Incentives are the greatest predictor of future outcomes

Sounds obvious right? If you pay someone to do something, they are more likely to do it. But often people take a company’s word for something without asking or looking to see if the incentives are there for it to happen.

One of the most obvious recent examples of this in business was the rise of Groupon and other social deal sites in 2011. The premise they sold to small retailers was that they could use a large discounted group buying scheme to attract lots of new customers into a retailer in a short period of time. The story the deal sites sold to small business was that although they would lose money on the deal itself, they would have a great chance to convert enough of these loss leading customers into profitable repeat clients for the deal to pay for itself many times over. The premise worked almost like magic at the start. Thousands of merchants signed up to offer deals and millions of consumers purchased them. Groupon in the process became the fastest growing company of all time, and others like Living Social became valued in the billions almost overnight.

However it was all premised on the understanding that small businesses would recoup the losses of the deal when a percentage of the deal customers converted into regulars. But nobody asked whether the deal sites were incentivised for those deal customers to become regulars. Turned out it was even worse than that. The deal sites were actually incentivised to stop the deal customers from becoming regulars.

Here is how: The deal sites only made money when they introduced a customer to a business (as in they got a large percentage of the initial deal — e.g sometimes as high as 50% in the case of Groupon). But they got nothing if the customer became a regular of that business. But they had a large list of email addresses of people within a local area they knew were interested in a certain service because they had bought it on a certain date. So the sales teams in the deal sites were massively incentivised to approach the direct competitor of that initial business and get them to offer the same deal to the purchasors of the original deal. Let’s take a nail service in a local beauty salon as an example that we saw happening many times with our customer base in Phorest. For certain types of nail services, it is common to visit your local salon every 4 weeks. We often saw deal sites offer a deal with Salon A one day, and then 4 weeks later offer almost the exact same deal from Salon A’s direct competitor. Everyone who had bought or showed interest in the first deal was emailed with details of the second deal, when the deal site knew the person was due to have that service again. Why would the consumer who had already shown themselves interested in a deal for this type of service go back to the initial business at full price when, just as they would be looking to book such a service again, they received a new ridiculously good offer for another local salon?

This wasn’t the only reason the whole social deal site phenomenon started to come off the rails within a few years but clearly if the incentives of the deal sites had been aligned with that of their merchants, i.e. to ensure deal buyers converted into regular customers, then it may have had a chance at being a long lasting business phenomenon.

This is something I think we can all have a close look at in our own business. Is our company incentivised to achieve the same outcome as that desired by our clients?

Ronan Perceval is CEO + Founder of Phorest Salon Software.