Who doesn't want a measure of the effort and resources employed to achieve a desired outcome? I think it's safe to say we all want that and that's probably why the term ROI is thrown around so much. ROI has become just a marketing buzz word, a term that makes us better about making a decisions to invest in services to achieve a specific outcome. It's meausured so it must be good right? Maybe...
I admit, when I was introduced to the concept of incentive program ROI I was a bit perplexed. I suppose it is because my professional background is dealing with numbers and my thinking was return on investment calculations were applied to only to investments in property, plant, equipment and the like. I guess you could say I am an ROI purist and actually I still am. Never in my wildest imagination did I think that ROI could be applied to the tangible and the intangible alike. As I began to educate myself in the world of incentive, recognition and rewards programs I learned otherwise. It is not an easy process to distill “true” return on investment for these programs, but I’ve learned it is absolutely possible.
In all transparency, my view of Incentive ROI is biased. Having partnered with Bob Dawson to reintroduce his ROI Modelfor incentive programs into the marketplace, I compare everything I read and every other model, methodology and claim against it. The biggest problem is that the term “ROI” has been thrown around so much that it has been reduced to a marketing buzz word, rather than a measurement of the incremental change to the bottom line. As you well know, the ROI buzzword tactic applies to many, many other types of service offerings as well.
So, how do you define ROI? It depends who you ask…
In terms of ROI for incentive programs, the definitions from the case study Measuring the ROI of Sales Incentive Programs sums it up well:
“Those in the financial arena view ROI as a precise measure of the financial outcomes (returns) arising from investments in projects and initiatives that involve capital expenditures.
Business managers think of ROI a little differently – in a more general sense and from a broader perspective. For them, the investment and outcome/results have more to do with “overall impact”, rather than an exact measurement of the financial return.”
According to a 2016 Incentive Federation, Inc. white paper, a study of US Companies using incentive programs award points, gift cards, incentive travel, and merchandise:
“84% of U.S. businesses use non-cash rewards to recognize and reward key audiences in the form of award points, gift cards, incentive travel, and merchandise – up from 74% in 2013. In 2015, U.S. businesses spent $90 billion on these types of non-cash rewards, up from $77 billion in 2013.”
I also read that the spend increased to $100 billion in 2016. Yet how many companies know the financial ROI of their investment in their programs? Do you know yours? Again, being an ROI purist or rather one in the “financial arena”, I’m talking about the ROI that is tied directly to the financial statements.
I know of two models that are viewed as “ROI Models” by and specific to the incentive, recognition and rewards industry. The methodologies more fully explained in the case study I mentioned above, Measuring the ROI of Sales Incentive Programs. One model is referred to as “Post-Hoc ROI Measurement”, after the fact, and the other “Outcome Based Measures of ROI”, a broader view of the business operation. The former method uses an estimated percentage attribution, the client’s best estimation, for the reported results after program completion, Post-Hoc. The results measured were only those areas of the business that were directly tied to the incentive programs, not the overall impact to the company financials. This model excludes potential impacts on other areas of the business which can either negatively or positively impact operating profit, not to mention cash flow.
The latter method, Dawson’s ROI Model, provides a more comprehensive view of assessing the impact of a sales incentive program, which means that the impact of the program on other departments within the company are considered prior to program implementation. Assessing the impact from the beginning and for the duration of the program decreases the likelihood of unintended results, provides a better estimate of resources needed for the program (not just for the rewards) and identifies objectives other than sales, to include in the program to help drive engagement and bottom-line profitability.
The prevailing challenge for the C-Suite is proving causation or attribution. Most realize that incentive programs are useful, but quantifying their value is often a mystery. Being able to quantify the bottom-line impact of an incentive program is critical to knowing its true ROI.
How do we quantify the bottom-line impact? Dawson’s model begins with desired outcomes and clarifying objectives based on the company business cycle. Once the objectives are defined, an Impact Analysis is conducted to account for both internal and external factors that may impact the program. Then the program budget can be created.
Developing the budget begins with establishing a baseline, what the company’s projected results would be without a program and includes any other initiatives the company may be implementing at the same time. That is followed by case scenarios that project the incremental impact above and beyond the baseline which includes incremental income, the program budget and the program ROI. They key to attribution is planning/monitoring for the incremental impact, the incremental revenue increase, the incremental costs and the cost of the program itself.
Of course, pre-program analysis and planning would not be complete without a view of best-in-class metrics according to industry classification code (NAICS) and company revenue size.
The C-Suite, Board of Directors and shareholders want true ROI, the financial kind. Based on your metrics what would happen to your incremental income/your ROI from a sales increase due to an incentive program? How does an ROI Incentive Program Budget compare to your line-item budgeted program expense? How could investing in your ROI program change your bottom line, your cash flow or your gross margin?
Stop drinking the Kool-Aid...if you're ready to see the difference an ROI Incentive Program can make on your finanical performance, bottom-line profit and true ROI, the financail kind, click below and let's talk..