Consumers: Incentive Overview

As any consumer knows, American business has a love-affair with incentives. Almost everyone has received countless offers from some of the biggest names in American business and from some of the smallest, local shops: A Burger King sweepstakes tied to a new product launch; your credit card’s loyalty program; your bank’s incentives to open up new accounts or credit lines; your favorite airline or hotel chain points program; that sign-up incentive you received from your favorite magazine; continuity programs at your local supermarket that save you money on name brand merchandise; the free gift for agreeing to hear a sales presentation, or sign up for an e-mail newsletter. The variations are endless.

Industry estimates put the market for travel and merchandise incentives at about $29 billion in 2005, and that’s probably a conservative estimate. The promotional products industry alone, which has a significant overlap with the incentive industry, posted $18 billion in sales in 2005. According to the most recent Incentive Federation “Survey of Motivation and Incentive Applications,” 68 percent of the companies participating used incentives to support consumer promotions, specifically to:

  • Increase sales
  • Encourage pantry-loading
  • Promote loyalty
  • Promote permission
  • Break through marketing clutter
  • Target key audiences.

The use of incentives has proliferated in this new age in which businesses want to increase their use of target marketing and more effectively engage consumers over the long run – not only to buy more product, but to refer their friends and family.

Consumer incentive programs target not only individuals, but also target businesses and the people who buy products and services on their behalf.

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Facts and Figures

Consumer incentives rarely get the media attention dedicated to advertising or Internet marketing, but they are big business. Of the $80 billion that Promo magazine estimates U.S. businesses spend on promotion marketing yearly, almost $30 billion is spent on consumer incentives, including:

  • Sweepstakes and contents
  • Gift-with-purchase offers
  • Door-opener or offers
  • Loyalty programs
  • On-pack or in-pack incentives
  • Word-of-mouth and referral programs
  • Web site opt-in or subscription sign-up incentives
  • Direct mail syndication
  • Event-related giveaways

Incentives, rewards, or recognition, are used at one time or another to encourage almost any type of consumer behavior. Despite the prevalence of their use, surprisingly little academic research exists to fully understand the psychological or other affects of many types of incentive programs. The bulk of the available research relates primarily to the activities and business practices related to consumer incentive usage.

The automobile industry and business media have helped create a lot of confusion related to the term of incentives. They frequently use the term incentives to describe what are in effect discounts or rebates – i.e., cash offers used to spur incentives. While this usage might be technically correct in terms of a dictionary definition, it creates confusion because it does not encompass the use of “added-value” incentives that are intended to achieve marketing objectives without discounts. The marketing world might be better served, and confusion would be lessened, if marketers agreed on terminology that clearly distinguishes cash incentives and rebates (effectively discounts) from added-value incentives.

Objectives. According to the latest Incentive Federation research of consumer marketers, incentives, rewards, and recognition, are used to achieve the following objectives:

  • Increase or maintain sales
  • Create new markets
  • Gain a larger share of existing markets
  • Acquire new customers
  • Build customer loyalty or trust.

The major industries that use incentives are, of course, those with large consumer audiences, including:

  • Consumer products
  • Banking and financial
  • Retail services
  • Food and beverage
  • Publishing
  • Automotive
  • Travel and travel services
  • Hospitality
  • Telecommunications.

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Types of Consumers

Not all consumers are alike, and of course consumers come in all demographics. For the purposes of this Web site, consumers are broken into the following groups:

Adult individuals: These people make purchases for themselves, for their families, and friends. The primary purpose of an acquisition is to service a personal, family, or gift-giving need or desire.

Businesses. For businesses, the buying process is more complex, because many people can be involved. The buying process can include: gatekeepers, who do basic shopping but don’t make final decisions; recommenders, people who have the authority to make final recommendations; approvers, the person in top management or the purchasing department who signs the purchase order; and the economic decision-maker, the individual who authorizes the expenditure in the first place.

