Setting the right Incentives

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Ever since I can remember, I have questioned the reason behind actions taken. I have always been curious about the why. I always had the idea of interaction of incentive systems in the back of my head, but it took me business school to articulate it.

 

As a recently graduated business administration student, I am still sorting through the countless frameworks, matrices and structures that I was taught. The one that I keep coming back to- the Mckinsey 7S framework.

For the un-initiated, the 7S framework attempts to provide a guide for management to look at what needs to change in an organization for the successful implementation of strategy. The seven components serve as levers- things that can be changed to achieve alignment with the vision of the organization.

 

What always intrigued me is the interconnectedness of the different elements within the structure. How management style, staff and systems all interplayed, and how culture (or the shared values, to maintain the alliteration) remained at the center of it all.

The one component of the framework that intrigued me most, and which continues to interest me, is the systems. The system refers to all the detailed sub-organizations which help keep people happy and working towards the common purpose. In particular, I always think about systems as the motivator for why people do the things they do- setting the incentive structure, and ideally covering Maslow's pyramids of needs. This framework gave me a good way to think about the internally focused, organization level why, or why would employees stay on track and deliver value.

It was only recently, reading Nir Eyal's seminal work- "Hooked How to Build Habit-Forming Products" that I realized the piece on why customers do the things they do- Customers, like all of us, have needs, a " Job to be done", as Prof. Clayton Christenssen would put it. These "jobs" create a required incentive structure for customers as well, and until and unless the value of the product/service combination aligns well with customer’s jobs to be done, a product cannot be successful.

Fortunately, creation of this alignment is achievable, though not easy- and has to begin with the customer, as all things should. Starting with the customer’s why, we need to ask ourselves why the customer employs a particular method to solve their problems, which job does the customer hire the product for, and then according to Nir Eyal, ask ourselves how might we simplify the customer journey to reduce the steps the customer needs to take. Time and again, we see a repetition of the same pattern with successful organizations- they enter and disrupt the incumbent norm by simplifying processes for the customer, addressing a need that the customers could not articulate, but is apparent in hindsight.

I find the IDEO’s Field guide to Design useful in customer need discovery. IDEO, a user-centric design organization details the benefits of ethnographic research in customer need identification and designing for customer needs using a repeatable process. These needs, specifically unarticulated, provide the template for what requirements customers have- and provide insight into what incentivizes customers to look for and adopt alternatives.

Looking at the intersection of customer needs and customer rewards, I find that Nir Eyal’s philosophy of the three rewards systems makes a lot of sense and incorporates customer need fulfilment at multiple levels.

 

I believe there exists a virtuous cycle between customer incentives- as presented in their needs and the incentive structure within the organization. I agree with what George Akerlof and Rachel Kranton suggested in The identity and economics of organizations- “firms get what they pay for”. Congruence between what the customer’s needs and incentives are and the organization’s incentives is critical, and of chief concern for leadership in any organization, but of imperative importance for product developing organizations.

 

By following this virtuous cycle, businesses can not only make setting incentives easier, but incentivize their people to make decisions to make more coherent, customer oriented decisions and product choices. By aligning every action to customer needs and incentives, organizations can create lovable and widely adoptable products, leading to a long lasting relationship between the customer and the company- which is ultimately how successful companies get made.

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