September 01, 2010
INCENTIVE: How’s the merchandise incentive business doing?

PEER: I am seeing a resurgence. Merchandise has always had the strongest [business] case, along with travel, in terms of behavior management and change. It provides one of the best values in terms of what you pay for what you get. 
  
This year the hot thing is [Apple’s] iPad, 3D televisions, tablet computers, e-readers, and so on. And it used to be VCRs and VHS tapes and CRT TVs. The stuff will change but people’s desire to have it doesn’t. Merchandise is our primary business. The key change in our industry was, what did we learn from Amazon in terms of what products people are interested in.
We learned was that there was a need in our industry for the ability to deliver low-dollar-value items for programs that don’t have substantial earning potential—books, movies, DVDs and so on. That category resonated out there, and the idea that people wanted choice. 

On the other hand, what has been learned from that experience is that we are offering our clients a redemption experience versus a shopping experience. In the merchandise world, the multi-million-dollar, million-unit SKU capability is kind of a lazy man’s way to do merchandizing. It created confusion and complexity in customer service issues. What we are learning is, going back to the basics of good, better, best: Give them a preconceived selection of [award items] but address the things that resonated—lower dollar value items, and supply chain and delivery excellence. The expectations have changed, they have made us reinvent ourselves, reengineer ourselves, made us better at what we do, and so we have truly refined our processes and engaged all of our partners from the beginning of the supply chain—the manufactures—all the way to the end. We have addressed every single component of that supply chain including the people who are doing the packaging … what kind of a container is going on what kind of a container ship, how is it going to be shipped into port, what port is it going to? I mean, all the way through who is delivering it. The fundamental differentiator now is customer care, taking care of your customers, and even more importantly, taking care of their precious customers.

VAN DYKE:  What I hear you saying is, Amazon raised the bar, but they didn’t have the secret sauce, which is what we do. 

PEER: What they did was raise the bar in operational excellence. What was wrong—and this goes back to what I was saying about making it a shopping experience—was that it was a square peg in a round hole. What Amazon ultimately was, was a glorified Amazon gift card. Amazon ultimately was a glorified Amazon gift card. Why are you investing in all of this infrastructure and this point structure when you can just be handing out Amazon gift cards and get the same thing?

I refer to a shopping experience—essentially what you did was you got your points on your Amazon gift card and you can go on to Amazon and then you had effectively a reverse auction or this huge array of merchant choices to spend your points on different things. And that’s kind of what [American Express] does too. These shopping portals as behavior-driving vehicles for merchandize redemption are not effective. It’s just converting your points to a currency and you’re shopping, whereas we are in the people behavior management business for our clients. If you provide them with the range of things that are appropriate for their requirement, that requires a lot more work. Its not lazy man’s marketing. You are creating an assortment of awards that are design specifically to drive the behavior that your client needs. You going to be far more effective and far more useful to your client.

DANNA:  I agree on many points and I think that Amazon did raise the bar a bit for us, brought efficiencies to the marketplace and raised the bar in technology as well. But we are not here to provide a shopping experience; we are here to create memories and connections to the organization. And that is what needs to lead. Shopping and business strategy are very far apart, redemption and connections are very close to business strategy. It’s actually the core fundamental of our business, starting with aligning with [clients’] core objectives or core values, designing programs that present a participant experience and a memory that will last a lifetime. 

MICHAEL FINA: And Amazon also, I think somewhat improperly, conditioned customers to accept situations that are really unrealistic. For example, all of their free shipping policies. Shipping is never free. Whoever the carrier is charges a price to get the product there. Just because it’s not an additional line when you are buying the product doesn’t mean there’s not a cost to it. But the free shipping policy conditioned a lot of buyers to say “Okay, if Amazon is going away, what’s next? And by the way, how much is the shipping going to cost?”

VAN DYKE:  I think that’s what threw procurement [departments] completely off. Just as procurement was starting to someone understand what we did—although I think many of them still doubt it, which is a huge challenge for us—you have Amazon entering the market. There is cost somewhere but people are putting it in different places. 

PEER: There were three things you could do: Either fold your tent, join them, or stand up and compete. Those who stood up and competed and made it are better for it. 

