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Incentive Industry Analysis

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

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Incentive Industry Analysis

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  1. Incentive Industry Analysis December 2001

  2. Industry Overview

  3. 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.

  4. 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

  5. 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

  6. Travel accounts for almost half of the total consumer incentive revenue 7% 48% Consumer 45% Employee $26.9B Source: 2000 Incentive Federation Study

  7. Award cost is the key driver in consumer incentive program (80% of costs) Typical Consumer Incentive Program Cost Structure Source: Incentive Marketing Organization 2000

  8. The top 20 firms make up only 35% of total consumer incentive revenue Top 20 35% >5,000 65% % of total revenue contribution No. of firms Source: Company reports and industry data

  9. Largest players are created through vertical integration in the travel related industry Revenue distribution among industry players Source: Company, industry data and estimates

  10. The manufacturing industry is leader in using consumer incentive programs Percentage of firms using consumer incentive programs by sector

  11. 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

  12. And consumer incentive program users are usually large firms Distribution of program users by sizes Source: Incentive Survey 2000

  13. Industry Business Models

  14. 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

  15. “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 • Service/products supply chain are complex and diverse • Both clients and incentive program providers own customer relationship • High requirements for customer services • Full redemption solutions • Retaining and attracting customers Model III

  16. Cash is the most effective incentive for consumers Effectiveness rating for loyalty items Effectiveness rating Source: Incentive Central 2000

  17. “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

  18. Current IndustryForces & Dynamics

  19. 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 don’t 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 M&A activities • Merger between online and traditional players Industry Rivalry • In-house reward program vs. outsourcing • Minimal - non-competence for customers Substitutes

  20. 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 M&A • 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

  21. Sourcing Implications

  22. 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

  23. Supplier Short List • Carlson Marketing Group • MARITZ Loyalty Group • Business Incentive • Marketing Innovators • SHC Direct Tier One >10 million • Enhancement Service Group • Incentive Solution • All Star Incentive Marketing • Dittman Incentive • MMS Incentive • Clarity Incentive Services • Xceleration • Hinda Incentive • Affina Tier Two > 1 million

  24. Appendix

  25. A 5% increase in consumer retention can achieve 25% profit and 100% revenue growth Source: Journal of Marketing, 1996

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