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Incentive Industry AnalysisIncentive Industry Analysis
December 2001December 2001
2
Industry OverviewIndustry Overview
3
What is an Incentive Marketing program?What is an Incentive Marketing program?
• Employee incentive programsEmployee incentive programs - provide incentives such - provide incentives such as merchandise and gift certificates to reward good as merchandise and gift certificates to reward good employees with the goal to retain them, lift loyalty, employees with the goal to retain them, lift loyalty, boost performance and eventually increase company boost performance and eventually increase company salessales
• Consumer incentive programConsumer incentive program - provide incentives such - provide incentives such as travel mileage and merchandise to consumers with as travel mileage and merchandise to consumers with the goal to retain valuable existing users and attract the goal to retain valuable existing users and attract new customers, and to eventually maximize new customers, and to eventually maximize profitability. profitability.
4
Incentive industry had a total revenue of Incentive industry had a total revenue of $26.9B in 2000$26.9B in 2000
Consumer Incentives$4.3B, 16%
Employee incentives$22.6B, 84%
2000 total revenue breakdown 2000 total revenue breakdown
Source: 2000 Incentive Federation Study
5
Overall, the incentive industry has been Overall, the incentive industry has been expanding market over yearsexpanding market over years
• 26%
• 22.8B
1997199719971997 2000200020002000
• 26.9B
• 32%
Total Revenue
Percentage of US firms using
incentive programs
Source: Incentive Survey 2000
IncreaseIncreaseIncreaseIncrease
• 17%
• 6%
6
Merchandise & certificates Travel Others
Travel accounts for almost half of the total Travel accounts for almost half of the total consumer incentive revenueconsumer incentive revenue
$26.9B
Consumer
Employee
Source: 2000 Incentive Federation Study
48%
45%
7%
7
80%
10%
5%5%
Awards Communication & promotion Administration Training & others
Award cost is the key driver in consumer Award cost is the key driver in consumer incentive program (80% of costs)incentive program (80% of costs)
Source: Incentive Marketing Organization 2000
Typical Consumer Incentive Program Cost Structure Typical Consumer Incentive Program Cost Structure
8
The top 20 firms make up only 35% of total The top 20 firms make up only 35% of total consumer incentive revenueconsumer incentive revenue
Source: Company reports and industry data
No. of firms% of total
revenue contribution
Top 20
>5,000
35%
65%
9
9%
7%
7%
5%
2%
2%67% 1%
Trilegiant
Maritz Loyalty
Carlson Marketing
AEIS
ITA group
Market Innovators
EGR International
Others
Largest players are created through vertical Largest players are created through vertical integration in the travel related industryintegration in the travel related industry
Source: Company, industry data and estimates
Revenue distribution among industry players Revenue distribution among industry players
10
The manufacturing industry is leader in using The manufacturing industry is leader in using consumer incentive programsconsumer incentive programs
39%
27% 28%32%
27%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Manufacture
Distribution/retail
Services
Financial
Others
Percentage of firms using consumer incentive programs by sector
11
41%
56%
3%
Increase Same Decrease
The financial industry will increase incentive The financial industry will increase incentive spend to acquire and retain customersspend to acquire and retain customers
Source: Incentive Survey 2000
Breakdown of consumer program users in financial industry regarding future budget plan
12
And consumer incentive program users are And consumer incentive program users are usually large firmsusually large firms
Source: Incentive Survey 2000
9%
25%
40%
53%
0%
10%
20%
30%
40%
50%
60%
1~9 10~99 100~999 1,000 +No. of employees
% u
se r
ewar
d pr
ogra
m
Distribution of program users by sizes Distribution of program users by sizes
13
Industry Business ModelsIndustry Business Models
14
Three potential transaction models exist for Three potential transaction models exist for the consumer incentive marketplacethe consumer incentive marketplace
Card HoldersCard Holders
Service providers, merchant manufacturers and distributors Service providers, merchant manufacturers and distributors
FulfillmentFulfillmentProvidersProviders
OnlyOnly
Full-solutionFull-solutionIncentiveIncentiveProgramProgram
Program ClientsProgram Clients
Model I Model II Model III
15
““Model III” has the highest complexity in Model III” has the highest complexity in supply chainsupply chain
• Normally product-based rather Normally product-based rather than service-basedthan service-based
• Client owns customer Client owns customer relationshiprelationship
• Directly working with services or Directly working with services or products providers who normally products providers who normally have adequate fulfillment and have adequate fulfillment and customer service capabilitycustomer service capability
• Usually service/product provider Usually service/product provider own relationship with customerown relationship with customer
CharacteristicsCharacteristicsCharacteristicsCharacteristics ApplicationApplicationApplicationApplication
Model IModel I
Model IIModel II
Model IIIModel III
• Specialty products for Specialty products for niche, targeted niche, targeted programsprograms
• Acquiring new Acquiring new customerscustomers
