Why Incentive Programs Endure Recessions

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Why Incentive                   H
                                                      istorically, incentive pro-
                                                      grams, unlike other sales
                                                      and marketing strategies,
                                                      have endured economic
                                                      downturns. In fact,



Programs Endure                                       according to a review of
                                past Incentive Federation and industry studies,
                                the incentive industry managed to grow
                                following the recessions that occurred in the



Recessions
                                late 1980s, after September 11, 2001, and
                                during the downturn of the late 1990s, fol-
                                lowing the dot-com collapse. In fact, there is
                                no evidence that the industry suffered serious
                                declines following the recession in the late
                                1970s/early 1980s, and the industry contin-
                                ued to prosper even during the Great
                                Depression when the industry’s trade
          Keeping quality       magazine at the time, Premium Practice,
          employees happy is    was filled with advertising pages.
          an important factor       This is not to say that the incentive business
          in your business      is completely immune to recessions. In the
          success.              early phase of a downturn, the effects can be
                                dramatic. Projections for consumer, sales, and
                                channel partner programs, or even employee
                                productivity programs, can go haywire when
                                the economy experiences a jolt, as it has over
                                this past year. Fewer participants qualify for
                                rewards, and companies seek ways to cut
                                costs by curtailing motivational meetings and
                                incentive travel programs. Afterwards, the busi-
                                ness tends to experience a rebound as organiza-
                                tions turn to highly targeted, cost-effective,
                                and measurable programs aimed at maximizing
                                specific market or cost-saving opportunities.
                                    This white paper, produced by the
                                Incentive Performance Center (IPC),
                                explores why incentive programs tend to
                                thrive during times of economic stress,
                                despite the initial hit when bad times set in.
                                It helps explains why savvy companies turn
                                to incentive programs to drive business
                                growth even while cutting budgets for other
                                business development functions.

                                Advertising May Falter but
                                Incentive Programs Persist
                                Numerous industry studies reveal a pervasive
                                decrease in spending on
                                advertising during economic
                                downturns. Consider just one
                                recent survey, a summer 2008
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survey of 100 marketers conducted by the                                    gram, whether it’s an employee, channel                          In addition, for those companies with a
Association of National Advertisers. It                                     partner, consumer or sales initiative. The                    low tolerance for risk, incentive plans can
found that 47 percent of respondents who                                    standard fixed costs related to strategic plan-               be close-ended, designed to fit a set budget.
answered a question about budget cutbacks                                   ning, communications, training, and systems                   While not as motivating as open-ended pro-
planned to trim spending by at least 11 per-                                are approximately 20 to 30 percent of any                     grams, these programs can deliver improved
cent, and of those, about 10 percent would                                  incentive program. This involves the time or                  performance during times of extreme
slash spending by more than 30 percent.                                     fees allotted for:                                            budget stress.
The remaining 53 percent expected cuts in                                           Developing a strategic plan and bud-
the 1-10 percent range.                                                     get for your campaign, which might include                    2) Ability to effectively target audiences
                                                                            meetings with key representatives of your                         Long before the days of the Internet and
Why Savvy Companies Turn                                                    audience to make sure your plan stands the                    database marketing, organizations turned to
to Incentives During Times of                                               test of reality;                                              incentive programs to boost sales and pro-
Economic Uncertainty                                                               Designing and implementing a tactical                  ductivity because they didn’t need technolo-
Five fundamental reasons explain why                                        communications and engagement plan;                           gy to identify the people most important to
incentive programs, unlike other sales and                                         Setting up the necessary systems for                   their business. As long as there was an eco-
marketing strategies, withstand economic                                    managing and measuring the program, and                       nomical way to deliver a message to the tar-
downturns:                                                                  then monitoring results so that you can make                  geted audience, organizations over the last
   1. Low fixed costs, variable costs driven                                strategy shifts if necessary;                                 100 years or more have used incentive pro-
   by performance, high potential return                                            Organizing meetings or events, etc., to               grams to target offers, enhancements, or
   2. Ability to effectively target audiences                               help communicate the effort.                                  other engagement strategies to change
   (no pay and spray)                                                           In properly structured open-ended pro-                    behavior and, subsequently, business perfor-
   3. Relative ease of measurement                                          grams, the remaining 70-80 percent of the                     mance. As noted above, incentive pro-
   4. Flexibility                                                           cost of your program is not incurred until the                grams are attractive during tough economic
   5. Potential for both short-term and                                     program has achieved its goals, or some por-                  times because the cost of communicating
   long-term results                                                        tion of those goals, and the rewards have                     with a well-identified audience of people is
    These five points are described in detail                               been issued or redeemed. Compared with                        generally much less than mass-marketing
below, so you can see what it means to your                                 advertising, direct marketing, and event mar-                 programs, such as advertising, direct mail,
organization in practical terms:                                            keting, well-designed incentive programs                      and trade shows. Why? Because you have
   1) Low fixed costs, variable costs driven                                have by far the highest level of cost account-                already identified the audience that can
by performance, high potential return                                       ability related to results. This is probably the              change your business outcome if they focus
   Set-up and ongoing communication are                                     No. 1 reason for increased incentive usage                    on what they can do to help you achieve
the primary fixed costs of any incentive pro-                               during tough times.                                           those goals. In good times or bad, business
                                                                                                                                          results depend on the willingness of a key
                                                                                                                                          audience to do what they can as customers,
    Fixed costs of commonly used sales and marketing strategies
                                                                                                                                          channel partners, salespeople, or employees
                                                                                                                                          to contribute to our business success.
     100%                                                                                       The fixed cost of incentive                   Today, using a low-cost Internet portal to
                                                                                                programs, unlike other sales              communicate your programs with a simple
                                                                                                and marketing strategies,                 enrollment or opt-in strategy, organizations
                                                                                                is 20 to 30% of the program.
      80%                                                                                       The remaining 70 to 80%
                                                                                                                                          can deploy highly targeted, personalized,
                                                         Public Relations




