellas:

The umbrellas are huge (3 people can fit underneath), colorful (in IKEA's signature blue and yellow with a big company logo), and made of good quality materials (strong cloth, steel shaft, large wooden handle). Exactly the kind of umbrella you want to carry when it's raining.

A small sign hangs nearby:
Sunny Day .............. $ 10.
Rainy Day .............. $ 3.

This strategy is contrary to one of the most basic examples in supply and demand analysis: when it is raining and the demand for umbrellas is high, firms can charge a higher price to make higher profits.

The author of the article thinks that IKEA's strategy is a good one (though he does not give any empirical evidence). What do you think? Is IKEA's policy leaving money on the table? Or can you think of reasons why it would be a good idea for them to go against the textbook example?

(Source: Newmark's Door)


Anonymous said...

To be honest, this strategy does not completely make sense to me. I thought that what the book suggests would be the best idea and firms would follow that policy. I think that IKEA i banking on the fact that when it comes to a rainy day that consumers will notice their lower prices. This could be effective because the umbrella market really only exists during rainy weather. It is a way of price discriminating based on the weather. The sunny days could also be priced higher because they are trying to make up lost revenue in the low price for the ones in the rain. This is a form of price discrimination.

Anonymous said...

IKEA clearly doesn't follow textbook examples of a smart retailer. The article says that IKEA is even smarter than the textbook example. When it rains, demand for umbrellas would be high, and retailers would be expected to charge a higher price for a good. Not IKEA. By pricing their umbrellas at $3 on rainy days and $10 on sunny days, customers will remember this extremely low price. Let's not forget that the umbrellas are signature yellow & blue and have a huge logo for IKEA. This umbrella's price will not only be remembered by the customer, but the actually umbrella would be a moving advertisement for IKEA itself. Maybe $3 wouldn't sustain the cost of the umbrella in the short run, but eventually and overall, the low price would bring in mony and the umbrella's logo would bring in new customers. This pricing method is taking a risk, but I think it is actually a good idea.
-Morgan Hale

Anonymous said...

I think, just like morgan, ikea has a great idea by having lower prices on rainy days. It does seem opposite to regular economic standars, but this is a unique example. Rain is not harmful. The worst it can do to a person is get them wet. I think most people who do not always carry an umbrella around do not let the rain bother them that much. If the price for an umbrella was high during a rainy day then those people who do not already have an umbrellla will not waste a ton of money on one. If the price is quite low though then those people, who the rain does not bother much, will consider buying becuase it is cheap. ikea is therefore opeing up the umbrella market to a custome who would not usually buy an umbrella. On a sunny day, the hardcore rain fearer would buy an umbrella to prepare for a nasty day, and therefore is willing to pay a higher price becuase they are more against the rain.
-seth weiland

Anonymous said...

I think that this new innovative strategy will be a good way for IKEA to retain customers. With the inexpensive umbrellas customers will feel IKEA is an honest firm and IKEA gets free advertising. A IKEA being a relatively large firm can support such minor losses from sale of umbrellas below ATC. This customer retiention strategy is very beneficial by setting IKEA apart from other stores as being customer friendly and not just out to make profits. This strategy will continue to draw in long term customers unless other firms in IKEAs market capitalize on this strategy by promoting their own business in a similar way.

Anonymous said...

I think that it is a good idea to charge a lower price on rainy days because on a rainy day a person needs an umbrella. Even though the demand is higher it wouldnt be advantageous to charge a much higher price. If its raining and the price is low, the person will definately buy one but if its a high price than the person might just suck it up and deal with it. IKEA also is doing a good service by supplying a needed good on those miserable rainy days.

Anonymous said...

Chris Templin wrote this last blog