hi everybody ikea is one of the most innovative companies of the 21st century and

the most astonishing thing about ikea is that in spite of furniture being a
highly localized business ikea has been the pioneer in turning the furniture
business into a global success and today ikr draws in a revenue of 45 billion
dollars from 445 stores spread across 30 countries and what's more important to
note is not the growth of the company but the fact that ikea taught the world how
to use the most powerful psychological tactics to exponentially increase sales
and today you are going to learn one such strategy that makes ikea stand apart
from the competition and no matter which business you are in no matter which
field you are in you can use these powerful psychological strategies to double
your profits at zero cost the question is what is this strategy how does it make
ikea stand apart from the rest of the competition and most importantly how can
you use them to double your profits this video is brought to you by a special
announcement from the think school community but more on this at the end of the
video the answer to this lies in a fascinating experiment conducted by dan ariely
with the students at the mit in the first iteration dan went to his class of 100
students and asked them to choose between two subscription plans for the
international magazine called the economist now let's do this experiment together
so you tell me which one of these options would you choose okay so the three
options were the digital version for 59 the print version for 125 and thirdly
the print plus digital version for the same 125 as it turns out 16 students
wanted the digital version zero percent wanted the print version for 125 and 84
of them chose the print plus digital option so for the second iteration he makes
a small change he thought since nobody is buying the second option then why keep
it there in the first place right so he removed the 125 print option and
presented the same question to another class of 100 students now technically by
eliminating the option that nobody chose the results are not supposed to change
right well guess what in the second scenario the results changed drastically and
this time only 32 percent of the students opted for the print plus digital
version and 68 of them opted for the just digital version subscription and that
is when dan realized that there was something magical about this unnecessary
option that made such a huge difference in the choice of the customers and that
is what we call as the decoy effect the decoy effect says that consumers change
their preferences between two options when presented with a third option which
acts as an unattractive option just to make the other options look extremely
lucrative now when i say decoy effect most people think about the popcorn example
wherein in the movie houses you get popcorn of small medium and large at a price
of 300 rupees 650 rupees and 700 rupees and because of the decoy effect people
tend to choose the 700 rupees option now although this is technically correct it
is the worst possible example to use why because if you look at the underlying
message that is being communicated to the customers this is what the options
indirectly tell the customers option a overpay for the popcorn option b
extremely overpay for the popcorn and option c extreme overpay for the popcorn
with a little extra popcorn and the basic flow over here is that the prices over
here can in no way justify the value for the popcorn therefore by default making
the purchase of that popcorn becomes a painful experience this is the reason why
we often feel guilty for buying popcorns and if you are a person like me you and
i we will not even think about buying a popcorn at the theater now when this is
done in a close and compulsive environment like a theater it will definitely work
but if the same is done in the free market this strategy will backfire in a
terrible way and if you give your customers this kind of a painful experience
while paying for your product the customers will never buy from you eventually it
will result into extremely heavy losses so the question over here is what exactly
is the right way to apply the decoy effect and that is where ladies and gentlemen
ikea's genius application comes in to tell you about it this is how ikea applies
the decoy effect ikea places three cabinets for you cabinet a b and c a cost
forty dollars b cost sixty dollars and c cost sixty five dollars option a is a
very small cabinet with very smooth movement but it's got very small space plus
the material used would be very ordinary option c will be a large cabinet with
premium handles premium material and most importantly it will offer a large
storage space along with that you will also get a 10 worth of compartment as
complementary if you buy option c and then you've got option b which is as large
as c but it is made out of ordinary material does not have premium handles and
you will not get complimentary compartments and here's where the catch comes in
if you look at the underlying message that ikea is trying to communicate using
its products here's what they say option a says here's a budget product with a
great value for money option c says here's a premium product plus large space
plus delightful complimentary product so very very high value for money and
lastly you've got option b which is almost the same price but without premium
build quality without complementary compartments so not so much of a value for
money as compared to option c so this way option b acts as the decoy so that
when you compare option b with option c option c looks like an amazing deal now
while most sellers only think about the people who directly buy option c ikea
understands that a 22 year old boy who just moved into the city will not be able
to afford a 65 product which is why he would buy the 40 product but when he does
ikea wants to make sure that he does not regret the purchase so even though it's
a low margin product in the race of upselling ikea will never ever try to rip off
