Incentive Industry AnalysisIncentive Industry Analysis

December 2001December 2001

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Industry OverviewIndustry Overview

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What is an Incentive Marketing program?What is an Incentive Marketing program?

• Employee incentive programsEmployee incentive programs - provide incentives such - provide incentives such as merchandise and gift certificates to reward good as merchandise and gift certificates to reward good employees with the goal to retain them, lift loyalty, employees with the goal to retain them, lift loyalty, boost performance and eventually increase company boost performance and eventually increase company salessales

• Consumer incentive programConsumer incentive program - provide incentives such - provide incentives such as travel mileage and merchandise to consumers with as travel mileage and merchandise to consumers with the goal to retain valuable existing users and attract the goal to retain valuable existing users and attract new customers, and to eventually maximize new customers, and to eventually maximize profitability. profitability.

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Incentive industry had a total revenue of Incentive industry had a total revenue of $26.9B in 2000$26.9B in 2000

Consumer Incentives$4.3B, 16%

Employee incentives$22.6B, 84%

2000 total revenue breakdown 2000 total revenue breakdown

Source: 2000 Incentive Federation Study

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Overall, the incentive industry has been Overall, the incentive industry has been expanding market over yearsexpanding market over years

• 26%

• 22.8B

1997199719971997 2000200020002000

• 26.9B

• 32%

Total Revenue

Percentage of US firms using

incentive programs

Source: Incentive Survey 2000

IncreaseIncreaseIncreaseIncrease

• 17%

• 6%

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Merchandise & certificates Travel Others

Travel accounts for almost half of the total Travel accounts for almost half of the total consumer incentive revenueconsumer incentive revenue

$26.9B

Consumer

Employee

Source: 2000 Incentive Federation Study

48%

45%

7%

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80%

10%

5%5%

Awards Communication & promotion Administration Training & others

Award cost is the key driver in consumer Award cost is the key driver in consumer incentive program (80% of costs)incentive program (80% of costs)

Source: Incentive Marketing Organization 2000

Typical Consumer Incentive Program Cost Structure Typical Consumer Incentive Program Cost Structure

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The top 20 firms make up only 35% of total The top 20 firms make up only 35% of total consumer incentive revenueconsumer incentive revenue

Source: Company reports and industry data

No. of firms% of total

revenue contribution

Top 20

>5,000

35%

65%

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9%

7%

7%

5%

2%

2%67% 1%

Trilegiant

Maritz Loyalty

Carlson Marketing

AEIS

ITA group

Market Innovators

EGR International

Others

Largest players are created through vertical Largest players are created through vertical integration in the travel related industryintegration in the travel related industry

Source: Company, industry data and estimates

Revenue distribution among industry players Revenue distribution among industry players

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The manufacturing industry is leader in using The manufacturing industry is leader in using consumer incentive programsconsumer incentive programs

39%

27% 28%32%

27%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Manufacture

Distribution/retail

Services

Financial

Others

Percentage of firms using consumer incentive programs by sector

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41%

56%

3%

Increase Same Decrease

The financial industry will increase incentive The financial industry will increase incentive spend to acquire and retain customersspend to acquire and retain customers

Source: Incentive Survey 2000

Breakdown of consumer program users in financial industry regarding future budget plan

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And consumer incentive program users are And consumer incentive program users are usually large firmsusually large firms

Source: Incentive Survey 2000

9%

25%

40%

53%

0%

10%

20%

30%

40%

50%

60%

1~9 10~99 100~999 1,000 +No. of employees

% u

se r

ewar

d pr

ogra

m

Distribution of program users by sizes Distribution of program users by sizes

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Industry Business ModelsIndustry Business Models

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Three potential transaction models exist for Three potential transaction models exist for the consumer incentive marketplacethe consumer incentive marketplace

Card HoldersCard Holders

Service providers, merchant manufacturers and distributors Service providers, merchant manufacturers and distributors

FulfillmentFulfillmentProvidersProviders

OnlyOnly

Full-solutionFull-solutionIncentiveIncentiveProgramProgram

Program ClientsProgram Clients

Model I Model II Model III

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““Model III” has the highest complexity in Model III” has the highest complexity in supply chainsupply chain

• Normally product-based rather Normally product-based rather than service-basedthan service-based

• Client owns customer Client owns customer relationshiprelationship

• Directly working with services or Directly working with services or products providers who normally products providers who normally have adequate fulfillment and have adequate fulfillment and customer service capabilitycustomer service capability

• Usually service/product provider Usually service/product provider own relationship with customerown relationship with customer

CharacteristicsCharacteristicsCharacteristicsCharacteristics ApplicationApplicationApplicationApplication

Model IModel I

Model IIModel II

Model IIIModel III

• Specialty products for Specialty products for niche, targeted niche, targeted programsprograms

• Acquiring new Acquiring new customerscustomers

• High requirements for High requirements for customer servicescustomer services

• Full redemption Full redemption solutionssolutions

• Retaining and Retaining and attracting customersattracting customers

• Service/products supply chain are Service/products supply chain are complex and diversecomplex and diverse

