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Sometimes marketing managers shy away from using incentives because they think they can’t afford to incorporate them into their budget. They think they have to offer something irresistible, and therefore expensive, so they don’t even try. Others who do use incentives think that they have to exaggerate the value of the incentive to get the desired result. My experience is that neither is necessary or true.
We recently released a new Spiff program because most of our travel certificates had a perceived value of $300 to $1000. We needed an incentive that had a perceived value of around $50 for purchases under $1000. Even if you are willing to buy a high value incentive for a sale this small, a potential customer would have to wonder why you are giving away an incentive that is worth almost as much as the product you are selling. Worse yet, if you exaggerate the value of the incentive, well, that gets you in all sorts of trouble. Either way, common sense tells the customer that this cannot work and thus the incentive actually works against you.
If you are selling a product for around the same price as your competitor, how much more value do you need to add to get the sale? You’d be surprised to find out that it’s not very much at all. When I’m designing a promo for a client I use the 5% rule. That is - the perceived value of your incentive should be about 5% of the sales price of your product. That’s the “Perceived Value”, not the cost of the incentive.
The spiff program we came up with was a complimentary membership to our Condo Vacation Club, a perceived value of $49.95 because we sell them every day on our web site for that amount. We packaged these membership cards in a pad of 100 and we sell the pad for $199, or less than $2 for each membership. This a very low cost to value but we have an incentive to build our travel club membership and considered than in setting our price. For the most part, you should expect that the cost of the incentive would be around 10% of its perceived value.
So, if you do the math, you come in with an actual incentive cost of about a half a percent of your sales price or maybe even a little less. Now anyone can build that into a marketing program, especially when you compare this against further discounting your products.
Tags: bonuses, incentives, pricing, product pricing, profitability, purchasing strategy, sales incentives, spiffs, travel certificates, travel club
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