Why Incentive Programs Work

Incentive_program_reward

From the time we are children, incentives are used to encourage us to behave in a particular way. Eat your dinner, and you can have dessert. Brush your teeth and earn a sticker. Get your chores done, and you can stay up an extra half hour. Sometimes they worked, sometimes they didn't. It all depended on the incentive and how much that incentive meant to us.

As adults, it's really no different today. We still respond to incentives. And we do so in our various roles - as customers, employees, and business channel partners. What has remained the same is that if the incentive is meaningless to us as individuals, we're going to be less inclined to engage in the desired behavior that the reward is hoping to elicit.

I want to look at three different segments and give you some thoughts on how incentive/rewards marketing works for them. These three groups are: customers, employees, and channel partners.

Customers

We know that today's customer expects a personalized experience in their shopping. This is why companies employ systems using artificial intelligence which target customers with a message that appeals to those individuals at the time it appeals to them and on the device that they are on. The old throw out an ad and see who bites is no longer effective. There is not a one-size-fits-all way of marketing.

The same is true in using incentives to encourage customers and prospects to behave in a desired manner. Today's customer reward programs or loyalty programs have to find that personal connection that will keep customers engaged as they try to earn free merchandise, coupons, cash back, or maybe even advance released products.

Here are some research results worth knowing about:
  • 90% of Americans participate in some type of loyalty program.
  • 54% of primary grocery shoppers participate in two or more loyalty programs.

And how about this?
  • An increase in customer loyalty of just 5% can increase lifetime profits per customer by as much as 95%.
  • An increase in customer loyalty of only 2% in some sectors corresponds to a 10% cost reduction.

When designing an effective customer incentive program, the first thing you need to ask yourself is: What is the outcome you are looking for? What do you want your customers to be doing? Do you want to entice customers to buy a particular product? Do you want to retain and deepen customer loyalty? Are you looking for your current customers to furnish you with referrals?

More to think about:
  • 68% of millenials indicate they would not be loyal to a brand without a good loyalty program.
  • 56% of customers indicate they would stop participating in a loyalty program if that program did not offer items of interest.
  • 54% would quit if earning points for rewards was deemed to hard in their opinion.


I came across an industry study on the effects of loyalty programs on value perception, program loyalty, and brand loyalty. One of the things that struck me is that some customer rewards may encourage program loyalty without necessarily brand loyalty.

The researchers differentiate between two types of rewards: direct and indirect. An example of a direct reward is "Buy a beauty treatment, get a free perfume." An indirect reward is "Buy a beauty product, get a DVD."

The study also explored the timing factor of immediate vs. delayed rewards. Immediate is right after the desired behavior is displayed. Delayed would be receiving the award after nth times of the desired behavior.

Another factor was high involvement vs. low involvement. For example, in choosing a beauty salon, a customer will put in more research before choosing where to go, so this is considered high involvement. Deciding whether or not to patronize a fried chicken store takes less consideration, so this is considered low involvement.

What's interesting is that in high involvement situations, the type of reward mattered more than timing, with a preference for direct rewards. In low involvement situations, timing mattered, and immediate rather than delayed rewards were more critical to encouraging customer loyalty.

This might all sound complex, but the point is that you can't just throw out any old loyalty program and hope it works. You've got to take findings like these mentioned, and design something that will appeal to the customers you are trying to reach and the goals with them you are trying to achieve. And these are just a few variables.

Any successful loyalty program must be perceived as valuable and doable by the customer. Customers are tuned into the attributes like the cash value of the award, the attainability odds, the program's ease of use, aspirational value (i.e., this is something that I want) and redemption choices. Luxury rewards are typically viewed as more desirable than necessity rewards. So start with the end in mind and work backward to figure out what your customer will respond to in the way of incentives.

Employees

A number of studies and surveys have been done on the topic of employee recognition. Here are some findings:

  • The number one reason people leave their jobs is because they do not feel appreciated. 
  • In one study, 65% of people surveyed said they had received no recognition in the past year.
  • Organizations with the most sophisticated recognition practices are 12 times more likely to have strong business outcomes.
  • When companies spend 1% or more of payroll on recognition, 85% see a positive impact on engagement.
  • When asked what leaders could do more of to improve engagement, 58% of respondents replied “Give recognition.”
  • Knowledgeable and attentive employees account for 80% of the reasons customers feel satisfied, according to a PNC Bank Corporation survey.
  • Piggybacking off the previous finding, a 5% increase in customer retention can increase lifetime profits from a customer by 75%, according to The Loyalty Effect, by Frederick Reichheld.
  • 65% of executives believe that sales incentive programs using travel and merchandise are more memorable than those using cash.

