INDUSTRY TRENDS
In 2000, the Premium and Incentive market was a $29 billion* industry. In 2000, industry spending by type was as follows:
- Sales Incentives -- $8.7 billion (or 33%)*
- Dealer Incentives -- $8.3 billion (31%) *
- End User (B-to-C and B-to-B) -- $6.3 billion (23%)*
- Non-sales Employee Incentives -- $3.6 billion (13%)*
The industry is growing, with more companies offering incentives and others spending more on premiums and incentives in 2000 versus 1999:
- 50 percent of businesses are spending about the same
- 35 percent spent more
- Only 5 percent spent less
Source: * Promo Magazine - Industry Report - May 2001
USES OF PREMIUMS AND INCENTIVES
Premiums and incentives can be used strategically to meet a wide range of marketing objectives, some of which include:
- Maximizing sales
- Rewarding loyalty or performance
- Gaining share of focus from employees, sales force or distributors
- Defend against competitive promotions, programs or pricing
- Educating target audiences
- Customer Objectives:
- Gaining Product awareness or trial
- Increasing sales or market share
- Differentiating your product from the competition
- Reinforcing brand attributes
- Encouraging retail display
- Increasing consumer loyalty
- Defend against price reduction strategy
PREMIUM AND INCENTIVE OFFERS
Premiums and incentives can also be used against a whole range of tactics including some of the following:
- In-Pack -- a free gift is packed inside the actual product
- On-Pack -- a premium is affixed to the package
- Banded Multi-Packs -- the premium is banded to a multi-pack
- Special Packaging -- the premium is the packaging with the brand being marketed in that special packaging, such as a collectible jelly jar
- Near Packs -- a premium is featured on the display (but not affixed to the brand) and the consumer takes one premium when they purchase the featured / displayed item
- All of the above tactics are used to encourage impulse purchase, gain in-store display visibility and retail support.
- Mail-in / Bounce-back offers -- These offers take various forms with the consumer mailing a request, proof-of-purchase or money to receive the premium.
- Catalog/Point loyalty program -- A catalog program typically offers multiple items for escalating levels of purchase.
- Mail-in/bounce back offers and catalog programs can help increase product awareness, trial, increase sales and market share, encourage retail display and maximize consumer loyalty.
Premium and catalog programs can be offered a number of different ways:
- Free offer -- the consumer receives the item(s) free with or without proofs-of- purchase.
- Self-liquidating offer -- the consumer funds the entire cost of the premium.
- Partially self-liquidating offer -- the consumer and marketer share the cost of the premium.
- Speed plan -- Catalogs often include a speed plan where consumers can redeem points or proofs-of-purchase plus cash to receive the item(s) more quickly.
- Sampling / Event Gifts -- a premium is given to attendees to reinforce the interactive experience / brand.
- Direct Mail Gifts -- a "free inside" premium message is flagged on the outer envelope to encourage the recipient to open the envelope.
Incentives
There are two kinds of incentives: performance incentives and prizes. Performance incentives are awarded when consumers perform certain actions. Prizes are awarded through games of chance or contests.
Performance Incentives
- Travel -- incentive trips can range from very low cost local getaways to around-the-world incentives
- Merchandise
- Gift Certificates
- Trade Incentives such as dealer loader and in-store merchandising support (Win-It-Here Sweepstakes, Gift with Purchase, etc.)
Prizes:
- Sweepstakes / Games of Chance
- Skill Contests
Prizes are typically offered in a tiered, pyramid structure with one or more major prizes and many supporting prizes. The top prizes will encourage the consumer to enter because they want to win that prize.
A large number of supporting prizes also is important so the consumer feels that she has a chance to win. The number of prizes offered and the type of prizes will depend on the type of program, audience and objectives.
PREMIUM/INCENTIVE TIERS
Premiums and incentives range in value from high-value incentives such as $10,000 cash, travel and cars to low level merchandise items such as a 50-cent key chain. The type of incentive / premium used will vary widely depending on your target audience and objectives.
High-Cost Category
In the high-cost category, cash is the most broadly appealing incentive. Cars and travel are the next popular high-value incentives. The range of cars and travel is immense and again, brand image should align with the vehicle or trip that you offer.
Mid-Tier Category
In the mid tier, cash is still important but merchandise is used frequently and takes on more appeal. In this category, there is tremendous opportunity to reinforce a brand's image.
Lower-Cost Category
In the lower tier merchandise can also be a strong motivator, especially since the perceived value of an item is often much higher than a comparable cash incentive. The retail value or perceived value of merchandise is often 50 percent higher than the actual cost.
Cash rebates and coupons are also prevalent in this tier. While they can certainly generate sales if used on a consistent basis, they can also detract from a brand's image (rather than adding value). It's important to determine at which point a cash incentive will be perceived as a product discount. If a discounting strategy is used on a regular basis, brands train consumers to purchase the item on deal as well as train retailers to expect future discounts or deal periods.
This discounting strategy has been used extensively in many categories, including lingerie. Lingerie manufacturers have been so successful in generating sales via "Buy 1 Get 1 Free" offers, that 80 percent of consumers now purchase lingerie on deal. Retailers have come to actually market a category deal period and all manufactures go on deal at the same time. The brands need to discount just to stay at parity with the competition.
