The Cobra Effect: It’s Impact on Sales and Brand
The Cobra Effect or Perverse Incentives, as some economists call it is is a phenomenon that can kill your sales. And, with it, your brand.
It refers to an attempted solution to a problem that actually makes the problem worse.
It's Origin
The concept is said to have its origins in colonial India. When the British ruled India there was a time when the city of Delhi was inundated with snakes. In order to tackle this situation, the offered a bounty for each dead cobra. This, in turn, led to people breeding cobras for the reward, and thus created an even bigger problem than before.
The Cobra Effect is increasingly relevant in the business world. This is because companies often create solutions to problems without understanding the long-term consequences.
Cobra Effect and Sales
Its biggest impact can be seen in Sales discounting. When used selectively, sales discounts provide incentives to attract new customers and retain existing ones.
But, once you go down the road of discounting indiscriminately, it has adverse effects. Customers come to expect discounts on all purchases, which can reduce profitability over time.
It turns out discounting is a zero-sum game. Once customers are hooked on sales, they’re not willing to pay full price ever again.
Brand value can also be affected. Discounting creates a perception that the brand is not worth full price or that it is cheap and low quality.
Image downloaded from CNBC website. Credit AP
The fall from grace of retail giants J.C. Penny and Gap are shining examples of how coupons and discounts, in the long run, can kill long term sales.
This effect was also seen in the banking industry with Wells Fargo, where employees were pressured to cross sell products. The fear of losing their jobs made them resort to opening millions of accounts without their customer’s knowledge. An action that eventually led to loss of trust of the brand.
How to avoid the Cobra Effect
As Anthony Luceno, Director of Marketing at accounting giant KPMG says, “One way to prevent the Cobra Effect is to avoid linear thinking entirely and approach problems using second level thinking instead. “
Our human mind assumes linear thinking. Which is "the best way to solve problems as it takes into account the efficient way of going from A to B". Without realizing the longer term consequence.
According to Luceno, you can avoid this by:
- Questioning everything: Don’t make assumptions. Keep asking the question, “what happens next? Continue to do so until you have a clear picture of potential outcomes.
- Involving others: We often use linear thinking because we can’t think of other possible outcomes. But when you include others in the decision-making process, you get alternate perspectives.
- Thinking long-term:Look past the immediate results and consider the future impact. How will the decision play out a week, month or year from now?
- Not discounting options too quickly: Keep your options open and scrutinize each one until you’re sure they aren’t the right solution.
- Keep practicing: The more you apply second-level thinking in your decision-making, the easier it will become.
In conclusion, note that every potential solution can also bring a host of unexpected outcomes. Despite your best efforts, there is no foolproof way to avoid the Cobra Effect. But by understanding it and applying a second level thinking approach, you can offer incentives that solve problems. Instead of making the problem worse.
