BOGO and Osama Bin Laden
by CRP Partner Gene Baldwin
as published in Franchise Times
I recently read the New York Times bestseller Freakonomics. It was a very entertaining and thought-provoking book. One chapter contained an interesting discussion of incentives. The authors, Steven D. Levitt and Stephen J. Dubner, made the following points; “Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. An incentive is simply a means of urging people to do more of a good thing and less of a bad thing. There are three basic flavors of incentive: economic, social and moral”.
This book got me thinking about how we use incentives in multi-unit operations to influence the behavior of two key groups: customers and employees. The moral aspects of incentives I will leave to ministers, priests, and rabbis. As we will see, incentives can be both positive and negative. We will also note that many incentives can have both intended and unintended consequences.
We tend to think customers are mainly driven by economic incentives. By giving customers a coupon or discount, we are providing an economic reason to buy from us rather than the competition. Very often these promotions gain the desired result, increased sales. A very successful promotion can have the unintended consequences of lower profits and poor customer service unless management is staffed to handle the increased business. In fact, discounting promotions can be so good they become addictive and train customers to have wrong habits. I see this most often in the use of “hyper-promotions” such as BOGO (Buy One Get One Free) or AYCE (All You Can Eat). These promotions are great traffic builders. Because they are so successful, many operators run these promotions repeatedly and train customers to shop with them only when the hyper-promotion is available. The retailer then gets stuck in a cycle of promotion after promotion before “biting the bullet” and stopping all hyper-promotions. It can be pretty tough to deal with lower customer counts for some period of time after stopping these promotions. Eventually, customers will be retrained to return to their normal buying patterns, but it can take a while. I think the automobile manufacturers are going through some of this shock after several years of rebates, employee pricing and discounting financial terms. It will take much longer, but marketing social incentives to customers builds more sustainable sales. Many multi-unit operators are very involved in their communities and put much effort behind LSM (Local Store Marketing). Nurturing and consistently maintaining a positive public image and customer friendly operations can overcome some of the need to constantly advertise price and value.
In the same way, we tend to think primarily think about economic incentives for our employees. We design bonus plans to either increase sales, control costs, minimize turnover or achieve excellent guest satisfaction scores. Negative results can obtain if either the incentive thresholds are set too low or too high. If the bar is set too low, bonuses become an entitlement and do not “stretch” the employee or business unit to do better. If the hurdles are set too high, they become a disincentive and employees may adopt their own ways to get the bonus they think they deserve by using methods that would not be approved by management. Economic incentives do not have to be the only tactic we employ. In fact, heavy economic incentives work best in independent sales organizations. I have some experience in the car business and I can assure you that nothing motivates a used car salesman but economic incentives. In multi-unit retail operations, social incentives can be very effective. Many people are highly motivated by being part of a team and by providing excellent customer service. Recognition programs for the individual as well as the team can be very effective. To implement positive social incentive programs, management must foster a positive, caring and stable culture. Performance-based recognition rewards for achieving desired results against a standard or in comparison to other business units can be very effective. Policies of open communication, inclusion and team building are essential. Employees will engage in the right behavior to be accepted by the local business unit team, supervisors and top management. These social incentives may not be expensive in terms of dollar cost but they will surely be very expensive in terms of management time and attention to providing an attractive work environment. The easiest incentive to implement is the economic incentive. A new bonus plan can be implemented in a week. Developing social incentives for employees through creation and nurturing of a positive culture will take your whole career.
Remember, economic incentives can only go so far. Otherwise, someone would have collected the $25 million reward for Osama Bin Laden long ago.
© 2006 Corporate Revitalization Partners, LLC. All Rights Reserved