Mad About Incentives: Shame On Us!

Incentive: Merchandise

Mad About Incentives: Shame On Us!
April 24, 2009
The commoditization of incentive suppliers

By Ley Borlo

For any of us who's been in this industry for more than a few years, a review of the Incentive Research Foundation's latest Vertical Market Study must have been painful. At least I hope it was. The study indicates that 78.5 percent of the respondents did not engage the services of an outside incentive company for the design, management and measurement of their incentive programs. Of the respondents who did engage an outside company, the majority of them engaged fulfillment services only. Wow, things have changed!

I must say that I was absolutely amazed that nearly 80 percent of the respondents didn't use outside incentive companies other than for fulfillment. In the not-too-distant past, when we developed a proposal for a piece of business, that proposal contained all elements that made an incentive program successful. We concentrated specifically on the design and rules structure, the measurement, the administration or management and the communications. The end of the proposal was mainly reserved for the fun stuff•the dazzle, glitz and glamour that could be provided by the awards. But the important points of how to make the program work were almost always discussed first.

Frankly, everyone in the industry could present a travel destination (it's not hard to make Hawaii or Rome look good) or a beautiful book of merchandise awards. Our proposals captured the essence of what the clients really wanted to do because we knew their industries and we did our homework to know how to make their programs successful. That's what we were trained to do, that's what we did best.

As evidenced by the IRF study, clients today don’t hold the same high regard for incentive suppliers. In the study, when asked why they didn't use outside agencies in incentive design, management and measurement, the following were the three major reasons given by respondents:

• 70 percent felt that they had in-house resources with the ability to design programs without assistance.

• 11.3 percent said the cost was too high to engage an outside agency

• 10.8 percent said outside agencies lacked the expertise in their specific industries to be of any value.

Evidently, we have allowed our stock in trade, our real reason for being in the business, which is our expertise, to be devalued in pursuit of profiting from just the awards component of programs. This is a shame!

So what changed? I can make an educated guess. For years, it was common industry practice to not charge for the program design, management, measurement and communications design. The full-service incentive companies gave all this away as a cost of doing business and made up their profits on the high-margin communications pieces and the awards—specifically the merchandise awards. It was not uncommon for these companies to be selling merchandise, guised in points, at very inflated prices—often 50 to 100 percent above retail.

Over 20 years ago we held a meeting in which we invited a high-level executive from McKinsey & Company, the well-respected business consultancy, to come and listen to our plight of shrinking profits. After listening to what we did, how we did it and touring our college-like campus, he said, "I'm very impressed by what your company does, but let me get this straight, you provide all the design, management and measurement services at no cost and give away your intellectual property, while trying to make your profit on selling what is essentially a commodity?"

The eyes of our chief executives opened in amazement, the smirk on the faces of the sales executives was palpable and the rest is history. From that day forward, we tried to change our entire pricing philosophy and invoice clients for all of our services. But, unfortunately, the sales force was very reluctant to make the change, and the clients were less than agreeable to being billed for what they had been receiving for nothing.

As time went on, more and more companies got into the business, the competition stiffened and the small companies started nipping at the heels of major incentive companies. Today it is not uncommon to find multimillion-dollar programs in the hands of very capable small, local incentive companies that provide tremendous service for the profit derived from awards fulfillment. Most of these companies don't have the resources to provide analytical assessment and measurement, detailed program structure and design and marketing-firm-level communications campaigns. They leave a lot of those up to the client. But they can and do provide (and often exceed) any to all of the awards that are offered by the larger incentive companies.

If clients don't put much stock in our capabilities other than fulfillment, when they turn to us only to purchase what is essentially a commodity we should be expected to provide commodity pricing.

Ley Borlo is a partner at Incentives Inc., a full-service incentive company (www.incentivesinc.com). In over 35 years in the industry, he has achieved success in sales, sales management and corporate management with a leading incentive company. He founded Incentives Midwest LLC, a consultancy that educates companies on the vagaries of the awards side of the business. He writes a bimonthly column on the incentive industry from the perspective of someone who has purchased, sold and managed full-service incentive programs. Other topics he has written about the incentives industry can be found on his blog, www.yourbabysugly.com.

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