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🧠 The Cobra Effect: When rewarding customers punishes your brand

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Hi there - Jen here :)

Every year, brands spend billions of dollars rewarding their customers for “good” behavior:

✅ Starbucks Rewards gives customers stars for purchases and then lets them exchange stars for free food and drink once they’ve collected enough

✅ American Express gives its members rewards points and special benefits for being a cardholder

✅ REI - the outdoor gear store - gives its co-op members discounts. They also send a refund check at the end of the year for 10% of each members annual purchases

Rewarding good behaviors is a great way to create a customer habit or encourage a behavior - like visiting Starbucks more often.

But what happens when rewarding good behavior… backfires?

Today you’ll learn:

  • The psychological effect that describes how incentives and rewards can backfire and make a situation worse than before

  • 3 real-world examples of this principle in action

  • How you can use (and avoid) this principle in your own business

👉 But before we get started, don’t forget to register for my free 60-minute Customer Journey Mapping workshop on Friday. 

I’m capping attendance at 25 people (and it’s already filling up) but if you can’t make it, don’t worry because I’ll share the recording - but only with those that register.

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What is the Cobra Effect?

When unintended negative consequences rear their heads when a reward or incentive is offered to solve a problem, it’s called the Cobra Effect.

The story goes that many years ago, in India, there was a cobra “infestation” in the city of Delhi.

 🐍 🐍 🐍 

(Or at least what the British-run government at the time deemed “too many snakes.”)

So the government created a bounty for cobra skins.

They thought by offering a reward for dead cobras, the public would solve the snake problem.

But instead of capturing feral cobras and killing them, people started farming cobras for their skins.

The government eventually got wise to the cobra-farming industry, and canceled the bounty.

But with no bounties to collect, the cobra farmers set the snakes free in the city — making the infestation even worse than before.

🐍 🐍 🐍 🐍 🐍 🐍 

It’s from this (likely ahistorical) story that the so-called Cobra Effect gets its name.

Coined by German economist Horst Siebert, the Cobra Effect describes one of those pesky quirks of human behavior:

Set up a reward and people will inevitably try to game it.

Here are a few examples:

1. Bogota Drivers vs Pollution

Bogota, Colombia was battling high levels of pollution in the city, caused by excess traffic.

So the government decided to create a law that limited the days people could drive - determined by the last two numbers on your license plate.

But lots of families - especially when both parents worked - needed to drive every day.

So many Bogota families bought more cars to get more license plates, and drive more - sometimes up to 4 new cars for a single family.

They didn’t break the law, they just found a loophole in the system.

The end result was more automobiles on the road, which meant more pollution (not less).

2. The NFL Team That Allegedly Lost on Purpose

In the NFL, new football players usually come straight from university programs.

After graduation, they're chosen by a professional team in a draft system.

Each team gets a turn to pick their favorite college players.

But the order in which a team can pick players in the draft is down to the team's performance in the previous season.

The worst teams go first, so they get their pick of the best players (in theory).

That reward seems fair at face value, since teams with poor performance could draft better players and improve.

But the NFL draft system fell victim to the Cobra Effect.

In 2021 the owner of the Miami Dolphins, Stephen Ross, was suspended for six games.

He had allegedly encouraged the team to lose games on purpose so they could increase their draft position.

Brian Flores, the former Dolphins head coach who blew the whistle on Ross, even suggested that he was offered his own incentives - monetary bonuses - to throw games.

(Whether the Dolphins ACTUALLY threw any games is still up for debate - the NFL claims there was no evidence a game was purposely lost, but Stephen Ross as suspended.)

While the NFL's intentions were good when they designed the draft system, in reality it left a huge loophole that unscrupulous teams could exploit.

3. How Employee Incentives Almost Destroyed Wells Fargo

When a bank wants to make more money, what do they do?

One easy way to generate revenue is to get existing customers to open more accounts.

That’s why Wells Fargo offered their employees incentives and created quotes for getting old customers to open new accounts.

But with bonuses for management and punishments for front line workers, this scheme created the perfect environment for the Cobra Effect to rear its head.

And that’s exactly what happened.

To meet quotas (and keep their jobs), many employees resorted to secretly opening accounts in customers’ names, forging signatures, and other unethical practices.

In 2022, Wells Fargo was fined $3.7 billion dollars to settle allegations of customer abuse by the Consumer Financial Protection Bureau.

🧠 How to Reward Good Customer Behavior (without unintended consequences)

If you’re considering launching an offer or rewarding a specific type of customer behavior, follow economist Steven Levitt’s advice:

  • Create simple incentives. The more complicated you make a scheme, the easier it is to find loopholes.

  • Try to outsmart yourself. Before you put a reward scheme in place, try and figure out a way to game it, then adjust your program accordingly.

Here’s a few clever ways to plan for moments when the customer experience goes off script:

  • Consider including real life “easter eggs” in your products and marketing to show some personality, reward (or distract) customers who a) go above and beyond or b) are looking for cheats in a system.

Source: /r/irleastereggs

This trunk says “no flip” on the sides. If you flip it, you see:

“You son of a bitch. It said no flip.”

Source: /r/irleastereggs

When your dog rips out this toy squeaker it has a printed message:

“Game over. Your dog won.”

Read, Watch, Listen (and Download)

  • Von Restorff Effect: A Guaranteed Way to Capture Attention [Read]

  • If you’re an NFL fan you know we’re in the midst of free agent season. Here’s Richard Thaler, author of Nudge, talking about the behavioral science behind the NFL draft + the False Consensus Effect [Watch]

  • Check out the latest episode of the top-rated Choice Hacking podcast, all about using Behavioral Residue to grow your business. [Listen]

  • [Free Download] Explosive Growth: 10 Ways Journey Maps Can Boost Your Business

Until next time,

Jen Clinehens, MS/MBA
Founder & MD Choice Hacking

Want to use behavioral science, psychology, and AI to grow your business?

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