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WHITE PAPER ITA Group, Inc.

Audience Segmentation and Targeted Strategies Impact ROI on Incentives Five steps to greater ROI for your incentive programs.

Marketers know that the key to developing a successful marketing plan is to segment the market, profile each segment and then develop strategies to motivate behavior in the targeted segments. The same is true for developing a successful performance management program. Through audience segmentation and strategic program design, participants at ALL performance levels can be motivated to improve productivity. Are Incentive Programs Worth the Investment? Companies invest millions of dollars in performance improvement programs because welldesigned and well-executed programs work. A recent study produced by the Society of Incentive and Travel Executives (SITE) Foundation confirms the positive impact. According to the study, incentive and recognition programs increase work performance by an average of 22 percent. The study also found that incentives help to create a more positive work environment, which translates into higher employee and customer satisfaction. According to the president of the SITE Foundation, “Incentive programs may be the single most important performance improvement tool available to executives today.” Return on investment (ROI) is also the measure that should be used to determine the success of a performance incentive plan or to decide whether to implement such a program at all. The question that must be answered is: “Will spending money on the program generate an equal or greater return than spending those marketing dollars in some other way?” It is clear that not all performance improvement programs are created equally, or, more importantly, generate equal returns on the company’s investment. There are several key elements in the program creation and implementation process that all need to be well-executed to ensure positive results. These elements include award selection, communication, training, administration and ongoing measurement and tracking. However, it is the up-front analysis and audience segmentation—

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so critical to the success of any marketing initiative—that is key in developing a successful incentive program. While audience behavior drives program results, thorough analysis as the preface to program development will identify behaviors that will most significantly impact ROI. A detailed up-front assessment, both cultural and financial, ensures that a program will meet business needs, and that strategies can be implemented to engage employees at all levels of a company—not just the top performers.

The Road to Greater ROI The process leading to strategic program design can be summarized in five distinct steps: identifying program objectives, audience segmentation, goal-setting, financial forecasting and program design. Each step is illustrated in the following pages using the example of one large financial services company, but can be applied to companies across all industries.

1. Identifying Program Objectives Clearly identifying the business issues that need to be addressed by the performance improvement program is the first step in the process. Typically, business needs go beyond specific employee or channel issues to broader company issues, such as increasing sales, profit margins or customer satisfaction. In the financial services example, the primary program objective was very specific— to increase the revenue generated by loans written in industry-specific dealerships within the company’s dealer network. In addition to revenue growth, the company also wanted to increase the number of dealerships writing loans, maintain consistent monthly production among mid-level performing dealers, and maintain loyalty among top dealers. Past performance improvement programs targeted at these channel partners had consisted of basic award cash payouts, which proved to be ineffective in growing sales.

2. Audience Segmentation The development of a performance incentive program can benefit significantly from applying a standard marketer’s approach of segmenting the market, understanding the segments and then customizing the marketing mix to target each segment deemed to be profitable. Market segmentation, or in the case of performance improvement program design, audience segmentation, is the process of dividing the audience into distinct subsets that behave in a similar manner and have similar needs. The premise is that each segment will be fairly homogenous in its attitudes and abilities, and will likely respond similarly to given incentives. Much has been written as of late about one particular audience segment—the importance of motivating “the middle 60.” It is true that sizable productivity gains can be made by motivating the many individuals in that middle tier to perform just a little bit better. However, it is also true that the size of the middle tier varies greatly from one company to another. For one company, middle performers—or B players—may comprise 60 percent of the audience, while B players could constitute 80 percent of another organization’s employee or dealer mix. To be accurate and ultimately ensure that programs are designed to meet the unique needs of each organization, companies need to move away from the “middle 60” terminology. Each company, along with its performance marketing partner, must determine how best to define its own tier structure. Although the importance of B players has been generating quite a buzz in the performance marketing industry, as well as in corporate management thought and academia, a segment that often tends to be overlooked in many programs is the third tier— or the C players. As will be proven in the example, understanding the third tier and strategically targeting program elements toward these performers generated millions of incremental dollars in revenue that otherwise would have remained untapped. While additional cultural and market information is essential in rounding out the picture, the heart of audience segmentation rests in the analysis of past performance data at the individual

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level. In the case of the financial services company, 12 months worth of sales data at the individual dealership level was analyzed. The analysis revealed that:

» Dealers fell into three performance tiers. The top tier comprised 4 percent of the dealer network that generated at least $1.24M in loans annually. The middle tier comprised 44 percent of the dealer network that generated $1,000–$1.24M in loans annually. And the bottom tier comprised the remaining 52 percent of the network writing no loans during the previous year.

» The 4 percent in the top tier are producing 53 percent of all of the loan volume. » Loan volume declined between August and November. » The average value of individual loans remained relatively steady over the last nine months of the year. The two primary implications for program design included the facts that the best opportunity for growth fell within the bottom and middle tiers, and the seasonal declines in loan volume signified the need for spurt programs to energize efforts during those down periods. The analysis, along with conversations with the client, also revealed the importance of fostering the relationship between the organization’s employees and the dealer structure in encouraging behavior changes among this independent channel network.

