Verifying the Obviously True May Show …

You likely have seen such signs. It may not be in IKEA parking lot (picture used here only for illustrative purposes) it could be your local grocer. The stores tell us that it is important for us to do our part, because it helps to keep prices low. Seems obvious and sounds true. We could even come up with an explanation on our own – carts left astray in the parking lot cause collision damage that cause liability to the store which flow back to products as higher prices.

We do not stop to question or analyze whether it true, we do our part (mostly) and move on. Which is a civic thing to do, so please continue doing it, I am not recommending otherwise. But I am questioning their not so subtle hint on pricing and the reason we tell ourself.

First let us look at this from pricing angle. How are merchandises priced? They are priced at what the customers are willing to pay such that it maximizes the business’s profit. A  simple explanation of customer willingness to pay  and price elasticity can be found in my book. Here let us look at IKEA’s published FAQ for the explanation:

The IKEA business idea is: “We shall offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.”

You cannot find a simpler and clearer explanation on pricing. IKEA has chosen to maximize its profit by appealing to as many people as possible. Note that if the prices are any lower than they are now, even more will  shop, so why not do that? Clearly they have to price the merchandises at least above their marginal cost (ignoring loss leaders here) – the cost for the store to acquire, ship and shelf them. Even at prices above marginal cost, after certain point the increase in number of customers by lowering the prices will not deliver incremental profit. So they find a price point at which the profit is maximized.

On the flip side, if they were to increase pricing on certain merchandise then they will find fewer people willing to buy it. They may find that the loss of profit from lost sales is more than incremental profit from price increase.

Back to shopping cart in parking lots. If you followed the pricing for profit maximization argument you can see why. The store cannot simply increase prices to recoup the losses from shopping cart damage liability or any other such costs without affecting the sales/profit. The prices we see now are optimized to the extreme, to their final cent. A moment’s reflection will convince you that if they can indeed raise prices because we are not stowing shopping carts properly without affecting sales/profit they would have already done that – shopping cart or not.

Second let us look at this from cost and execution angle. Each IKEA store sells 10,960 products. Only the marginal cost of the merchandises matter not the fixed cost of operating the building, the interest payments, employee salary or liability insurance premium. Even if the costs were to be allocated to each merchandise, and somehow they have figured out a weighted average method to do so across all 10,960 of them based on their price and sales volume, the increase will likely be very low that we won’t even notice it. Which brings us back to previous point in bolded text, why wait for the damages to go up?

So what we see is a nudge to improve a store’s operational profit by keeping its costs down – be it liabilities or hiring an additional person. None of these can be easily passed on as higher cost without impact on their sales and profit. Do not worry about prices going up.

Next time you see a sign like this, do not take take the pricing reason for granted. Leave the cart in its allocated space because it is the civic thing to do.

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