Saturday, April 21, 2012

Mortgaging the Future

It's NFL Draft season, which means that many franchise decision-makers are being confronted with the agonizing dilemma of whether to "mortgage the future" in order to increase present competitiveness. It's tempting for general managers to deal future draft picks in order to move up in this draft and get a better player that will help them win right now. Sometimes, this works out. An impact player can make a huge difference on a team's success. Sometimes, it backfires. Even if a team does get an impact player, too many sacrificed draft picks can lead to a future drought.

But the nature of decision making in the NFL is to privilege the here and now. Part of that is because in professional football, the future is just too unpredictable to stake any surety on what might happen. And part of it is because the decision makers (general managers and coaches) generally have too little job security to sacrifice even the chance of short-term gain. Why do they have an incentive to plan for the future when there is little guarantee that they will be around for it?

And the incentive to blow off the long-term also applies to the political world. People affiliated with both major political parties believe that there should be some kind of reform of social security and Medicare. But these same people are terrified of the political implications of attempting that reform. The prospect of short-term loss is much more concrete than the possibility of long-term gain. So to truly get a decision maker to consider the future, there must be incentive. There must be a tangibility to future promises.

Unfortunately, in the NFL that simply cannot be given. And I'm not optimistic that it can be applied to the political world, either. But I think the business world is missing out on customers and profits by not providing further incentives for futurity. Businesses are certainly aware that customers respond to "loyalty" incentives. Bring in your loyalty card every time and get it swiped for the promise of future discount. Rack up frequent flyer miles and earn rewards. Send in your proof of purchase and get a rebate. These and other tactics are used in specifically in order to prevent customers from seeking alternatives in the marketplace.

But I think that ultimate incentives (and the dollars that come with them) are being left on the table. Turn on the television or the radio and someone is always trying to get you to switch your car insurance. Cellphones are trying to lock in customers for years at a time, but free agency always looms (and I've heard of some plans that under certain conditions agree to pay the penalty to cancel out other companies' plans). Cable companies are finding that customers will bide their time, wait out the terms of their agreement, and then at the earliest opportunity, split. Industries that used to count on reliable lifetime customers now need to fight to keep customers.

But I've got an idea that would once again win the day for complacency. If I was the CEO of a company that depended on customer loyalty, I would propose a radical incentive. Agree to stay with us as your service provider for say, 30 years, and after that you get free service for the rest of your life. The effectiveness of such a strategy may become muted by copycats, but to the first company that offers such a possibility, I predict a huge influx of customers. I'm no actuary and I haven't run the data, but my guess is that by providing such an influx of capital, as well as the guarantee of capital over such a long-term period, the infrastructure could be put in place to provide free services decades down the road at little additional overhead cost(though I suppose I can see how auto insurers may bristle at the idea of providing free insurance to a fleet of senior citizen motorists).

And I don't even think you would need to get customers to sign a 30-year agreement. The principle of "loss aversion" would leave them reluctant to leave after they have invested even a minimum amount of the time necessary. If they are already considering the promise of free service as a gain they have been awarded (as I think most people would), walking away from that possibility would be psychologically difficult.

And particularly given that whoever makes the decision on such a policy won't have to deal with its ultimate repercussions, I'm surprised something like it hasn't been tried already.


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