Price vs. Incentives

Recently I had a client ask whether price or an incentive program has a greater ability to drive performance in the current marketplace environment.

While there is no right or wrong answer, there are a number of reasons why a proactive, aggressive, performance-oriented marketing strategy can help a company survive and thrive during challenging economic conditions. Incentives such as merchandise giveaways, trips to vacation spots, sports tickets and discounts such as prepaid gas cards can be a high-visibility focal point for a marketing campaign. Here are some reasons the incentives work.

Distribution is a market-share game

While the pie may not be growing, and may even be contracting, your objective is to gain a greater share of that pie. To accomplish this, it's important to provide customers with another reason to do business with you. A good incentive program can do just that.

For independent distributors, an incentive program can create a point of differentiation versus the national chains. Incentives can help you take share from the chains among existing customers by penetrating accounts that are small to mid-sized for you but potentially larger for someone else. Incentives also are an effective method for getting the attention of new accounts.

The contractor wants to know, “What's in it for me?”

An incentive program speaks directly to this issue. It enables them to take a trip, or earn merchandise rewards, for free. Price concessions inevitably are passed on to their customers. In today's economic environment, with consumers cutting back on discretionary expenditures, “free rewards” can go even further than during boom times. Consider the power of a free LCD television, a free computer, free gas, etc. — the kinds of rewards customers would rather keep for themselves than pass on to their customers.

Incentives can pay for themselves

Ideally a program is structured to be self-liquidating. That means the incremental gross margin generated from a customer's increased purchases pays for the cost of the program. With manufacturer funding to offset fixed program costs, even more of the incremental gross margin can go to the bottom line. Conversely, if you use that same investment to lower your prices, price deterioration continues to erode gross and net profit margins and eventually contributes to lower market pricing (with limited ability to eventually grow your margin).

Hold your margins without disadvantaging your customers

Contractors earn business based on their relationships with their customers, on their ability to handle the project, on their credibility and, to a lesser degree, on price. They do need to be price-competitive, but labor is the primary driver of a contractor's pricing, not materials.

Any strategy you consider needs to be price-competitive as well, but incentives enable you to be competitive without having the lowest price in the market. In fact, during the last three months of a program, it's sometimes possible to slightly increase margins for customers who are striving to earn the reward.

Price cuts make life easy for your competition

Price is the easiest marketing tool for your competition to compete against. They simply have to lower their prices to meet, or beat, you. Many distributor salespeople already use price as their preferred sales tool.

Fair price and good service are prerequisites to earning business from a contractor. A “cherry on the cheesecake” helps capture the business. Incentives such as travel can also be a powerful way to solidify relationships with customers. Practically all distributors who have conducted travel programs rave about the opportunity to thank customers for their business and to strengthen their relationships with customers and their spouses.

One caveat about incentive programs is that, to a significant degree, their success depends upon the support of your sales organization. Your sales force must work to register customers and use the program as a tool to capture business. An aggressive, consistent marketing communications campaign can help position the company with customers, reinforce the value you add, highlight key manufacturers and solicit business by keeping the program “front of mind.” Sales helps ask for the business. Consider using monthly analysis reports to help guide your sales organization.

Incentives add drive to your top line

From the perspective of a “down” year, there are essentially three strategies a company can take. It can reduce operational costs commensurate with sales declines in an attempt to retain profitability. It can make minor changes and hope to survive. Or, it can view the downturn as a growth opportunity and sell its way out of the slump. Companies that have a vision of where they want to take their business — and the resources to invest and take advantage of opportunities — can grow in many ways. They may open locations, make acquisitions, hire quality people, invest in marketing, and so forth. Research has shown that companies that invest in sales and marketing typically grow during a downturn and experience accelerated growth when the economy rebounds.

Given this, investing in incentives represents an opportunity.

David Gordon is a principal of Channel Marketing Group Inc. Channel Marketing Group develops growth strategies for manufacturers and distributors. He can be reached via e-mail at [email protected]. Visit his blog at www.electricaltrends.com.

Incentive Programs Work

According to a 2005 survey conducted by Channel Marketing Group:

• 69.5% of contractors responded that incentive programs change/ sometimes change their purchase behavior

• 57.1% of respondents stated that incentive programs can differentiate one distributor from another

• Desired rewards were merchandise award catalogs (40%); individual travel (17%); group travel (14%); select merchandise (11%); and gift cards (8%)