Gravity, incentives, and outcomes

In interviews, Peter Thiel apparently asks, “What important truth do very few people agree with you on?” Phrased differently, “What’s your core unpopular opinion?” This question has lingered in the back of my mind since I first read Zero to One.

Here’s my current take:

Most negative outcomes and actions are best attributed to poor incentives, not malice.

It’s my own spin on Hanlon’s Razor. It seeps into many areas of my thinking, specifically how we can build amazing products that do some good in the world.

One obvious application: Healthcare.

Ask any outside observer about the US healthcare system. They’re likely to repeat the common narrative. It’s a broken “sick care” system that leaves quality care inaccessible and unaffordable for many. I agree with that assessment, but I think the deeper question is, “Why?” Here, answers span two ends of the spectrum:

  1. Bad Actors: Nefarious, greedy individuals that care more about money and power than actual health of the population break the system on purpose.
  2. Incentives: Fundamental incentives have encouraged well-intentioned people to behave in counterproductive ways, leading to a terrible system over time.

I won’t pretend that fixing healthcare is so simple as to be represented by these two items. It’s a complicated web of dependencies. But, my personal belief is the second (incentive systems) is the bigger culprit than the former (bad actors).

Justin Mares (Kettle & Fire, Perfect Keto, etc.) recapped this incentive system in a recent podcast (emphasis mine):

I think the underlying issue is that around why the US is getting so unhealthy, why the average person is sick and all these sorts of things, is that the incentives in our food system and in our food environment are such that it is driving unhealthy outcomes…the highest leverage intervention that you could make in this system is not educating people. It’s not anything but fixing their environment towards one that structurally outputs healthy people rather than sick people of the default.

He dives further into some of these incentivize systems—crop subsidies that promote mono-crop farming with lower nutrient density, preventative healthcare requires out-of-pocket spend, and more.

But, let’s tie this core idea of incentive systems and defaults back into product development.

On a recent episode of the Unsolicited Feedback podcast, Darius Contractor shared this concept of gravity. In short, how do you design a product or a system in such a way that customers naturally do the thing you want? Instead of pushing a boulder up a hill, how do we use gravity to make the whole thing easier?

This overlaps neatly with incentive systems. If we’re building products to encourage or incentivize some behavior, we can approach the challenge in one of two ways:

  1. Build and then try to force people to adopt.
  2. Go along with their natural instincts. Build in a way that customers naturally fall into the right behaviors (assuming we have good intentions in mind).

Let’s wrap this up with two examples.

First, credit cards. Traditionally, credit cards work on a ~30 day statement cycle. You rack up charges over those 30 days. Then, you have a period of time to repay that balance before accruing interest. If you fail to make the minimum payment, you’re hit with a late fee. If you use a credit card, you know all of this already.

Credit card companies want you to pay back your statement balance.1 In fact, they want you to pay early. First, faster payback means less capital outlay for the company as collateral for the outstanding debt. Second, they’re always trying to predict delinquency; faster payback is a strong signal.

So, companies want you to pay back your balance sooner, but it’s in the customer’s interest to pay back the balance at the end of their statement period. Let’s align the incentives. X1 allowed you to set weekly/biweekly autopay. Then, they rewarded you for faster autopay cycles with more reward points, which you can redeem for cash or rewards.

Second, Figma. In a recent podcast with Lenny, Claire Butler shared some wisdom around pricing in freemium:

…initially the way that it worked was our starter team was that you could have unlimited files but only collaborate with two or three people, and that was the starter team and you wanted to add more people to collaborate with, and then you hit the paywall. We realized that wait a minute, that’s hurting us. And so we switched it and now it’s like you can have something like three files, but unlimited collaborators…So not introducing payment too fast and giving people that time to build that advocacy and to try it out with their teams, with people before they have to pay, I think is huge there.

Collaboration is Figma’s competitive advantage. The initial pricing model (unlimited files, limited collaboration) constrained growth. Instead, they began using gravity. You can have as many collaborators as you like (the core value prop). Then, once you see a ton of value and want to start adding more files, we’re going to ask you to pay. Collaborative design is new; don’t hinge your pricing on new behaviors. Instead, hang it on existing behaviors (creating new files).

  1. Well, they want you to make the minimum payment and accrue interest because interest is revenue. Let’s set aside interest for the moment just to keep things simple.

Photo by Muzammil Soorma on Unsplash

Leave a Thought