3. Goal-setting The third step in the upfront assessment process is the determination of realistic performance goals for each segment. All too often, companies make the mistake of setting performance goals arbitrarily without fully utilizing the direction that past performance data, current market conditions and proven statistical forecasting and goal-setting techniques can provide. Goals set too high may intimidate the audience and fail to engage them, while goals set too low generate performance results well below what is possible. Proper goal-setting is both an art and a science. Statistics and forecasting techniques drive the science behind the calculation of performance improvement goals. However, the art of incorporating the effects of internal business initiatives and external market conditions on those statistics is what results in performance goals that are realistic and achievable, yet still motivate the audience to achieve at higher levels. Creating multiple performance benchmarks is a way to ensure a complete and accurate assessment of past performance data, which is the foundation for future performance forecasting. Multiple benchmarks may include various time periods, various market condition scenarios and alternate performance measures such as sales units, sales volume, production, turnover or participant engagement. For this particular financial services client, statistical analysis and input from the client resulted in the following goals for the three dealer tiers:

Tier I: Maintain last year’s production Tier II: Write four to five loans per month Tier III: Write three loans over the course of the year 4. Financial Forecasting Using the forecasted performance goals, program scenarios for multi-tiered rule structures and award values, a proforma statement can assess each program scenario’s breakeven point and predicted return on investment. The proforma can be used to determine which program components will result in the greatest increases in productivity and revenue. The predicted ROI then becomes the measuring stick for the success of the program. Performance should be

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tracked against the proforma on a regular basis throughout the duration of the program to ensure it is on track to meet the end-of-program goals. In evaluating the financial success of a performance improvement program it is also necessary to be mindful of the fact that other company initiatives can significantly impact the results of the program. Other company activities, such as marketing initiatives, sales directives, compensation changes and concurrent reward and recognition programs must be accounted for. Although it is a challenge, every effort should be made to isolate the impact of the specific performance improvement program being evaluated. This can be done with multiple performance benchmarks and pre-determined test groups. In this particular instance, the proforma revealed that incremental production growth, less the cost of the program, required that the client needed only 2,025 loans to break even. The incremental growth projection showed that by simply motivating 10 percent of the bottom tier dealers to generate three loans throughout the year, the breakeven number of loans could be achieved. The predicted ROI for the three-tier program was $98M.

5. Program Design Once audience segments have been identified and investigated, and goals have been set for each tier, the work begins on designing a program that will encourage the desired behaviors within each segment. Oftentimes, this is best achieved by the combined efforts of a crossfunctional team made up of experts in strategy, analysis, awards, communication and administration. Long-term performance changes are motivated via long-term program strategies, while more immediate or very specific performance goals are motivated by working shorter spurt initiatives into the long-term program. Industry best practices support the use of programs—especially among B and C players— in which participants earn rewards through the accumulation of points, as opposed to a cash pay out. The philosophy behind merchandise versus monetary rewards is simply that $1 worth of merchandise can generate more than $1 worth of value in the eyes of the participants. The same cannot be said of a $1 cash payout. One dollar tends to get lost in a participants’ regular compensation and begins being viewed as an entitlement. In our example, engagement of the dealers within all three tiers was the final goal. To that end, the following elements were designed in their customized performance improvement program:

» To enhance loyalty and to reward dealers for working toward the goal, points were awarded for every $20,000 in business generated. Once the dealers’ goals were met, points were doubled.

» For the first three months of the program, a Fast Start Bonus was implemented. Tier III dealerships received points (plus their regular program earnings) for the first three loans written.

»A  n on-going monthly Spin-and-Win program component encouraged consistency in loan volume. Participants earned one “spin” on the online Spin-and-Win game tool each month they generated at least $100,000 in loan volume. Each spin earned them additional program points.

» To enhance loan volume during the slower October and November time period, additional bonus opportunities were made available to dealers in all tiers during those months.

» To bolster spring volume, a seasonal promotion was offered for dealers within one particular industry.

» Key program information such as rules, an online awards catalog and program reporting was provided through a custom-designed program website.

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The Results This program, which was designed strategically to engage and motivate dealers at all levels exceeded expectations. The objectives of the program were to incent top-performing dealers to produce the same amount of revenue they produced in the previous year, and to increase productivity most significantly among dealers in the second and third tiers, which it did:

» Tier I dealers enrolled in the program grew their loan volume by 3 percent over the previous year, exceeding the goal of maintaining last year’s production.

» Tier II dealers enrolled in the program increased their loan volume by 83 percent over the previous year, generating $1.1B in loan volume.

» Tier III dealers who hadn’t produced any loans during the past 12 months generated $224M in loan volume over the course of the 12-month program.

Lessons to be Learned For best program results, the audience needs to be segmented into tiers based on past performance. Then targeted strategies must be devised and implemented to motivate each of the segments of interest. In addition, this client’s experience illustrates very clearly the fact that B and C players can not only contribute to the financial return of a program, they can actually drive its success.

Learn more of our story at itagroup.com. About ITA Group We create and manage events, incentives and recognition programs that align and motivate your people. ITA Group has operations in Atlanta, Boca Raton, Chicago, Dallas, Des Moines, Detroit, Indianapolis, Los Angeles, Minneapolis, Philadelphia, San Francisco and the greater New York City area.

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ITA Group® and Driven by Loyalty® are registered service marks of ITA Group, Inc., and the associated design/logo is a service mark of ITA Group, Inc. All rights reserved.

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