Setting attainable goals is essential to motivating your customers to perform in your incentive program, as is offering them an exciting award to peak their interest to participate in the first place. These two elements have to be in sync for an effective strategy to be realized. Once these ingredients are baked into your program, your ROI may be even better than you hoped for in the beginning, due to what we incentive industry types call “program breakage.” Program breakage occurs when a customer exceeds their purchase goal or when they come close to earning an award but fall just short. The incremental dollars generated in these two examples equate to profits for the distributor that are free and clear of any award investments.
To use the first case of program breakage, let’s say a distributor is requiring contractor “X” to grow by $100,000 in a 12-month period at a 30% average gross profit margin. The incentive being offered is a trip to Hawaii at a cost of $7,500. Once contractor “X” achieves their goal, the distributor’s incremental gross profit margin would be $30,000. The distributor would then take 25% of that amount ($7,500) to cover the cost of the trip and pocket the balance of $22,500. Program breakage would be a factor in this scenario if let’s say customer “X” grew by $140,000, leaving the distributor with an additional $40,000 of “program breakage,” which would amount to $12,000 in additional profits. In this example, the program breakage reduced the overall award investment percentage of the incremental gross profit dollars generated from 25% to 18%. In other words, the distributor would have been able to bank an additional $12,000 as a result of customer “X” exceeding their goal by $40,000.
In many cases, motivated customers won’t stop buying after they achieve their goal. When the fundamentals are in place, good things can and will happen.