• Both clients and incentive Both clients and incentive program providers own customer program providers own customer relationshiprelationship

• Small, commodity type Small, commodity type gifts/awards for mass gifts/awards for mass reward consumersreward consumers

• Retaining customersRetaining customers

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Cash is the most effective incentive for Cash is the most effective incentive for consumersconsumers

Effectiveness rating for loyalty items

Source: Incentive Central 2000

10

8.6

8.4

8.3

0 2 4 6 8 10 12

Cash / certificate

Discount / Rebates

Travel

Merchandise

Effectiveness rating

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““Freddie” award winners (best-in-class) use Freddie” award winners (best-in-class) use full redemption solutionsfull redemption solutions

Source: Freddie Award 2001

Dinner ClubDinner ClubDinner ClubDinner Club AMEXAMEXAMEXAMEX

Travel RelatedTravel Related

Cash CertificatesCash Certificates

MerchandiseMerchandise

Online ShoppingOnline Shopping

Points/MilesPoints/MilesExchangeExchange

AAdvantageAAdvantageAAdvantageAAdvantage

Status UpgradeStatus Upgrade

Feat

ures

Feat

ures

Func

tions

Func

tions

More than 90% of all reward cards provide full solutionMore than 90% of all reward cards provide full solution

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Current IndustryCurrent IndustryForces & DynamicsForces & Dynamics

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• Merchandise suppliers have little Merchandise suppliers have little power in the commodity marketpower in the commodity market

• Specialty providers have more leverageSpecialty providers have more leverage

• Suppliers such as travel agency and Suppliers such as travel agency and airlines expand to reward programairlines expand to reward program

• Internet makes online entrants easierInternet makes online entrants easier

AttributesAttributesAttributesAttributes Industry ImpactsIndustry ImpactsIndustry ImpactsIndustry Impacts

New EntrantsNew Entrants

SupplierSupplier

CustomersCustomers

• New entrants emerge both New entrants emerge both online and offline online and offline intensifying competitionintensifying competition

• Fragmented, diverse Fragmented, diverse supplier environment supplier environment have minimal impacthave minimal impact

• Customers don’t have adequate Customers don’t have adequate information on this relatively information on this relatively young industryyoung industry

• Established, brand-name Established, brand-name programs are favoredprograms are favored

New entrants is the most important force in New entrants is the most important force in the industrythe industry

Industry RivalryIndustry Rivalry• Competition is intense, due to low Competition is intense, due to low

differentiation and easy entry, differentiation and easy entry, particularly for online playersparticularly for online players

• Increasing M&A activitiesIncreasing M&A activities

• Merger between online and Merger between online and traditional playerstraditional players

SubstitutesSubstitutes• In-house reward program vs. In-house reward program vs.

outsourcingoutsourcing• Minimal - non-competence Minimal - non-competence

for customersfor customers

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• Provide travel related, merchandise, certificates and almost all consumable services and goods

• Established players are buying smaller players, particularly online players

StrategiesStrategiesStrategiesStrategies GoalsGoalsGoalsGoals

• Increase service capability and bargain power

• Increase appeal to mass market and meet competition

• Own travel agencies

• Build fulfillment processes

• Simplify complexity for customers and increase bargain powers

Program providers have been adopting four Program providers have been adopting four major strategiesmajor strategies

M&AM&A

FullFullSolutionSolution

VerticalVerticalIntegrationIntegration

• Provide online exchange, buy/give capability and others

• Increase appeal to mass market and meet competition

FlexibilityFlexibility

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Sourcing ImplicationsSourcing Implications

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High complexity and low differentiation High complexity and low differentiation indicate a opportunistic approachindicate a opportunistic approach

SupplySupplyComplexityComplexity

SupplierDifferentiation

LowLow HighHighLowLow

HighHighStrategic Cooperation

- Long term partnership- Maximize value creation- Focus on wants

Commodity Sourcing

- Seek best deals- Focus on needs- Short-term and transaction based

Opportunistic Approach

- Reduce supplier dependency- Increase supply certainty

Tactical Cooperation

- Mid term partnership- Focus on improvement

Source: Adopted from Peter Kraljic, HBR

Incentive ProgramIncentive ProgramIncentive ProgramIncentive Program

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• Carlson Marketing Group

• MARITZ Loyalty Group

• Business Incentive

• Marketing Innovators

• SHC Direct

Tier OneTier One>10 million>10 million

Supplier Short ListSupplier Short List

• Enhancement Service Group

• Incentive Solution

• All Star Incentive Marketing

• Dittman Incentive

• MMS Incentive

• Clarity Incentive Services

• Xceleration

• Hinda Incentive

• Affina

Tier TwoTier Two> 1 million> 1 million

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AppendixAppendix

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5%

25%

100%

0%

20%

40%

60%

80%

100%

120%

Retention Profit Growth

A 5% increase in consumer retention can A 5% increase in consumer retention can achieve 25% profit and 100% revenue growthachieve 25% profit and 100% revenue growth

Source: Journal of Marketing, 1996