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The "Ten Hot Dogs" Strategy of Ingvar Kamprad

07.04.2008

The In 1995 the IKEA furniture store started selling hot dogs at five kronor each, as opposed to the usual price of ten to fifteen kronor. This invest­ment was at once successful, and today it contributes to the growing restaurant and food sector by turning over 1.6 billion kronor in 1997, and alone answering for exports from Sweden amounting to 700 million kronor ($87 million). That makes IKEA Sweden's leading food exporter. But behind this success is a special story. The "ten hot dogs strategy" says a great deal about the way the company regards price, competition, and the needs and desires of the customer.

Everyone, including myself, who likes sausages knows what a hot dog costs at a stand. At present it is between ten and fifteen kronor. I suggested to the directors that we sell them at five kronor. They looked at me with dismay and surprise. Perhaps they thought the idea foolish, or perhaps I didn't explain it very clearly. Talking about selling hot dogs in a multibillion furniture store was not really on the agenda.

The next objection arose from my staff, who are always concerned with what they call the gross profit margin. We're selling hot dogs for almost the same amount it costs to make them. Shouldn't we raise the price and take six or seven kronor in profit? In that case, the project ought to be abandoned, I replied, as the whole idea is based on the substantial price difference, the easily understood price. The hot dog went on costing five kronor regardless of the cost of raw materials. We don't lose on the deal, nor do we make much profit, but at least we make a little on each hot dog. In the end, that is what matters.

A little while ago, we advertised a mug costing ten kronor. Come to IKEA and buy the mug, it said. I was upset—the price was much too high. It should have cost five kronor at the most, although it did look pretty nice and was of good quality. It was the price that was wrong. So it came about that I wrote down my philosophy about the ten (twenty nowadays) hot dogs. We have ten different prod­ucts that live up to "hot dog" pricing. A rule of thumb is 3 + 1 + 1—three kronor to the producer, one krona to the Ministry of Finance (tax authorities), and one krona to ourselves. Each time we are unable to follow that equation, we should think twice. Take the mug from the above example, called "Bang." In Switzerland it costs exactly one franc at IKEA. I haven't found one on the ordinary market for less than three francs, and even in that case our mug was much better in both design and quality. Before, we sold at the most seven hundred thousand mugs per year, and now the "hot-dog mug" sells twelve and a half million.

One day I found a wonderful English beer glass for eighteen kronor at our Swedish co-op competitor—I always go and look at what my competitors are doing. It was the kind of English glass with a level measure on it, forty centiliters, heavy and really good to hold. I thought it would be a good "hot dog." I went straight to our most superb buyer and said: "Bjorn, can you get that glass out at one krona? You can order two million." He replied: "Nix - I can't, but maybe in an edition of five million." The whole thing had the support of the product head, whom, as usual, I had bypassed. The last time I met Bjorn, he had a supplier who would do the glass at 1.08 kronor. It'll work out. So in a short time we've put twenty or so "hot dogs" up for sale - the whole organization is up and going.

The reader is right to ask himself or herself why, as the retired head of the firm, I go on with this kind of thing. There are three answers: one is that I find it difficult not to; it also says in my contract that I have a veto in matters of the range; and people in the company often say, "If you're on to something, let me know." So I let them know. I'm going on with my search for new "hot dogs" - lots of associates are involved. I recently saw a multi-plug we sell for under twenty kronor, while competitors take about fifty. My belief is that this "hot dog" will sell millions. Our pricing policy is fundamental. The stumbling block is when we price ourselves out of the market. Our economists constantly go on that we must keep our "total gross profit margin" to a certain percentage. I say to the economists, "What the hell is 'percentage' anyhow?" Percentage is something mysterious.

The only thing that interests us at IKEA is what is left in our pocket when the season is over. They talk about "cash flow," and I say that I don't know what cash flow is, but I know what I have in my pocket. If we had taken ten kronor for that mug, and not five, then we would, of course, have "earned" more on each mug— perhaps one and a half kronor—and had a better "gross profit margin." But we would have sold only half a million of them instead of almost twelve million, on which we now earn one krona each. These learning experiences are easy to suppress or ignore. But after having been the subject of endless bickering for over a decade, in this respect we are beginning to wake up with a vengeance. That pleases me enormously.

From: Leading By Design: The Ikea Story, Ingvar Kamprad, Bertil Torekul

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Anton Murad Anton Murad
Good2Work, Alumni
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