its customers who've got low purchase power and the best part is the decoy effect
over here doesn't just make option c look great it also makes option a look great
because the customers feel like they would have overpaid by choosing option b
which is 50 more costlier as compared to option a so by default the budget buyer
buys the smaller drawer set and the premium customers they buy the 65 product why
because they compare it with the decoy and this clean execution of the decoy
effect gives the ikea brand three wonderful superpowers number one irrespective
of their purchase both types of customers get value for their money secondly the
premium customers have been tactfully influenced to buy the 65 product and
because the 60 product was such a bad deal the premium customers actually feel
very good about the purchase and most importantly when the 22 year old boy is
extremely satisfied with his 40 purchase tomorrow when he grows up and makes a
handsome income he will again choose ikea but this time as a premium customer
because he was given the value for money that he was promised even at the 40
price tag therefore customer retention of the ikea brand increases by a large
extent this is how you actually apply the decoy effect so while most sellers
often use pricing strategies with the sole intent to upsell the ikea team
constantly keeps learning and carefully deploys its strategies in a way that it
drives profits but at the same time it retains its brand value and the most
amusing thing over here is that ikea does this literally for every single one of
its 12 000 products starting from affordable drawers all the way up to the
premium beds and even wardrobes now again this might look very easy to some
people but here's something that nobody will tell you if you take a step back
guys you will realize that it is extremely difficult to maintain this fine
balance between profit and brand value especially when you're as big as ikea with
4 45 stores spread across 30 different countries with 2.1 billion visitors who
are coming from different cultures from all across the world and the only reason
why they're able to execute this strategy is because of ikea's powerful
philosophy of democratic design and lifelong learning culture every time ikea
enters a country the ikea team specifically studies every little aspect of that
place starting from the average balcony size all the way up to the average spoon
size this is done just so that ikea could fit into the cultural framework of any
country therefore even when you apply this strategy always make sure that you
constantly keep learning about the customer's reaction and keep a very close eye
on the customers culture purchase power and their spending habits because only
then you will be able to understand how to strike a balance between profit and
brand value and this brings me to the most important part of the episode and that
is as a businessman or a business woman what is the step-by-step process to apply
the decoy effect and what are the study materials to help you dive deeper into
the superpower of pricing meanwhile if you are someone who wants to learn how to
tell powerful stories like we do at think school i would highly recommend you to
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to the application here are five very very important steps that you need to
follow when you apply the deco effect to your products step number one do a
thorough research and find out which is the most popular and profitable product
in your store step number two if it is a premium product find a budget substitute
for the same product such that people who cannot offer the premium one can still
fulfill their need with a budget product why because budget customers will soon
become your premium customers therefore engaging with them should never ever be
underestimated step number three would be to create a decoy and the point to be
noted over here is that your decoy must not be a degraded version of your premium
product however the premium product should have a way better offering than your
decoy so if you're selling drawers it's okay to have a non-premium material but
it shouldn't be like the drawers are rigid and they're very badly functional why
because people even the decoy is going to reflect your brand value so always try
to make the premium product more attractive with complementary offerings rather
than purposefully degrading the decoy step number four would be to price your
products in a way that the premium product looks way better than the decoy and
the budget product or option a looks like the obvious choice for the customers
with a lower purchase power this way your high margin product will become
extremely lucrative driving very high sales and at the same time the budget
customers will also be very happy to get the value for their money in fact those
people will be even more happy because they didn't have to pay 50 extra just to
get a bad deal on the decoy and lastly do not add more than five products and
make sure that the price of the decoy is very close or even equal to the premium
product now the disclaimer over here is that in the green for more profits please
don't misuse the decoy effect because people always remember in the free market
the customers are just one step away from leaving you forever this is how ladies
and gentlemen you can apply the decoy effect to your products and when done right
it can increase both your conversion rates and your profit margins by a large
extent meanwhile if you are someone who wants to dive deep into the philosophies
of pricing and consumer psychology i would highly recommend you to read this book
called misbehaving by richard thalor which has now become my standard
recommendation and the second book is this book called nudge written by the same
author that's all from nice after today guys if you learned something valuable
please make sure to the like button in order to make youtube baba happy and for
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channel thank you so much for watching i will see you in the next one bye bye
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