Children: Businesses should consider children separately from adults for both moral and practical purposes. Ethical companies draw the line between promoting sales to children and taking advantage of their inability to make the calculations necessary to determine a fair offer from one that is deceptive. In addition, children’s purchases can be heavily influenced by parental gatekeepers and, increasingly, have become significant purchase influencers on technology-challenged parents and grandparents.

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Motivational Factors

Motivating consumers is a complex process that involves many key factors, of which incentives, rewards, and recognition are only a part. Many organizations overlook the interrelationship between how they market to consumers and how they market to their channel partners and even their employees in affecting the overall outcome of their external marketing efforts. After all, it is the behavior of salespeople, customer service or delivery personnel, and even the behavior of the product or service itself that can make the difference between a one-time and repeat customer.

Developing an incentive program without addressing these key issues could lead to failure, no matter how effective or desirable the incentive or award itself.

Here is what consumer motivation research tells us about all of the factors affecting customer behavior:

Availability. Is the consumer aware that the product or service exists? Is it easy to find? Availability could be a function of willingness of retailers or other resellers to carry a product, which in turn could be determined by how they are treated by sales or other employees. Incentives often are used to help draw attention to a new product or to prompt retailers to stock or adequately display it.

Function. Does the product or service fill a big enough need, and does it do what it says it will do? Function can be a product of innovation that comes from a committed employee base ever committed to finding new ways to please the customer. Incentives can add function through an on-pack or in-pack offer that enhances the utility of a product – such as blades offered with a razor.

Value. Is the price paid comparable with similar products in the market? Is there a perceived reason to pay more? Incentives can add perceived value, such as through the use of a free gift, bonus points, special privileges, etc. Value can be a result of employee productivity, which often depends on the efficiency of internal employees, or even the service offered by employees, for which some consumers might pay more.

Emotion. Many people respond to what they perceive to be fun, exciting, and hip, and they want to feel valued and recognized. A properly selected consumer incentive can directly affect the emotional response. Example: A popular CD sold at a discount at a popular coffee shop. Marketing strategies that address emotion also often require the involvement of employees or channel partners, whose behaviors can have a direct impact on consumer impressions and response.

Convenience. Is the product relatively easy to buy and use with a minimum of problems? Incentives can enhance convenience, providing an extra value that enhances a product – such as offering a flash memory card with a computer. Convenience can suffer greatly, however, when internal employees have little interest in customer satisfaction or understanding of what they can do to foster it.

Affiliation. Can the customer or prospect emotionally identify with the “brand,” and feel comfortable interacting with the company’s people or image? Marketers often use incentives and promotional products to promote affiliation, such as through imprinted apparel or other customized gifts. Many organizations spend millions to build a brand through advertising, only to have it thwarted by customer-facing employees whose attitudes can’t always be covered up by a uniform, dress-code standards, or one-week intensive-training programs. So incentives can also be used to help promote brand behaviors internally.

Communication. Motivation can depend on making sure that customers and external channel partners understand your latest products, services, and value propositions. Incentives, notably sweepstakes and contests, are often used to break through marketing clutter, whether to external or to internal audiences.

Integrity. If there is a problem, how does the company handle it? Incentives rarely are used to promote integrity, but they should be used with integrity or they will defeat the purpose. Many organizations make the mistake of using incentives in a way that actually deceives the customer, creating a negative impression that more than outweighs the short-term benefits of diminishing the value of an offer in order to improve the marketing economics. In addition, many marketing departments overlook the extent to which the internal audience—employees, salespeople, channel partners—can influence trust between an organization and consumers, and the role incentives can play in gaining their engagement.

Power. Is the consumer made to feel in control or at the mercy of the vendor? To varying degrees, consumers want to feel they have the power over the seller, and many look forward to the opportunity to exercise it. An effective customer recognition program gives consumers a feeling of power that can translate into long-term loyalty: Witness the success of the travel industry and credit card loyalty programs.

When properly constructed, consumer incentive programs address all of the audiences that can have an outcome on the consumer’s loyalty, which can include salespeople, channel partner principals and salespeople, and your own employees.

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