Do alternative funding models exist for performance incentive programs?
According to the Incentive Research Foundation (IRF), the average per-person cost of an incentive program is just shy of $4,000.
What’s more, 60% of respondents to the recent IRF study also claimed that costs are rising faster than budgets, leading the IRF to reasonably conclude that cost pressure is becoming one of the top ongoing constraints for incentive programs.
With cost continuing to be a concern for program planners, it’s fair to wonder if there are any best practices out there that might mitigate these concerns by requiring a smaller slice of a company’s budgetary pie.
In fact, there are a couple of alternative ways to fund incentive programs out there, and depending on what goals and strategies you have for your particular channel, these methods might be just what you’re looking for.
Alternative Funding Method #1: Market/Manufacturer Development Funds
A market development fund—also known as a marketing or manufacturer development fund (MDF)—is designed to help vendors and manufacturers penetrate new markets, create brand awareness, and help their channel with sales and marketing activities that are based around their products. When vendors implement an MDF, their main goal is to build strategic alliances and brand loyalty within their channel.
Typically, vendors allocate between 1%-2% of top-line revenue to these funds. This budget can be used in any number of ways, from product discounts and rebates to advertising, customer events, sales meetings or sponsorships.
Of course, one of the most effective uses of MDF funds can be to create a sales or channel incentive program or supplement an existing one.
For an example of how a company used its MDF to support its incentive program, download our success story, Remodeling Incentives: How to Construct an Enhanced Program…for Free.
Unfortunately, a good chunk of a vendor’s MDF often goes unused—depending on your source this number can be anywhere from 40%-60% of total MDF funds. The reasons for this vary, but can include:
- there is a significant gap between vendor processes and reseller capabilities
- significant lag time between dealer claims submissions and vendor reimbursement
- complicated or restrictive guidelines and processes
- lack of understanding of which partners are best to target
However, if vendors can be aware of and address the above issues then an MDF can actually be a useful way to alleviate incentive program budgetary concerns.
Manufacturers and vendors must shorten the time it takes to reimburse partners, simplify the fund guidelines and processes, provide marketing concierge services for those partners who need it, and recognize which partners are set up and motivated to actually use the funds effectively.
Only then will the MDF be fully utilized.
Alternative Funding Method #2: Co-Op Marketing Funds
Like MDFs, co-op marketing funds are often derived from 1%-2% of prior partner sales or purchases and are designed to help channel partners create local awareness of a national brand while promoting the company’s products and/or services.
Unlike MDFs, which are controlled by vendors and assigned to channel partners in anticipation of future sales, these funds are based on previous sales, may vary from dealer to dealer, and are typically controlled by channel partners once they are assigned.
Of course, vendors usually have agreements in place with their channel partners that dictate the ways this money can be spent and the reporting protocols for when it is.
As they are usually “accrual-based” and determined by sales history, these co-op funds also tend to reinforce existing partner behaviors in current markets rather than trying to anticipate new ones.
This leads to more of a fixed budget and funding thus is more predictable for channel partners, which means your partners can do a better job preparing for how they will spend that money.
This predictability lends itself to longer-term marketing activities such as annual incentive campaigns whose budgets must be more-or-less fixed from the outset.
Which Method Is Right For Me?
Which alternative funding method you choose depends in part on what your channel looks like.
Do you have established relationships with partners that you’re looking to reinforce? Or is your market more dynamic, offering new and enticing channels that you haven’t yet begun to sink your teeth into?
If you’re looking to stimulate channel partner activity that doesn’t yet exist, then a more discretionary MDF might be what you’re looking for.
However, if your channel partners tend to be smaller, and thus don’t have tons of resources to devote to complex marketing, then a more reliable co-op fund may be more appropriate.
Other determining factors include whether you’re looking to use your funds for.
Do you want to create a long-term incentive program or a short-term promotion?
Are you a vendor looking to stimulate activity among your dealer network, or a distributor trying to generate funds from a series of manufacturers?
Do your channel goals include partner development and enablement?
For more information on whether a MDF or co-op marketing fund can help support your next incentive program, promotion, or campaign, contact us at 888.220.4780 or email@example.com.