Incentive Industry Analysis

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Incentive Industry Analysis
December 2001
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Industry Overview
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What is an Incentive Marketing program?

• Employee incentive programs - provide incentives
  such as merchandise and gift certificates to
  reward good employees with the goal to retain
  them, lift loyalty, boost performance and
  eventually increase company sales
• Consumer incentive program - provide incentives
  such as travel mileage and merchandise to
  consumers with the goal to retain valuable
  existing users and attract new customers, and to
  eventually maximize profitability.

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Incentive industry had a total revenue of 26.9B
in 2000
2000 total revenue breakdown
Consumer Incentives 4.3B, 16
Employee incentives 22.6B, 84
Source 2000 Incentive Federation Study
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Overall, the incentive industry has been
expanding market over years
1997
2000
Increase
Total Revenue

• 26.9B

• 17

• 22.8B

Percentage of US firms using incentive programs

• 32

• 6

• 26

Source Incentive Survey 2000
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Travel accounts for almost half of the total
consumer incentive revenue
7
48
Consumer
45
Employee
26.9B
Source 2000 Incentive Federation Study
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Award cost is the key driver in consumer
incentive program (80 of costs)
Typical Consumer Incentive Program Cost Structure
Source Incentive Marketing Organization 2000
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The top 20 firms make up only 35 of total
consumer incentive revenue
Top 20
35
gt5,000
65
of total revenue contribution
No. of firms
Source Company reports and industry data
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Largest players are created through vertical
integration in the travel related industry
Revenue distribution among industry players
Source Company, industry data and estimates
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The manufacturing industry is leader in using
consumer incentive programs
Percentage of firms using consumer incentive
programs by sector
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The financial industry will increase incentive
spend to acquire and retain customers
Breakdown of consumer program users in financial
industry regarding future budget plan
Source Incentive Survey 2000
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And consumer incentive program users are usually
large firms
Distribution of program users by sizes
Source Incentive Survey 2000
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Industry Business Models
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Three potential transaction models exist for the
consumer incentive marketplace
Card Holders
Service providers, merchant manufacturers and
distributors
Full-solution Incentive Program
Fulfillment Providers Only
Program Clients
Model I
Model III
Model II
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Model III has the highest complexity in supply
chain
Characteristics
Application

• Directly working with services or products
  providers who normally have adequate fulfillment
  and customer service capability
• Usually service/product provider own relationship
  with customer

• Specialty products for niche, targeted programs
• Acquiring new customers

Model I

• Small, commodity type gifts/awards for mass
  reward consumers
• Retaining customers

• Normally product-based rather than service-based
• Client owns customer relationship

Model II

• High requirements for customer services
• Full redemption solutions
• Retaining and attracting customers

• Service/products supply chain are complex and
  diverse
• Both clients and incentive program providers own
  customer relationship

Model III
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Cash is the most effective incentive for consumers
Effectiveness rating for loyalty items
Effectiveness rating
Source Incentive Central 2000
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Freddie award winners (best-in-class) use full
redemption solutions
Dinner Club
AMEX
AAdvantage
Travel Related
?
?
?
Features
?
?
?
Cash Certificates
Merchandise
?
?
?
Status Upgrade
?
?
?
Online Shopping
?
?
?
Functions
Points/Miles Exchange
?
?
?
Source Freddie Award 2001
More than 90 of all reward cards provide full
solution
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Current IndustryForces Dynamics
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New entrants is the most important force in the
industry
Attributes
Industry Impacts

• Suppliers such as travel agency and airlines
  expand to reward program
• Internet makes online entrants easier

• New entrants emerge both online and offline
  intensifying competition

New Entrants

• Merchandise suppliers have little power in the
  commodity market
• Specialty providers have more leverage

• Fragmented, diverse supplier environment have
  minimal impact

Supplier

• Customers dont have adequate information on this
  relatively young industry

• Established, brand-name programs are favored

Customers

• Competition is intense, due to low
  differentiation and easy entry, particularly for
  online players

• Increasing MA activities
• Merger between online and traditional players

Industry Rivalry

• In-house reward program vs. outsourcing

• Minimal - non-competence for customers

Substitutes
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Program providers have been adopting four major
strategies
Strategies
Goals

• Established players are buying smaller players,
  particularly online players

• Increase service capability and bargain power

MA

• Provide travel related, merchandise, certificates
  and almost all consumable services and goods

• Increase appeal to mass market and meet
  competition

Full Solution

• Increase appeal to mass market and meet
  competition

• Provide online exchange, buy/give capability and
  others

Flexibility

• Own travel agencies
• Build fulfillment processes

• Simplify complexity for customers and increase
  bargain powers

Vertical Integration
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Sourcing Implications
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High complexity and low differentiation indicate
a opportunistic approach
High

• Opportunistic Approach
• - Reduce supplier
• dependency
• - Increase supply certainty

• Strategic Cooperation
• - Long term partnership
• - Maximize value creation
• - Focus on wants

Supply Complexity
Incentive Program

• Commodity Sourcing
• - Seek best deals
• - Focus on needs
• - Short-term and transaction based

• Tactical Cooperation
• - Mid term partnership
• - Focus on improvement

Low
Low
High
Supplier Differentiation
Source Adopted from Peter Kraljic, HBR
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Supplier Short List

• Carlson Marketing Group
• MARITZ Loyalty Group
• Business Incentive
• Marketing Innovators
• SHC Direct

Tier One gt10 million

• Enhancement Service Group
• Incentive Solution
• All Star Incentive Marketing
• Dittman Incentive
• MMS Incentive
• Clarity Incentive Services
• Xceleration
• Hinda Incentive
• Affina

Tier Two gt 1 million
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Appendix
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A 5 increase in consumer retention can achieve
25 profit and 100 revenue growth
Source Journal of Marketing, 1996