"Free Gas!": Make sure your incentives line up with the behaviors you want to encourage

Many digital marketers who are trying to sell products use affiliate programs as a major strategy.  Essentially most affiliate programs work by paying websites a commission on each referral they make to a merchant that results in a sale.  Affiliate programs can be great for increasing the exposure for your products or store, and they can be a win-win for the marketer and the websites who participate.

But when setting up affiliate programs -- and many other pay-for-performance programs like them -- marketers should think through their entire strategy carefully, to ensure they're not encouraging the wrong behaviors or creating a slanted playing field.  This can apply to sales commissions if you manage a sales force, not to mention pay-per-action advertising campaigns, and even promotions/discounts offered to your customers.

Here's an example of a discount program that's poorly thought out on a couple different levels: Giant Eagle grocery store's fuelperks! program.

Giant Eagle is a grocery store with locations in Ohio and three other states.  The company also has a number of gas stations called GetGo, many of which are co-located with their grocery stores.  A few years ago, it introduced a program called fuelperks!, where customers receive a 10-cent-per-gallon discount on their entire fuel purchase for every $50 they spend on groceries.  The discounts are valid for three months and can be accumulated, so it's reasonably easy for a regular Giant Eagle shopper with a large family to build up enough of a discount to earn an entirely free tank of gas, or at least a very cheap one.

While the fuelperks! program's overall incentive (getting people to spend more on groceries to earn more fuel discounts) is good, Giant Eagle seems to have missed a few details in the way their program is set up -- thus inadvertently giving incentives for the wrong behaviors:

• The program gives disproportionately large discounts to shoppers who drive large, gas-guzzling vehicles.  For example, let's say you have two consumers who each spend $2,000 over three months at Giant Eagle on groceries, and the price of gas is $4.00 a gallon.  The $2,000 in spending qualifies them for a $4.00 per gallon discount -- so their gas is effectively free.  But consumer A drives a Chevy Aveo with a 12 gallon gas tank, while consumer B owns a Ford Expedition with a 28 gallon tank.  Consumer A walks away with a free tank of gas worth $48, or a 2.4% discount on their $2,000 grocery purchase.  But because consumer B drives a bigger vehicle, they get a free $112 tank of gas, which is effectively a 5.6% discount off their groceries.
  
  Since the program rules state that your discount applies to a single tank of gas up to 30 gallons, Giant Eagle is giving a disproportionately large incentive to people with huge vehicles.  That doesn't seem like an environmentally friendly behavior to encourage!  (I'm shocked environmental advocates haven't given Giant Eagle a hard time about this yet.)
  
  
• The fuelperks! program also encourages widespread cheating by ordinary people.  In the case above, the Aveo owner might want to get as much free gas as possible, so he cheats.  Nearly every time I've visited a Giant Eagle GetGo gas station, I've seen at least one customer cheating -- by bringing several gas cans to fill up, or by having two cars fill up their tanks on the same transaction.  These are clear violations of the rules, but I've never seen anyone enforce those rules in my many visits.  Widespread cheating of the system takes place, and often I'll see multiple cheaters on a single visit.
  

While the fuelperks! program has been a big success for Giant Eagle, I wonder how many honest, rule-abiding consumers get frustrated watching people abuse the system.  I wonder how many people with small gas tanks get frustrated when they see giant SUVs getting more than double the savings they're receiving for the same amount of grocery spending.  For these reasons, I hate going to GetGo!  (My wife and I stopped shopping at Giant Eagle, so it's rare that we earn much of a discount anyway).

So here are some takeaways for marketers who are setting up an affiliate program or a discount program:

• Make sure you're offering incentives for the right behaviors.  Examine your margins.  Are you encouraging behaviors or purchases that will drive short-term revenue, at the expense of long-term profitability?
  
  
• Think through all facets of your offering, and ensure there aren't any unintended side effects.  Giant Eagle might be driving the purchase of more groceries, but that incentive sprouted some ugly unintended consequences, like rewarding gas-guzzlers and encouraging customer cheating.
  
  
• What is the effect on customers who purchase through the program?  Do they have the same lifetime value as other customers?  In some cases it might be OK to take on less profitable customers to boost volume, but be careful with this strategy.  You might end up with a whole different problem on your hands, if too large a segment of your customer base will only respond to special offers.
  
  
• Watch for cheaters.  Especially with affiliate programs, you will have a certain percentage of sites who will try to beat the system.  They'll look for loopholes, try to use underhanded tactics to increase their revenue (spamming, search engine manipulation tactics, etc.).  These people don't care about your brand, your reputation, or your customers -- they're just trying to make more money for themselves.
  

Here are a couple old but good articles from ClickZ that talk about similar issues:
Rewarding Profitable Behavior
Free Shipping and Handling Aren't Free