KEY SUCCESS FACTORS
Regardless of the amount of money spent, to achieve success any incentive / premium reward must be appealing to your target audience and be consistent with your company imagery.
Appealing to your target audience
Many programs are structured based on assumptions rather than actual research. Wherever possible, conduct research to be sure you're offering the best item possible.
For programs targeted towards employees, research can be as simple as having one-on-one discussions with key members of your target. Don't be afraid to ask key members of your team about a potential program and rewards.
For example, one of our clients had been using travel rewards over a period of a few years to incent sales performance. The programs achieved some success, but the results were diminishing each year. By speaking with some key sales people they learned that trips were great but the sales force wasn't able to get time off to take the trip. So, instead of being a reward, the incentive was actually creating bad will among top performers.
When the company launched the next program, they combined the trip with a guaranteed week off for reaching quota. Sales and morale increased dramatically.
If you're creating a consumer program, understand your consumer. A "sanity check" for premiums can be as simple as an on-line survey with a list of premium choices or as complex as a series of focus groups with brand users and competitive users complete with concept boards and live premiums.
Research can also reveal new premium options. A client conducted focus groups and found out that instead of giving high-cost trips, low-cost VIP access to local events was the preferred incentive for top-tier customers. Research can also give a company a sense of the liability that a program could entail. When developing a program budget, it's important to gauge the costs of redemption.
Consistency with Company / Product Imagery
One of the most important, yet underrated considerations is for a premium / incentive is to reinforce brand imagery.
Not only will a poorly selected premium or incentive not motivate the target, but also it can actually do harm to a company or brand image. Regardless of the cost of the incentive, it should always be consistent with your branding message.
Before selecting any incentives, it's important to assess your brand assets and determine what you really want to communicate to your audience. Is your brand prestige-priced, fun and edgy, exotic? Be sure that your premium and incentive program reinforces that identity.
Imagine a very expensive, upscale chocolatier offering a $1.00 neon pink plastic key chain. That company could spend the same $1 on a "Guide to Elegant Entertaining" and create a completely different result.
STEP-BY-STEP GUIDE
I. Determine Your Objectives
- What are you trying to achieve?
- How are going to measure your achievement?
- Who is your target -- current consumers, competitive users, light, medium, heavy users, retailers, sales force, or potential business partners?
- Do you have multiple targets and can you attract these targets with a single program or do you require separate efforts?
- When do you need sales support? Is there anything else planned for that time period?
- How is the competition likely to react to your offer and do you also have a plan for that situation?
- Do you have the support within your company to develop and execute a program?
II. Select the Tactic that Best Meets your Objectives
III. Determine Your Budget
- Planning and program development
- Research
- Agency Fees -- If you're executing a complicated program, an agency can assist in developing the program structure and manage the program.
- Redemption analysis -- Have you developed calculations for redemption and liability models relying on experts and past history? Is over-redemption insurance warranted?
- Premiums
- Premium customization with graphics and logos
- Shipping -- Include the costs of shipping from the manufacturer to the fulfillment company. Also be sure to have the necessary insurance.
- Program support such as advertising and point of sale displays
- Packaging charges
- Fulfillment costs such as program set-up, packaging for shipment, servicing, postage, order returns, storage and management fees
IV. Create Measurement / Success Criteria
- Develop specific criteria.
- Be sure that criteria is measurable.
- Determine points to adjust budget, program support and other elements.
- Update budgets throughout the program.
V. Time Line
Be realistic. A simple program with domestically sourced premiums can be put together relatively quickly. However, complex programs with packaging changes, offshore sourcing or printed loyalty catalogs can take six to twelve months to prepare.
Make sure that your time line is detailed and that all parties involved in your program understand and have approved their role in the time line
Update time lines throughout the program.
VI. Source Premiums / Incentives
- Conduct research to make sure the premium is an item that your customers want.
- Source the items for the best value, but don't sacrifice quality for price.
- Determine minimum efficient quantities.
- Check references on manufacturers for financial stability and track records.
- Determine order and reorder time lines.
- Arrange a backup product line.
- Do you have detailed specifications and contracts with each of your suppliers?
- Negotiate a payment schedule with the manufacturers up front, but don't pay too much up front. Get a letter of credit instead.
- Ensure that manufacturers have product warranty and product liability coverage.
- Test for product safety, especially with toys.
VII. Create Support Materials
- The offer and premium should be the focus of all materials.
- Check the legality of the promotion for trademarks, copyrights, state and federal laws.
- Consult a lawyer.
VIII. Set Up Program Fulfillment
- Check the fulfillment company's financial background and track record.
- Know who will be on the account team, and make sure they are experienced.
- Run the program by the account team to troubleshoot.
- Monitor progress. Small problems are easier to fix while they're still small.
IX. Program In-Market
- Monitor what's happening in the field. Don't rely on the fulfillment company to do the work.
- Solicit reactions from the entire team.
- Keep the team updated on progress.
- Make corrections ASAP.
- Revise forecasts continually
X. Evaluation
- Follow-through on your commitment to measure the program
- If a program is a success, be sure that everyone on your team knows it and understands their contribution to that success.
- Evaluate your forecasting process.
- Revise your forecast and keep "Lessons Learned" to help form the basis of planning future programs.
