Getting incentives right and the pursuit of “frictionless” business

2 psychological concepts that can improve how wine and spirit companies function

The intersection between psychology and business is paramount. After all, what successful business doesn’t profit off of how people think. Whether selling a product or service, you’re fundamentally addressing a desire of the mind. Despite the significance of this relationship, the failure to connect how brains work with how businesses operate puts most companies at a severe disadvantage. This is particularly true in the wine and spirit industry, where most operations don’t address this holiest of unions. Luckily, by brushing up on a few concepts in psychology, companies—be they wineries, distilleries, importers, distributors, or retailers—can improve how they function at little expense.

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Just Noticeable Difference and How to Get Incentives Right

I rarely speak with a company that feels they’ve executed an incentive program well. It is even rarer I encounter a salesperson that’s excited to participate in an incentive program. That kind of tells you all you need to know; an incentive program that no one is excited about isn’t really an incentive program, is it?

If you want to incentivize people, you must dangle cake not carrots!1

While that’s easier to envision than execute, the idea of just noticeable difference provides an optimal metaphor for understanding what “moves the needle” when it comes to incentives. The just noticeable difference is the threshold that must be exceeded for people to sense a change. If you’re blindfolded and holding a single paper clip in your hand, you can likely detect when another has been added for a total of two paper clips. If you’re blindfolded and holding an apple in you’re hand, you won’t be able to tell when I put a paper clip on top of it. Just noticeable differences are relative thresholds.

Now apply this concept to a cash incentive of the $500 a salesperson can get for hitting a goal. If that salesperson makes $75,000 a year, a “measly” $500 doesn’t mean much because it doesn’t make a just noticeable difference.2 This is one way in which wine and spirit companies get incentives wrong. They view $500 in absolute terms, not relative ones.

Properly-designed incentive programs:

  • Allow all participants the opportunity to succeed (as opposed to just those with the most experience or accounts).

  • Are designed to reward adherence to best-in-class practices rather than simply successful outcomes. By placing an emphasis on the process, good work is rewarded rather than chance outcomes.

  • Do not disproportionately steal participants’ attention and effort away from other responsibilities.

  • Provide those who achieve goals with a reward that makes more than a just noticeable difference.

One related note about incentives: when it comes to promoting, know that employees don't view being given more work as a reward for their previous good work. A “promotion” without benefit to the employee is a great way to squander their potential and tax their enthusiasm.

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The Framing Effect and “Frictionless” Business

The words we choose to describe a problem often define how it gets resolved. This is an extension of the framing effect. The framing effect is “a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations.” Consider the following:

  • A popular product that sold for $120/case loses customers when a 10 case drop of $96/case is introduced. The frontline price customers can buy this product for is constant, but because there’s a less expensive price they’re no longer getting the best deal.

  • What you are selling, isn’t necessarily what your customer is buying. You are selling alcohol, but they might be buying a price point or a package or an allocation.

  • Two job candidates speak about their previous positions. One uses the word “challenges,” while the other uses the word “opportunities.” Though these words might describe the same issues, we’re biased to the candidate that views things through the positive lens of “opportunity.”

The framing effect is usually presented as a dichotomous choice. In wine and spirits management, it’s the tired refrain of:

  • “carrot” or “stick”

  • “push” or “pull”

  • “lead” or “serve”

The problem with these frames is that they view the thrust of business as a zero-sum game—one where there are winners and losers. They imply and impose unnecessary forces where there needn’t be any.

To this end, wine and spirit businesses would be best served by a different frame: one that actively pursues the reduction of “friction.” Customer and employee discontent is born of dissatisfaction with systems and/or products. Assuming you have faith in the integrity of your products, then it’s your systems that act as impediments to growth. These systems could include, but aren’t limited to:

  • Burdensome order minimums, delivery fees, and case-breaking/bottle fees. These are glaring disincentives to doing business with a company.

  • Unnecessary micromanagement of sales reps. Do you want your reps to spend their time selling or reporting? If you don’t trust your reps to do their jobs, then it’s a reflection of your hiring process.

  • Draconian restrictions on sampling. Yes, it’s understood that no one can pull a bottle of La Tâche, but getting other samples shouldn’t be difficult.

  • Limited sales rep empowerment. If it is a rep’s job to serve the customer, then they shouldn’t require permission to act in their customer’s best interest.

If more companies simply asked “how can we make doing business with us easier,” they’d find the answer to “how can we make our business better?”

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1

Unless your salespeople are rabbits.

2

A top sales rep that banks more, might not even blink for $1,000 or $2,000.