The Cobra effect is a kind of perverse incentive where loopholes or weaknesses are exploited in an offer intended to influence behavior to solve issues, making the problems worse. Recipients of these incentives that could be well-meant but with unintended consequences, include external customers or internal executives.
A classic example of the cobra effect, was first observed in India when the British colonial government launched a successful incentive campaign for cobra skins, to address the growing number of dangerous venomous cobras in Delhi. Eventually, enterprising people began to breed cobras as a way to get more rewards. When the offer was scrapped, cobra breeders set their now-worthless snakes free, increasing the wild cobra population further; thus defeating the purpose of the incentive in the first place, wasting resources along the way and making the situation worse than before the incentive was launched.
Other examples of unintended negative consequences below may be familiar to our readers.
- A credit card company offered free foreign trips for x amount spent within a specific duration. Smart couples bought gift cards in supermarkets representing several months of supply with the credit card company ending up spending without incremental revenue post promo duration.
- A fast food company offered free self-service soda filling and refill station. Some couples were seen sharing a single cup while eating, before leaving and worse, returning the next day with the same cup. The fast food decided to remove self-service offer and placed the dispenser inside the selling area under the control of the cashier.
- A multi-level direct selling company offered free trips to Boracay for attaining a specific group sales volume. Forgetting to include disallowing of duplication of volume count in their terms and conditions. An independent distributor placed most of the volume in the lowest level downlines which became counted as part of the group volume of the uplines, resulting in multiple trips for the same group volume.
- A consumer company incentivized its sales force for hitting 100% of their quota by year end. Knowing the attainment is at risk, the salesforce started doing inventory loading to the trade, offering unofficial “extended” terms and discounts, resulting in poor sales, heavier sales returns and lower collection performance at the start of the next quarter.
- A pharmaceutical company prided itself with a no-questions-asked vendor managed inventory (VMI) level for their distributors. Upon closer examination, distributors complained that they ended up with increasing number of months inventory levels that they had to pay for unnecessarily while the distributor executive always attain his sales quota. The extra sell-in and additional sell-out incentives given by the company were simply not worth it.
- When a condiment company incentivized their general trade sales force for evidence to have higher reach with more transactions, the sales force ended up booking transactions of the same channel customers in separate receipts.
- A communication company paid top executives heavily based on attainment of profit of the calendar year. So executives focused all their attention on this short-term metric, ignoring the threat launched by competition, cutting costs aggressively instead of adding to their defense budget, and postponing investment in business development needed to build future businesses.
Incentives can work for or against an organization so there is need to think through not just in what to offer short-term versus long-term but on how stimulating the market can bring unintended negative consequences. This can be done through a pre mortem meeting to anticipate, bring out and mitigate the worst scenarios of an incentive campaign. This is also a chance to legitimize and actually welcome the negative feedback of the skeptics and the paranoids, who can, in fact, be your greatest assets in that premortem session.
Josiah Go is chair and chief innovation strategist of Mansmith and Fielders Inc. His areas of specialization include, among others, market-driving strategy, profit strategy, business model and innovation.