• High requirements for High requirements for customer servicescustomer services
• Full redemption Full redemption solutionssolutions
• Retaining and Retaining and attracting customersattracting customers
• Service/products supply chain are Service/products supply chain are complex and diversecomplex and diverse
• Both clients and incentive Both clients and incentive program providers own customer program providers own customer relationshiprelationship
• Small, commodity type Small, commodity type gifts/awards for mass gifts/awards for mass reward consumersreward consumers
• Retaining customersRetaining customers
16
Cash is the most effective incentive for Cash is the most effective incentive for consumersconsumers
Effectiveness rating for loyalty items
Source: Incentive Central 2000
10
8.6
8.4
8.3
0 2 4 6 8 10 12
Cash / certificate
Discount / Rebates
Travel
Merchandise
Effectiveness rating
17
““Freddie” award winners (best-in-class) use Freddie” award winners (best-in-class) use full redemption solutionsfull redemption solutions
Source: Freddie Award 2001
Dinner ClubDinner ClubDinner ClubDinner Club AMEXAMEXAMEXAMEX
Travel RelatedTravel Related
Cash CertificatesCash Certificates
MerchandiseMerchandise
Online ShoppingOnline Shopping
Points/MilesPoints/MilesExchangeExchange
AAdvantageAAdvantageAAdvantageAAdvantage
Status UpgradeStatus Upgrade
Feat
ures
Feat
ures
Func
tions
Func
tions
More than 90% of all reward cards provide full solutionMore than 90% of all reward cards provide full solution
18
Current IndustryCurrent IndustryForces & DynamicsForces & Dynamics
19
• Merchandise suppliers have little Merchandise suppliers have little power in the commodity marketpower in the commodity market
• Specialty providers have more leverageSpecialty providers have more leverage
• Suppliers such as travel agency and Suppliers such as travel agency and airlines expand to reward programairlines expand to reward program
• Internet makes online entrants easierInternet makes online entrants easier
AttributesAttributesAttributesAttributes Industry ImpactsIndustry ImpactsIndustry ImpactsIndustry Impacts
New EntrantsNew Entrants
SupplierSupplier
CustomersCustomers
• New entrants emerge both New entrants emerge both online and offline online and offline intensifying competitionintensifying competition
• Fragmented, diverse Fragmented, diverse supplier environment supplier environment have minimal impacthave minimal impact
• Customers don’t have adequate Customers don’t have adequate information on this relatively information on this relatively young industryyoung industry
• Established, brand-name Established, brand-name programs are favoredprograms are favored
New entrants is the most important force in New entrants is the most important force in the industrythe industry
Industry RivalryIndustry Rivalry• Competition is intense, due to low Competition is intense, due to low
differentiation and easy entry, differentiation and easy entry, particularly for online playersparticularly for online players
• Increasing M&A activitiesIncreasing M&A activities
• Merger between online and Merger between online and traditional playerstraditional players
SubstitutesSubstitutes• In-house reward program vs. In-house reward program vs.
outsourcingoutsourcing• Minimal - non-competence Minimal - non-competence
for customersfor customers
20
• Provide travel related, merchandise, certificates and almost all consumable services and goods
• Established players are buying smaller players, particularly online players
StrategiesStrategiesStrategiesStrategies GoalsGoalsGoalsGoals
• Increase service capability and bargain power
• Increase appeal to mass market and meet competition
• Own travel agencies
• Build fulfillment processes
• Simplify complexity for customers and increase bargain powers
Program providers have been adopting four Program providers have been adopting four major strategiesmajor strategies
M&AM&A
FullFullSolutionSolution
VerticalVerticalIntegrationIntegration
• Provide online exchange, buy/give capability and others
• Increase appeal to mass market and meet competition
FlexibilityFlexibility
21
Sourcing ImplicationsSourcing Implications
22
High complexity and low differentiation High complexity and low differentiation indicate a opportunistic approachindicate a opportunistic approach
SupplySupplyComplexityComplexity
SupplierDifferentiation
LowLow HighHighLowLow
HighHighStrategic Cooperation
- Long term partnership- Maximize value creation- Focus on wants
Commodity Sourcing
- Seek best deals- Focus on needs- Short-term and transaction based
Opportunistic Approach
- Reduce supplier dependency- Increase supply certainty
Tactical Cooperation
- Mid term partnership- Focus on improvement
Source: Adopted from Peter Kraljic, HBR
Incentive ProgramIncentive ProgramIncentive ProgramIncentive Program
23
• Carlson Marketing Group
• MARITZ Loyalty Group
• Business Incentive
• Marketing Innovators
• SHC Direct
Tier OneTier One>10 million>10 million
Supplier Short ListSupplier Short List
• Enhancement Service Group
• Incentive Solution
• All Star Incentive Marketing
• Dittman Incentive
• MMS Incentive
• Clarity Incentive Services
• Xceleration
• Hinda Incentive
• Affina
Tier TwoTier Two> 1 million> 1 million
24
AppendixAppendix
25
5%
25%
100%
0%
20%
40%
60%
80%
100%
120%
Retention Profit Growth
A 5% increase in consumer retention can A 5% increase in consumer retention can achieve 25% profit and 100% revenue growthachieve 25% profit and 100% revenue growth
Source: Journal of Marketing, 1996