Tackling the Cobra Effect in Indian e-commerce startups

In part one, I explained the concept of Cobra Effect. I shared a real-world occurrence of this phenomenon and discussed the impact on consumer behaviour.

This follow-up article continues in the same light, exploring other instances and their effects on the e-commerce industry. It also discusses possible ways in which the consequences could have been tackled (or avoided).

Ethics and incentives

The general tendency is to presume that people will make ethical choices. And if a few users err, their accounts can be flagged and blacklisted, thus leading us to believe such inadvertent situations can be controlled keeping losses to a minimum.

However, in reality, under certain conditions, anyone can abandon their moral dimensions. Many e-commerce players have unintentionally created circumstances that lead to users exploiting incentivised schemes. Resorting to banning some users and consequently on-boarding new users does not solve the problem. Thus, we need to revisit the way in which incentives are structured and designed for e-commerce.

Applying retail tactics in e-commerce

Incentives and its effects, as a branch of behavioural economics, has been deeply researched for decades. As a result, these techniques work quite well in the retail world.

Take, for example, when someone gives a gift; we feel compelled to give a return gift. Many hypermarkets apply this tactic. They set up live counters doling out food samples. Many a time, the customer feels an obligation to purchase the product because of the guilt trip of having tried something that they had not paid for. However, since retailers can’t pull off this tactic of getting the customer to try out all the samples in advance, another innovative tactic is employed. The store offers free samples with specific fast-moving products. Thus, as a workaround to overcome their inability to get customers to sample a product in advance, they offer the sample alongside a product the customer purchases. This trick is often employed for cosmetic and beauty products.

Here, we see two powerful triggers related to the principle of reciprocity at work. One, humans are generally averse to the ‘losing’ something (loss aversion). And, two, humans are easily ‘pulled’ towards something.

However, blindly adopting these tactics for the online world (e-commerce) often leads to undesired results. One such instance is illustrated below.

Cobra effect in freebie schemes 

The easiest way to increase GMV is to focus on fast-selling high ticket items. Typically, these tend to be electronics and, particularly, mobile phones than any other category.

Thus, in order to drive more sales, an e-commerce firm launched a campaign where with certain mobile phone models purchased, an iPod Nano was given away for free. Retailers often employ such marketing promotions to meet sales targets and sometimes to even move (or clear out) slow-moving goods as giveaways.

However, as it happened, in most cases, for logistical and economic reasons, the products (mobile phone and iPod Nano) were rarely delivered together. This was because the mobile device and the free iPod Nano were dispatched from different warehouses. Unfortunately for the e-commerce firm, the iPod Nano would reach the customer first before the mobile device as the latter had to be procured from the seller first, while the iPod Nano was already in the warehouse.

Sure enough, the participating sellers (and a few users) capitalised on this delay. First, the vendor would place an order for the mobile phone device sold by themselves. Then, once the free iPod Nano was received, the user would cancel the order, thus pocketing the freebie for zilch! Even in the event, where the seller received both items on time, they still profited from getting an iPod Nano for free (margins on mobiles are very low) as the mobile device had belonged to their inventory anyway and can be resold (either at their retail outlet or on the marketplace).

Consequences of the Cobra Effect in the freebie scheme

The scheme was eventually taken down. Unfortunately, for this e-commerce startup, the Cobra Effect played out yet again.

Running incentives on products sold by third-party sellers now proved to be counter-intuitive. If the product was being sold at a lower cost (or if a cashback was provided), the seller simply bought them back — effectively buying back their own goods at a discount.

This freebie scheme not only backfired but also compounded the problem. In the absence of discounts, the customers now had no incentives to buy from the e-commerce platform when they could instead directly purchase the item from a retail outlet near their home. In fact, purchasing from the retailer directly made all the more sense now as there was zero wait time to receive the product. Besides, most retailers throw in a few incentives of their own (mobile cases, screen guards, etc.) to sweeten the deal.

Can the Cobra Effect be tackled?

In reality, once the consequences have played out, it is almost impossible to reverse the effects in future campaigns. So it cannot be tackled, but can certainly be avoided (repetition). In the above case, the e-commerce firm struck exclusive deals with OEMs thereafter. Not a solution per se, but, perhaps, an alternative approach at best.

Practices and tactics that work in the offline world cannot be applied to the online world without understanding the environment deeper (beliefs, preferences besides socio-economic and technology factors).

However, the impact of incentives in the digital realm can be positive with the right approach. But, simply creating clever incentives is not enough. It’s equally important to focus on the framing and other underlying factors in order to induce customers to take a favourable action. To begin with, one needs to calculate the optimum value of the incentive to be offered. The calculation not only depends on the customary parameters (price bracket, units available, replenishment rate, etc.), but a lot more on social preferences of the target segment and which cognitive biases are applicable.

Over-reliance on incentives backfire in the long run

The more e-commerce firms rely on incentives as a strategy for building customer loyalty, the more they will have to rely on those incentives. While digital marketers may argue that they are just tapping into a basic human nature — i.e., people looking for the best deal, in truth, they are changing human behaviour itself.

Invariably, despite the best efforts of the marketer, intrinsic biases shape these ill-conceived incentives, which instead of motivating the user to take specific actions, achieves the exact opposite. It often changes the framing of the scheme itself in the minds of consumers. More importantly, consumers will now tend to completely overlook the moral dimensions as such transactions are completely legit (although still ethically questionable).

What’s the solution?

It might be that when businesses lose confidence in their product or service, they turn to incentives. But in doing so, more often than not, they realise that they get what they paid for, as their business model is fundamentally broken. The moment a business values vanity metrics (such as GMV, MAU, etc.) over profit or the product itself, incentives will backfire.

The fact is that there is no substitute for building loyalty. One needs to just make a good quality product and deliver a great user experience. This holds even more relevance in the digital environment where consumers’ needs and desires are extremely fickle, and loyalty is all the more difficult to build and sustain. Ideally, consumers should come back for the product/service because they really want that product/service — and not for any other reason.

The product and the experience it delivers should always be the best incentive on offer.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)