I have been reading Drive by Daniel H Pink and not only am I surprised by how little I understood about customer motivation but also have found the answer to why almost any company that has tried to buy customer loyalty has failed (and miserably at that). Yesterday, as I was setting up my newly created family office in Hyderabad, I got into a discussion about the influence versus incentive strategy that startups utilize to gain initial traction utilised by startups with the principal of a newly created family office in Hyderabad.

The discussion started over how Paytm was going to recover the losses it was willing to make to get customers to transact using its platform. Earlier, I would have defended Paytm stating that these incentives were like dangling a carrot to get customers into the habit of using Paytm, but I’d also ask, whether the platform understands that selling its service below cost means that they value their service at zero (or less than that). As I am learning through the research carried out in this book,  using incentives to alter consumer behaviour can have similar effects as addictive drugs have on the human body. For example, in Paytm’s case the massive incentives lead to a sale, but in order to get the customer to transact again, Paytm has to keep increasing the size of these incentives. All the while the platform remains unaware, if the customers would want to transact at all, if the subsidies were taken away. In fact, it could even lead to a situation wherein users that would have used their services regardless, have developed the habit of being incentivized and therefore expect incentives to be doled out each time. In essence, the customer acquisition cost becomes a transaction acquisition cost, a cost that continues to escalate with each interaction – a truly dangerous situation, in my opinion.

I realised that I myself, was guilty of this behaviour last month while searching for the alternatives that were available to buy a new phone. I was willing pay the sticker price to offline stores, but got lured into buying the phone online with Paytm’s offer to give me 8% cash back; a cash back to subsidise the interest on EMIs and money in my PayTm Mall wallet. It was a no brainer for me to choose this option that was giving me the same phone at a deeper discount than any offline retailer was willing to offer. However, when I was looking in the market to buy something for my dog, the lack of any cash back offers from Paytm prevented me from using it, and I chose Amazon instead. With the cash back money in my wallet I should’ve used Paytm, but intuitively only wanted to utilise Paytm if and was getting a deep discount.

This behaviour and its end result remains the same for any venture using an incentive laden customer acquisition model. The customer needs more and more incentives to be loyal and will stop using the product/service the minute the incentives are taken away.

In fact, Ronnie Screwvala had asked this question on twitter a few weeks ago and received a cheeky reply from Vijay Shekhar Sharma but not an answer.

27/2019