                                                                                                is paid only when the                     and measurable ways to communicate on a
                                                                                                program’s goals are reached.              one-to-one basis with the people who can
                                                                                 Publications




                                                                                                                                          drive your business results, no matter what
                              Advertising
                Direct Mail




                                                                                                (source: Incentive Research Foundation)
                                            Consulting




      60%
                                                                                                                                          the audience or business goal. And this can
                                                                                                                                          be done via the Internet very economically.
      40%
                                                                                                                                          3) Relative ease of measurement
                                                                                                                                              Naysayers argue that it’s impossible to
      20%
                                                                                                                                          effectively measure any marketing program,
                                                                                                          Incentive
                                                                                                ●         Programs
                                                                                                                                          because of the multiple factors that can
                                                                                                                                          affect outcomes. Sure, the actions of a com-
                                                                                                                                          petitor, the economy, or internal operational
            Fixed Costs of Commonly Used Sales and Marketing Strategies                                                                   and other issues can affect outcomes of any
                                                                                                                                          program. That said, effectively structured

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incentive programs make it possible to                                                                      are not as easily engaged as in a
screen out the noise of external factors                                                                    more trusting era.
to find at least some cause and effect.                                                                         It is a great testimony to the
Here’s how:                                                                                                 power of incentive programs that
       Build at least three measures into                                                                   they have continued to flourish
your program: one outcome measure,                                                                          despite the fact that so few business
such as increased sales, or increased                                                                       people have formal training in pro-
output, or decreased defects; and two                                                                       gram design and that so relatively
related process measures—i.e., actions                                                                      few organizations strategically
that can contribute to the results, such as                                                                 design, implement, and measure
making more cold calls (easily measured                                                                     their programs. The best programs
today with a customer relationship man-                                                                     weave an essential combination of
agement system), or complete machine                                                                        business planning, inspiration, tech-
maintenance compliance to reduce                                                                            nology, communications, and math-
downtime, or consistently recalibrate                                                                       ematical measurement that merit
equipment to reduce defects, etc. Then                                                                      professional help—either from
monitor the correlation between the spe-
                                                   Few Marketing Options                                    trained internal or external
cific behaviors promoted in the program           Offer Such a High Degree                                  resources. The Incentive
to achieve results and outcome. These                                                                       Performance Center recommends
leading and lagging measures allow one                Of Accountability                                     that any organizations seeking to
to confirm the inter-relationships and to                                                                   maximize results through incentive
produce the desired results.                      This so-called over-hang effect helps explain    programs employ either internal or external
                                                  why so many organizations whose cultures         resources trained in incentive program
4) Flexibility                                    are based on promoting positive behaviors        design. The first place to start is with orga-
    Things change. It’s much easier to address    outperform their competitors in terms of         nizations that have individuals certified by
change when the audience is highly defined        share price performance or financial results.    the Incentive Marketing Association, which
and the communication program in place.               Compelling evidence shows that incen-        offers a complete program planning curricu-
You might wish to offer bonus points to pro-      tives drive bottom line performance and the      lum on strategic program design.
mote a new feature your product team turned       business and academic communities have               As companies make the shift from mass-
out; you might want to add bonus points to        begun to understand and embrace their use        marketing to target-marketing, they will ulti-
behaviors that early results indicate are hav-    for a variety of constituents and wide range     mately turn to incentive programs as a pri-
ing a highly effective impact on results.         of needs. In the area of employee motiva-        mary solution rather than a secondary or
    You might learn that product knowledge        tion, a study by the Forum for People            complementary tool, for all the reasons out-
is an issue and that you have to give your        Performance Management and                       lined above. Each time an organization
sales team a quick refresher. It’s quite diffi-   Measurement— “The Impact of Employee             replaces a mass marketing technique with a
cult to change a trade show, advertising, or      Attitudes on Market Response and Financial       one-to-one strategy, such as an incentive
direct marketing program in mid-stream but        Performance”—revealed a direct link              program, it will realize a ripple effect of
it’s fairly easy, in a timely manner, to adjust   between employee satisfaction and customer       benefits—engagement, satisfaction, behav-
an incentive program.                             satisfaction, and between customer satisfac-     ioral changes, etc.— that will last over time.
                                                  tion and improved financial performance.
5) Potential for both short-term and long-        Other studies target channel partners, sales      The IPC is the corporate outreach arm of
term results                                      personnel and consumers.                          the Incentive Federation, an organization
    Companies, of course, turn to incentive                                                         comprising associations, publications, trade
programs to achieve short-term results. They      A Note of Warning                                 shows, incentive providers, and others involved
like the equation of being able to put down       The positive, long-term benefits of incentive     with all aspects of incentives, rewards,
only about 30 percent of the total potential      programs are not a simple do-this, get-that       recognition, and promotional products.
cost, with the remaining budget determined        proposition. The era of the carrot and the        The IPC manages incentivecentral.org, a
                                                                                                    not-for-profit information portal providing
by the degree of performance improvement.         stick is arguably gone, as people look for a
                                                                                                    comprehensive, objective information to help
That said, programs structured based on           higher level of satisfaction in their business
                                                                                                    organizations improve the
research and best practices have the addi-        relationships and are not quite as likely to
                                                                                                    motivation, engagement, and
tional value of producing residual value.         respond to a simple offer. For any incentive      performance of customers,
That’s because the behaviors promoted dur-        program to succeed, the target audience           channel partners, salespeople,
ing the incentive program generally have          has to be convinced that the behavior             and employees.
long-standing value to the organization.          change is in their best interests, and people
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