Why Incentive Programs Endure Recessions
This white paper, produced by the Incentive Performance Center (IPC), explores why incentive programs tend to thrive during times of economic stress
Despite an initial hit when bad times set in, incentive programs are essentially recession-proof. This helps explains why savvy companies turn to incentive programs to drive business growth, even while cutting budgets for other business development functions.
Five fundamental reasons explain why incentive programs, unlike other sales and marketing strategies, withstand economic downturns:
- Low fixed costs, variable costs driven by performance, high potential return
- Ability to effectively target audiences (no pay and spray)
- Relative ease of measurement
- Potential for both short-term and long-term results
These five points are described in detail below so you can see what it means to your organization in practical terms:
Set-up and ongoing communication are the primary fixed costs of any incentive program, whether it’s an employee, channel partner, consumer or sales initiative. The standard fixed costs related to strategic planning, communications, training and systems are approximately 20%-30% of any incentive program.
In properly structured open-ended programs, the remaining 70%-80% of the cost isn’t incurred until the program has achieved its goals, or some portion of those goals, and the rewards have been issued or redeemed. Compared with advertising, direct marketing and event marketing, well-designed incentive programs have by far the highest level of cost accountability related to results. This is probably the No. 1 reason for increased incentive usage during tough times.
Incentive programs are attractive during tough economic times because the cost of communicating with a well-identified audience of people is generally much less than mass-marketing programs, such as advertising, direct mail and trade shows. Why? Because you’ve already identified the audience that can change your business outcome if they focus on what they can do to help achieve those goals. In good times or bad, business results depend on the willingness of a key audience to do what they can as customers, channel partners, salespeople or employees to contribute to business success.
Today, using a low-cost Internet portal to communicate programs with a simple enrollment or opt-in strategy, organizations can deploy highly targeted, personalized and measurable ways to communicate on a one-to-one basis with the people who can drive business results, no matter what the audience or business goal.
Naysayers argue that it’s impossible to effectively measure any marketing program, because of the multiple factors that can affect outcomes. To be sure, the actions of a competitor, the economy, internal operational and other issues can affect outcomes of any program.
Effectively structured incentive programs make it possible to screen out the noise of external factors to find at least some cause and effect. The key: Build at least three measures into your program – one outcome measure, such as increased sales, increased output or decreased defects; and two related process measures, such as actions that can contribute to the results – making more cold calls (easily measured today with a customer relationship management system), complete machine maintenance compliance to reduce downtime, consistently recalibrate equipment to reduce defects, etc. Then monitor the correlation between the specific behaviors promoted in the program and outcome. These leading and lagging measures allow one to confirm the inter-relationships and produce the desired results.
Things change. It’s much easier to address change when the audience is highly defined and the communication program is in place. You might want to offer bonus points to promote a new feature your product team turned out; you might want to add bonus points to behaviors that early results indicate are having a highly effective impact on results; you might learn that product knowledge is an issue and you have to give your sales team a quick refresher. It’s quite difficult to change a trade show, advertising or direct marketing program in mid-stream, but it’s fairly easy, in a timely manner, to adjust an incentive program.
Companies often turn to incentive programs to achieve short-term results. They like the equation of being able to put down only about 30% of the total potential cost, with the remaining budget determined by the degree of performance improvement.
That said, programs based on research and best practices have the additional upside of producing residual value. That’s because the behaviors promoted during the incentive program generally have long-standing value to the organization.
This so-called overhang effect helps explain why so many organizations whose cultures are based on promoting positive behaviors outperform their competitors in terms of share price performance or financial results. Compelling evidence shows that incentives drive bottom-line performance, and the business and academic communities have begun to understand and embrace their use for a variety of constituents and a wide range of needs.
A Primary Solution
It’s a great testament to the power of incentive programs that they have continued to flourish despite the fact that so few businesspeople have formal training in program design, and that relatively few organizations strategically design, implement and measure their programs. The best programs weave together an essential combination of business planning, inspiration, technology, communications and mathematical measurement that merits professional help – either from trained internal or external resources.
As companies make the shift from mass marketing to target marketing, they will ultimately turn to incentive programs as a primary solution rather than a secondary or complementary tool, for all the reasons outlined above. Each time an organization replaces a mass marketing technique with a one-to-one strategy such as an incentive program, it will realize a ripple effect of benefits – engagement, satisfaction, behavioral changes, etc. – that will sustain itself over time.
To download a PDF of the complete white paper, “Why Incentive Programs Endure Recessions,” go to: www.IncentiveCentral.org
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