How to use incentive alignment to unlock faster growth (in the real world)

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Hey! I’ve been working on this essay full-time for about a week and I couldn’t be more proud to share it with you. It’s big (~4k words) but I think you’ll love it. It’s my best yet, with much more original analysis than before.

I showed it to Dan Shipper, who wrote the Jesse Beyroutey interview on “Dominance Friction,” and he said:

“I love that this essay takes a simple principle — the best companies align their incentives with their customers — and explores it from a bunch of angles to expose its nuances in practice.”

Also, as always, if you prefer to listen, there’s an audio version that’s narrated by me.

Enjoy!

My recent interview with Jesse Beyroutey solidified a hunch that I’ve been nursing for awhile:

Incentive alignment is one of the most important ideas in business, but making it work in practice is incredibly tricky.

Sure, you might understand the general principle — businesses who have incentives that are aligned with their customers tend to grow faster than those who don’t — but recognizing the logic of an idea and making an idea actually pay off are totally different things.

In order to put it into practice, you have to learn what good incentive alignment actually feels like from the inside. Case studies about companies that have done it successfully always feel much cleaner, simpler, and more inevitable than any business does in real life.

In real life, there isn’t just one principle — be it “incentive alignment” or anything else — that wholly determines your success. Instead, there are many forces; many details to integrate. It’s hard to know which to pay attention to. This makes even the biggest successes feel messy on the inside.

But if good and bad businesses both feel messy, how do you know if you’re on the right track? This question is especially relevant to tiny startups that are just getting started, but every company faces questions of strategic health which are impossible to measure in any analytics dashboard.

The solution is to develop a feel for how incentive alignment plays out in practice by learning the details of how it’s happened in different industries — to use history to improve your perspective.

This essay shares history from three different industries, to illustrate three different obstacles to making incentive alignment pay off.

1. DTC ecommerce —how Warby Parker cut out the middleman 10 years ago, but is still tiny compared to the “complete rip-off” incumbent, EssilorLuxottica.
2. Income Share Agreements (ISAs) — how Lambda School’s model copes with the fundamental tension in their model between the interests of employers, students, and investors.
3. Subscription media — Sometimes what people want isn’t what they need, and even though subscription media businesses like The New York Times and The Athletic are generally better than ad-supported businesses, it doesn’t give them a free pass.

The common thread between all these stories is they all illustrate some of the limitations of incentive alignment. Nobody is arguing that it’s a silver bullet, of course. But in order to move beyond the first step (explaining the idea and why it matters) we need to add nuance, and to complicate the narrative.

“God is in the details,” Mies van der Rohe once said. I find that it’s equally true of architecture and business.

So let’s dive in :)