In the purest sense, determining a Rewards Program ROI should be a Win-Win-Win proposition. The rewards program designer creates a program for their client or company to give points, cash or special benefits to program participants in exchange for completing certain activities. So the Company Wins because those activities lead to more revenue and/or profitability for the company. The Participant Wins because they get the goodies. And the Program Designer or Manager Wins when the program results achieve and/or exceed expectations. This post is written for the Program Designer.
Start with Your Personal ROI
That’s right. Make sure you’ve got the right mandate. Don’t be tricked into thinking that your success is based on simply getting the program launched. Or even to simply manage an already successful program. Ask yourself the same question you should ask on behalf of each of your program participant audiences — What’s in it for me? (WIFM).
Think ahead to your next annual review or contract renewal. Will the program be on-track to achieve or exceed its objectives? Will participants be likely to rave about it? Will the company want to continue it based on results? Will it enable you to meet your personal goals? Will you meet your MBOs to qualify for a well-deserved bonus? If you can’t answer each with an emphatic “Yes” then there’s work to do. And, I’d start by looking at the program’s design. Because the surest path to your personal success is ensuring a Win-Win for your stakeholders.
Rewards Program ROI – A Win for the Company
I like to think of an incentive program as if it were its own business. If it can’t be run profitably then it shouldn’t be operating for long. So, the first questions to consider are financial. And if the anticipated results don’t pencil out – don’t do it …or at least, don’t continue to run it the way you are running it!
Start with simple math. ROI = Net Margin from business growth (such as incremental sales or any outcome or behavior that leads to that outcome) less the cost of the Program over the cost of the Program. For example, let’s say you plan to grow a $50MM line of business by 20%. To do so, you need to sell an additional 1MM widgets (or apps) @ $ 10 each to equal $10MM in new revenue or upsell all current customers to your the new premium widgets that sell for 20% more. Or some combination of the two. Assuming a net margin of 35% results in $3.5MM net new margin or profitability. So if the all-in incentive program costs = $700K, then the return is 4:1 ($3.5MM-$700K/$700K =4) or 400%! Is 400% acceptable? That’s a great question and one that should spark some very interesting internal discussions. Assuming that it is acceptable and the reward program design provides a degree of confidence that the incentives will enable the company to achieve these objectives, then the Company Win is defined. And your incentive budget should be set at $700K.
So what happens if growth is half of Company forecast (10% rather than 20%) while your incentive costs are 90% of forecast? Then the ROI would be less than half ($1.75MM-$630K/$630K =1.77) or 177%! A handsome return but not nearly what your CFO was anticipating. Drop below 5% growth and the ROI could become less than break-even!
But you know that your Company’s business plan is solid. So let’s continue with the assumption above that the total incentive program costs = $700K. Assuming the cost of actual rewards = 80% of the overall program costs which leaves you with $560K in reward value or 5.6% of the incremental revenue of $10MM. How do we get the most impact from the budget available?
Program Rewards- A Win for the Participant
To be effective, rewards need to be big enough and well communicated to get a sales reps’ attention. For direct sales incentives (non-channel) the non-commission, non-salary incentives typically run as much as 8% of a sales employee’s total income – e.g., $8,000 in reward value for a sales rep with a $100,000 salary.
However, adapting that model to the channel is not a straight-forward exercise – after all the revenue generated by your product or service is only part of their overall compensation. What that percentage is varies widely – it’s not a completely linear equation to set the reward value. The point here is that not indexing the reward potential to the income level of your target audience can be a major mistake.
Set the incentives too low – and no one will pay attention; set them too high and you’ll risk overspending. Worse yet, you can create a dependency that will be hard to break in the future. Global marketers should pay particular attention to the ‘reward value’ in regions with large variances in employee earning capacity. So, how do you incentivize the growth without “overpaying” for existing business? We’ll address that on our next post.
Meanwhile, be sure your program is designed to make it easy to take advantage of each offer. Keep the program simple, communicate the rewards clearly and automate the process as much as possible.
If you need help, we would be happy to help, share best practices and work with you to optimize the impact of your rewards budget – the subject of our next post!