Employee programs can increase performance by up to 44% in teams and 25% in individuals. Incentive programs help to leverage the resources you already have in employees. If cash were a true motivator, every salesperson given the same opportunity would earn equally or very similarly, but that's not the case. Top performers are usually always the top performers, while the next level group is usually the same and your biggest group. A small increase across this secondary group gives you more lift than an increase from your top performers.

Here's an example of an incentive that used to work, but not any longer. I was working with an organization that for years, had traditionally given out watches for 25 years of employee service. The person in charge of employee recognition was given a dollar amount to spend on the watch and would choose the particular watch for the employee. It's become evident in recent years that this is not working. One employee admitted that she has the brand new watch tucked away in a drawer. Why? Two reasons: 1) It was not the style of watch she would have chosen for herself. 2) She's content to use her phone for telling time.

What this example is meant to show you is that if you are a company trying to use incentives to encourage certain behaviors, one of the most important things to keep in mind is that the incentive has to speak to the recipient. Just because you think a mug or a blanket or a tote bag seems like a perfect gift doesn't mean the person you are giving it to agrees. Your gift must have a perceived value in the eyes of the recipient. There is no place for guessing or for buying something because it's got a great price break and your logo looks good on it. Or because that's the company tradition.

Like any good incentive program, the first thing you need to do is to figure out your reason for the program. Is it to attract a certain caliber of employee? Retain that caliber of employee? Is it to reward an employee or a team for a job well done, for hitting a milestone? Maybe you're looking for ways to increase productivity or even reduce something, like the number of work accidents over a period of time.

Some points to remember:
  • Make sure your employees understand the "why" for the incentive program.
  • Employees also need to be clear on exactly what actions need to be taken in order to earn the incentives. Provide concrete examples.
  • Timeline and deadlines should be clearly stated.
  • Reward every employee who meets that criteria, not just the top one or two.
  • When you deliver the rewards, explain exactly what the employee did to earn the reward.
  • Publicly acknowledge the employees and their contributions.


The same method you employed with your customers can be followed here. Start with the end goal in mind, and design a program that will engage your employees while getting them to help you reach that end goal.

Channel Partners

Your channel partners are your distributors, agents, resellers, and dealers. Together, you are a team. With channel partners, you want to reward them for behaviors that are consistent with and supportive of your company's sales goals. Like customers and employees, you want to implement a program that is attractive to your channel partners. Channel partners have to feel that the amount of effort they expend in the rewards program is fair as compared to the reward.

You might be trying to increase sales in a specific market. Or maybe for a specific product or service. Maybe you are launching a new product or service that you want your channel partners to promote. Whatever the goal, start here. Be clear about exactly what you want achieved.

Some study findings:
  • 60% of vendors and partners indicated that an effective incentive program can increase sales of a particular vendor’s products by up to 40%.
  • For partners, incentives can account for as much as 14-18% of their total company revenue.
  • Channel partners ranked big deal discounts, performance-based campaigns and market development funds (MDF) as the most motivating incentives.
  • When planning an effective rewards program for channel partners, here are four elements to pay attention to:
  • Determine the goals of the program.
  • Decide which channel partners you want to target.
  • Figure out how you will make your channel partners aware of the program and how you will train them.
  • Determine how you will measure the success of the program.

Channel partners report that they like cash incentives because they directly affect their bottom line. The incentive cannot be too small or channel partners will not participate, and the program must be in sync with the known demand for the product or service. Channel partners are looking for realistic and attainable goals. The targets must be easily understood. That's what's going to keep them engaged in your program.

As much as cash incentives such as rebates stood out as preferred, there are other channel partners who respond well to points programs. I am currently running a successful points program that has been in effect for the past three years by major print hardware and software company with their channel partners. Unlike cash, tangible rewards carry with them what is called a trophy value. Looking at a reward that was earned and chosen by the individual helps to motivate a person to set new goals and higher goals to achieve the next reward.

In an incentive program used by a Fortune 500 company where top prizes were a spot in a "Top Gun" flight school experience and a "Lifestyles of the Rich and Famous" vacation award, total revenues increased by 12% over a desired 20% increase, market share in 9 of 12 markets increased in excess of 30%, and net operating income increased 9% over the desired 10%. Again, one-size does not fit all, and many times a memorable experience is going to trump a cash award.

Two types of programs commonly used with channel partners are incentive programs, which reward a partner for achieving a specific goal, and loyalty programs, which builds the relationship between you and your channel partner. A loyalty program can help a channel partner to see that your company is interested in their success as well, and involves helping channel partners to understand products and services at a deeper level. Again, keep in mind what you are trying to achieve before even deciding on which type of program you want to offer.

Whether you are rewarding customers, employees, or channel partners, there are a few things that apply universally. First, you must choose a program and incentives that speak to the recipient. Next, design a program that just makes sense with the goals you are trying to achieve. Then, make sure the program and its requirements and timeline are clear to all. Lastly, distribute your rewards, evaluate your program, and make any necessary changes to make it more effective in the future.

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