FINA: And at the same time, Amazon didn’t make a decision to do the other way, to get into our business. We all thought, “Hey, you never know, one day could it happen.” 

DITTMAN: The moment of connection is the receipt of the [award], it’s not the shopping for it. [Getting the award is] the moment that has to be special. Our business is really a matter of what happens in the mind and the heart of the person when they open that box. That’s when [the incentive planner] has to make the final underscoring—that you got this because you did something and because your company cares enough about your effort to give this to you. 

I was thrilled to see [Amazon] leave, we never joined with them because there is nothing worse than being controlled by your own supply chain. I hated to see them come in to the business, I was thrilled to see them leave, because it was a one step towards the greater commoditization of our business. You had about 25 or 30 resellers who were all competing, you know some of them are going to compete for the same business at the same time. People are going see it and they are going to think, “Okay, it’s just a matter of how much are they marking up?” Because they know what the costs are, they know it’s going through the Amazon site and they can see what's going on. 

VAN DYKE:  The commoditization question was all over the [IRF] roundtables, I thought it was interesting hearing some people say they are now much pickier about the business they even go after. If there is a 
certain role of procurement in the business deal, if they can't make any emotional case, about they don’t even pursue the business. 

INCENTIVE: That emotional connection is something very associated with watches—it’s always been the presentation. 

KEENAN: When I, like most of us, stumbled into this industry and became a senior buyer with Curt Carlson [founder of Carlson Marketing, one of the largest and oldest incentive houses] we didn’t know what the word “incentive” meant. A watch was always an important item. Why? It’s a piece of jewelry and it has an intrinsic worth. A woman generally wears jewelry, but it’s one of the few pieces of jewelry a man will wear. I know men who won't wear their wedding ring but they wear a watch, which I've never understood.

The watch always had that intrinsic value and I think it touches emotion—this is something you are going to want to keep. Popular items like a DVD player or a VCR player change [over time], but an item that has intrinsic value, an emotional connection like jewelry, remains important. 

[Citizen Watch Co.’s] partners in the business really like watches because they are an item that has some margin, and still resonates with the individual. It hits at the heart of the incentive business because it is a recognition item. It says you’ve achieved, you’ve made it, and fortunately everyone has multiple watches now. They say something about [the wearer’s] lifestyle. The people in this room’s parents had one watch that they cherished for the rest of their lives. [Today], you wouldn’t be caught going to a formal reception wearing your everyday watch, and a guy who plays golf will have a watch just for the course. Watches have been a very important category and I think they continue to be important. 

INCENTIVE: What are we seeing in terms of per recipient spending, is that coming back? What’s happening with budgets in general?

PEER: What we are seeing is that new budgets are not being created. So, if you don’t already have a program in place, the probability is low that you can be able to convince somebody to create a new one. We are seeing existing budgets beginning to expand back again. The smart companies kept the programs, but they scaled them way down. Now they are okay, things are loosening up a bit. The pie of clients has not grown, so there is a big dash for market share [among incentive providers], but the size of the budgets is just beginning to see some rebound.

DANNA:  One thing we have seen in per-recipient spending is that more companies are becoming enlightened to their B player strategies. It used to be the A players only that got the rewards. More and more clients understand how powerful it is to move the middle 60 percent—B player strategies. I have seen a lot more interest in this space lately. Although the budget remains the same, per recipient [spend] goes down because they are spreading the wealth amongst the As and Bs. If you move the middle 5 percent, you will gain 70 percent more in revenues, or in results, than moving the top  5 percent. It’s a powerful statement that we can’t ignore any longer. It also eliminates that us versus them—the A players went on a trip every year and nobody else did [so the B players] gave up half way through the year.

RYAN: Can I make a comment about the emotional connection of awards, which I think is very important? You talk about the framing of awards as being a big part of a whole experience. We had a client that had a relatively young workforce. Their sales professionals in particular were in their late 20s or early 30s, and were showing signs of decline in terms of their connection to the organization. What they were able to diagnose was these people were getting pulled in multiple directions. On the one hand, they were being told to work harder—this is a career step for you, put in the hours, make sacrifices. On the other hand, they had new families at home that were pulling them in that direction. 

