When dealing with new prospective clients, one of the most common questions I encounter is, “What will a reward program cost?” For new prospective incentive buyers, the first thing we condition is that programs should not be treated as a cost, but an investment. When you invest money into a performance incentive program, it’s an investment strategy that is expected to drive performance in the marketplace.
The rewards are the fun and exciting part, but it is not about what we do but why we do it.
It’s important that our focus is not just on the rewards, thought they take up a sizeable chunk of the typical budget as you’ll see. We instead focus on the achieveable goal of a program: gain new market share, drive engagement, capture mindshare. Rewards are just cherry on top of the cheesecake.
Budgeting for a performance incentive program has many elements outside of rewards. There are the investments to consider such as incentive design strategy, implementation, technology, plus on-going management for the program. And of course, the marketing and communication of the program.
A Typical Incentive Budget/Investment
Your typical incentive strategy is going to look a little like the above chart. We’ve found that this breakdown is often the sweet spot between gaining attention through rewards and marketing while putting enough investment into a strategy and technology to make goal achievement possible.
Beyond the breakdown, what your total investment looks like is determined by a few fiancial factors both for your company and based on who your participants are going to be.
- The reward payout for a program needs to grab the attention of the participants. We recommend the payout equal 1-5% of the participant’s pay.
- Like any investment, a program needs a steady stream of funding. We recommend dedicating 1-3% of sales toward program funding.
- Or, if you’d rather look at Incremental Gross Margin, we’d recommend 5-12% from Incremental Gross Margin to fund your program.
- There are also some opportunities to garner MDF/Co-op funds to help invest in the program. Many of our programs are subsidized by funds like these.
Don’t Make This One Mistake
The one mistake when it comes to budgeting for a program is not considering marketing. Often, the behavior that programs reward on, sales, is a lagging indicator, and implies your participant did something right in the past. But will it continue? Capturing mindshare is done through a robust communication plan, which will embed your brand into the minds of your participants and will become a much better, leading indicator of your program success. To ensure your program is structured correctly, you should work with an agency that understands not only how to market and deliver rewards, but drive behavior change.
Structuring Your Points Program
Now, the most significant portion of the budget by far will generally be in the rewards. For clients running a points-based strategy, this will make up the lion’s share of the investment.
Program sponsors can create their own “point currency” and assign a value to those points. The most common point value we see is $.005 (so 5,000 points are worth $25 in reward value). It is vital to try and create a point-scheme that isn’t tied to cash or the dollar, as the research has proven that non-cash incentives are more motivating. A points program is about driving performance, not compensation.
When the points start getting issued or redeemed, a cost does get assigned to them. So, what are your options, and how will you get billed for these points? The impact of choice has implications your finance team will want to understand. At HMI, we typically offer three types of billing models for those points.
The Redemption Billing Model:
The client pays for the points as they are redeemed. In this model, the client only gets charged for points once they are spent and gone. This model helps ensure a higher return on investment because even in the most engaging programs, not all points will get spent.
It may seem like a no-brainer, but bill on redemption does provide some challenges as the reward program cost will be unpredictable and even inefficient for your account team to understand. Your company must carry the potential liability as you issue out points. This means the cost of the reward can hit the books months or even years after the points were initially awarded. HMI programs typically see over a 95% ultimate redemption rate, so one way or another, these points will hit down the line.
The Issuance Billing Model:
The issuance billing model is when the points get paid upfront when a client issues out those points to the participants that are able to redeem. The issuance model works well for clients that typically work with POS and need a consistent way to plan their budget and the costs of the points. It provides a balanced billing approach. HMI manages the liability of the program. We know not all points issued will be spent.
If you decided to go this route, often your reward program cost around administration would be discounted to account for the program leftover points and breakage supporting the program and our services. Another alternative we can offer at set-up: we would clear out points from inactive accounts. These points can be credited back to a house account in which you can award or gift to other participants in the future or fund future program initiatives.
Hybrid Billing Model:
The Hybrid model is a combination of the issuance and bill on the redemption model. You pay for a portion of the points when they get issued (50%) and the rest of the portion when they get redeemed (the other 50%). This model can provide the benefit of a balanced cost structure while still paying for most points once they get redeemed.
When setting up a program, there are a wide variety of things to consider that may feel overwhelming. It is essential to know your options and how to explain this choice to your finance team when they come calling. Have questions about options? How to manage program liability and point investment? How to structure an incentive program to ensure its self-liquidating? What marketing and communications will help you capture mindshare?
At HMI, we have 40 years of experience managing point-based programs in the B2B space across numerous channels. It is not only what we do but helping clients structure programs and gain performance is why we do it. Contact us today, we are here to help.