Never underestimate the power of...

We travel from Colonial India to modern Memphis to uncover one of the most powerful forces in human nature (and business).

At the end of the 19th century, a significant event took place in India that will lead us to the idea I want you to think about today:

At that time, India had been under British control for almost a century. A hundred years of strict management by the colonizers who, however, never quite understood the peculiarities of the local culture and its people.

A problem arose that threatened the British plans of extracting resources and riches from the colony: the number of poisonous cobra snakes was increasing due to favorable environmental conditions. Cobras were everywhere and they bit the workers who were harvesting natural resources.

So, the local British authorities created an incentive: they would pay a monetary reward to anyone who brought in a dead cobra.

Given the number of Indians living in poverty, volunteers wouldn't be scarce. This legion of mercenary hunters would solve the cobra problem within weeks. All in exchange for a portion of the money they were already extracting from these lands in the form of valuable resources. Give me a dead cobra, take some coins.

But things did not go as expected.

The Indians wanted this incentive more than anything, so they thought of the best way to obtain it: secretly breeding more cobras.

They set up clandestine snake breeding farms, where they had them accessible, controlled, and kept together. Smart people 😉

When the British discovered what was happening, they reacted impulsively: they immediately removed the reward for dead cobras. They eliminated the incentive.

The snake breeders released all the cobras because they no longer needed them. And the free-roaming cobra population multiplied by ten. The British now had a problem ten times worse. All because of the incentives created.

The law of unintended consequences states that in a world of consequences, initial intentions rarely matter.

We jump in time and space to present-day United States, where FedEx, the largest express delivery company in the world, operates. The frenetic pace of business requires FedEx's hundreds of cargo planes to meet in the middle of the night at a large central airport in the country (their Memphis, Tennessee hub) to exchange their hundreds of thousands of packages, each moving towards its final destination that night.

Time and coordination are of vital importance, as all planes must take off back to their points of origin as swiftly as possible, or the promise of "overnight" delivery will not be fulfilled. And the key process of unloading planes is still quite manual 😱

FedEx's night shift workers have to make all this magic happen every night, without delays, without failures. And many nights, they fail.

The company's management has tried everything to solve this problem: motivation, punishment, layoffs, changes in middle management, even paying more per hour worked (a poorly thought-out incentive)... but nothing ensures the job gets done without delays and failures.

What about incentives?

Finally, someone designs an appropriate incentive: workers would no longer be paid by the hour. Instead, they would be paid per shift worked (the equivalent of 8 hours of salary). If they finished the job earlier, they could go home, earning their entire shift's pay.

Boom! Magic. Suddenly, efficiency skyrockets. No one stops to rest or grab coffee. No one gets distracted talking. Everyone focuses on finishing the job as soon as possible to get home to a warm bed.

Problem solved "overnight." With the right incentive 😉

Never think about other things when you should be thinking about the power of incentives. Few forces are more powerful than incentives.

— Charlie Munger

Let's take this idea to online business

In all online businesses, incentives exist. We typically use them to get more customers to buy from us.

Here are three good examples of the power of incentives:

1/ I'm sure you've used the incentive of "free shipping on purchases over X euros." It's not an incentive to make customers buy, but to make them buy more. When used well, it will help increase our customers' average ticket. To get them to buy one more product or accessory; always spending more than they initially intended to buy (the “average ticket”).

2/ An incentive designed to get customers to buy is the terrible "20% discount only for new customers." We aim to encourage new customers to make that first purchase (giving up much of our margin). And we greatly upset existing customers who have already rewarded us with their loyalty. This incentive fills our database with duplicate accounts because the customer is smart and knows how to appear as a new customer. And it erodes the margin on all orders. Bad business.

3/ The "free returns" incentive aims to get hesitant customers to buy. But what it achieves is that everyone - hesitant or not - buys more products than they need, on different colors and models, planning to return what they ultimately don't want. A disaster for the income statement of your ecommerce. And bad for the planet.

I've dramatized everything a bit; there are other uses and nuances in these three practices, making them a good incentive; sometimes. But you see how easy is to define the wrong incentive.

What other incentives can you think of in the different areas of an ecommerce? Not only for customers; there are also internal ones, as in all companies. And toward external collaborators or suppliers.

Are they all well-defined? Do they incentivize the right things?

I simply hope, with these examples, to make you think about the incentives you create. Because:

You get exactly what you incentivize;
have you thought carefully about what you’re incentivizing?

— Pablo Renaud

Your turn:

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If you recommend me to your contacts using your personalized link, you can earn these rewards

Have a look 😉

P.S. If you want to see more examples of poorly designed incentives, in a very short and easy-to-consume format, you’ll like this thread.