What we did is, we designed the presentation of awards to reinforce the context of family. To show them in the awards presentation that you want to use these awards as a way to have a special moment with your family. And without spending any more money on awards, this organization was able to close the gap between people feeling that the organization was pulling them in one direction to perform better, and the emotional drains [pulling them in the other direction], that they had to be spending more time at home. Sometimes it’s just as simple as the way you package things, to show that your success is our success. If organizations are more creative in the way they position awards, they might be able to get even more bang for their dollars in that regard.

DITTMAN: I agree. I think all too many times, if you look at the wording of the literature that goes out with many incentive programs, whether it’s electronic or in print, when it comes to merchandise, it’s somewhat manipulative, not motivational. It doesn’t attempt to position things through the eyes of the recipients, but it’s rather a matter of, “You do this and this is what you get,” instead of having any sense of empathy. I think people fall down time and time again by not doing the proper positioning of an incentive program, whether it involves travel or merchandise.
 
INCENTIVE: Employee recognition programs were growing rapidly before the downturn. Are they are still growing, and if so, how much? 

DITTMAN: When you have an enterprise-wide, integrated incentive recognition and rewards platform in place, it makes it easy—and it’s very effective—to draw a larger number of players into the audience. They may not be the B players, they may be the A players in the non-sales arena, but once you are working from a platform that is enterprise wide, and has different opportunities for people to earn points in multiple ways and therefore raise their level of self-expectation and raise their sights, what you are going to find is merchandise and gift cards moving, if not exponentially then significantly, because the budget is going to expand at the same time.

If you go into a company, especially if the company that has a variety of different divisions, is that some companies have a mishmash of programs, each with its own ownership, in its own division. Some are using gift cards and some are using trophies and some are using merchandise and some are using days off. If you actually go in and find a person who really has ownership of all recognition, and you challenge them to take an inventory of the programs that exist, they are normally stunned to find out how much money being spent so absolutely ineffectively, because [the programs are like] isolated little drops of water. When you bring all the programs together and you put them all in one place, and you drive people back to it over and over again through the messaging and emails that you send out, all of a sudden you are going to win the war for talent. Because every time somebody goes to that [recognition program] Website, they are going to look at a variety of evidence that says, “You know, this company really cares about me, they really do.” And the net result of it is that they are more engaged.
  
I think there’s a great, great opportunity for both merchandise and gift cards in the recognition arena in particular. Because now, you’re bringing in people who normally are not part of an incentive program but you’re rewarding them in the same fashion.

VAN DYKE:  The challenge is that so few organizations want to turn over all of those rocks to see exactly how much they’re spending for a gift card here and a gift card there, because the programs are very personal to the people who develop them. And if they had been using them as a motivational tool throughout the last couple of years, they’re very unwilling to say, “Yes, let me incorporate my program into this ‘[broader new initiative.]”
  
PEER: The scrutiny because of the [bad] economy has put all of those disparate budgets in play. You’re having to go back and justify all of it and then somewhere in the smart ones’ heads, the light goes on. I think Jim [Dittman] hit it right on the head. They realize, “Hey there is a ton of rogue spend going on here. We feel we need this kind of program, but there’s a lot of efficiency and effectiveness that can be added if it were more centrally managed.” 

RYAN: The consolidation is an opportunity for organizations to cut out the waste in shared spending, in administration, in communication. It also creates a centralized environment where people see the aggregate investment the organization is making them. 

And through the Web, you can personalize a presentation so it doesn’t become noise. The other side is, it gives the sponsors a really good diagnostic trail as to where recognition is being utilized. They can link it back to business outcomes. They can not only build their initial business case, they can sustain it, and as sponsors, they can get a bigger seat at the planning table because they’re now able to redirect incentive investment to have better outcomes. That’s where the consolidation aspect has benefit. 

If you develop a mechanism, a portal that can consolidate everything but still give legacy programs the level of nuance they need in terms of everything from eligibility, to structure, if you still allow legacy planners to feel that their existing programs are still in play, you’re going to have a winning formula, because you’re going to give corporate sponsors that control in terms of benefits and those sponsors that flexibility.