Incentive Hacking

Why do people do what they do? Why do companies what they do? The answer is pretty simple: incentives.

An incentive is something that motivates an individual to perform an action. The study of incentive structures is central to the study of all economic activity (both in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure).

Economics, wooh!

Considering one’s incentives is typically a good predictor of what one’s next move is going to be. If we could pick our own incentives, would that mean we could better control what we do and what we get good at?

Here’s an example of how incentives work from the phone and tablet industry and how it influences their behavior. What is the incentive of Android phone manufacturers like HTC and Samsung? Selling as many phones as possible. That’s where the money comes from. Now, let’s say you consider buying a phone from HTC with Android version n and you wonder: will I get an upgrade to Android n+1 when it comes out? The question is: what is the incentive of HTC to provide its users with the upgrade. The cost is clear: for each of their phones (they carry dozens, if not hundreds of different models) they have to do considerable work porting whatever Google releases next, and rolling it out. There’s considerable cost associated with that. What will it win them? Some happy users. Let’s be realistic, most users don’t care or are even aware that they are running Android n, let alone that version n+1 just came out, so there’s little reason to do all this work. In fact, not providing the upgrade may result in more sales, since hardcore Android fans may just buy a new phone if their old one is not upgraded. So, HTC has little incentive to provide upgrades, and therefore does so occasionally, slowly and reluctantly. On the bright side, this incentive also means that companies like HTC will iterate very quickly on their phones, which will always sport the latest and greatest specs. New phones are constantly coming out, trying to get people to dump their old ones and buy the new ones.

How about Apple? Apple is selling you two things when you’re buying an iPhone: the hardware and the platform. Apple controls both, and benefits from both, although the make the vast amount of their money from hardware. However, they also make a long-term investment in the buyer. If buyers use the device, buy content (applications, music, books) specific to the device (AppStore, iBook store, iTunes), they are more likely to stick around and buy more and more into the Apple ecosystem. “Oh, this iPad works just like my phone — it’s easy and I can run all the same apps as on my phone!” “Oh, with a push of the button I can send video to my TV when I buy an Apple TV” “Oh, my phone integrates perfectly with this Mac computer.” HTC and Samsung don’t leverage their own ecosystem, but use Google’s and therefore have little incentive to push Android as a platform, because their users can just as easily walk across the street and switch to a Motorola phone that also runs Android.

Apple benefits from selling hardware, and pushes it heavily, but also keeps investing in its current customers, because the more they buy, the more deeply invested they become. In addition, Apple has chosen the strategy of putting out a relatively small amount of different kinds of hardware, making pushing out upgrades simpler and cheaper. Therefore, for most Apple products, you can expect 2–3 years of software upgrades. By that time, Apple too strongly feels it’s time to move over to your next iPhone, iPad or Mac.

When Amazon released its Kindle HD tablet in their September 2012 keynote, Jeff Bezos was surprisingly frank about their incentives. They used their incentives as a differentiator with their competition. Bezos clearly said: Apple and Android device manufacturers make their money from hardware, Amazon makes its money from content. That means that, while “hardware companies” make all their money with the sale, for Amazon that’s only when the relationship starts. Amazon Kindles are sold at close the cost, money is only made when people decide to buy content in the Amazon ecosystem (Kindle bookstore, streaming video etc.). Therefore, Bezos claims while hardware menufacturers don’t care at all if you put your tablet in a drawer right after you buy it and never look at it again — Amazon does. Amazon will do everything to make you use that tablet, to read more, watch more. Therefore, Amazon intrinsically has a big motivation to build a product that its buyers will want to use all the time. It also means that Amazon has little interest in pushing consumers to buy the latest and greatest hardware. It may even be cheaper for them if people keep using their Kindles for years on end. That also means they are incentivized to keep upgrading the software so that when — theoretically — 3D movie streaming comes out, you can just upgrade your Kindle Fire, get some glasses and you can now order and watch those movies as well. This is also why there’s a Kindle reading application for practically for every platform out there: it’s another gateway to their paid content.

The Amazon keynote was the first time that I heard a company talk so openly about their incentives. In this case it made sense, because they were able to spin it to show that their incentives aligned with what is best for the customer.

It did make me realize that the study of incentives is not like studying a natural phenomenon you have no control over. It is in fact possible to “design” the incentives of a company, team or even yourself, and thereby implicitly push it into a desired direction: first you decide what your goals are, then you come up with a set of incentives to achieve that goal.

Designing your incentives to match your goals is what you could call incentive hacking.

An example of personal incentive hacking that I often apply to myself is a task list for the day. At the beginning of the day I decide what I’m going to get done that day. Once I create the list, I freeze it. I will not allow myself to add items to it, or remove items other than by completing them. I find striking off an item from this list a very satisfying experience — that’s my incentive. Since doing things that are not on the list will not result in striking anything from the list — but do take time — I’m disincentivized to do anything that’s not on the list. As a result, I stay focussed and am super productive. It sounds silly, but you’d be amazing how much you can control your own behavior in this way.

Once you get used to this idea, you start to think in incentives and how to manipulate them constantly. How can you change your own, your team’s, your company’s incentives to steer in your desired direction?