Money Talks: It’s Past Time That Marketers Reconsider Reward-Based Promotions

Recently, Bill Warshauer provided Target Marketing readers with a timely reminder of the efficacy of reward-based promotions and their utility in replacing discounts in the promotional mix. Now let’s take it a step further with some modeling.

Recently, Bill Warshauer provided Target Marketing readers with a timely reminder of the efficacy of reward-based promotions and their utility in replacing discounts in the promotional mix.

Extremely interested, I commented and a somewhat updated summary follows:

It is past time that marketers reconsider reward-based promotions.

Let me give you one simple case history.

Some years ago, a client, a leading bank, found that they were sending pre-approved but unrequested credit cards to customers and were getting unacceptably few people “deblocking” or “activating” their cards despite a regular monthly conversion series urging them with various incentives like no annual charges for one year, to accept and use the new cards. The low conversion rate, plus the costs of up to six efforts per prospect with no revenue, were at least discouraging.

When we were asked for help, we proposed turning this system on its head. Our objective was simple: incentivize card recipients to use their new cards immediately instead of allowing the costly slow drip from promotions over months: make them, as mafia lore says, an offer they couldn’t afford to refuse but we could afford to make.

To do this we designed an elaborate mailing to be sent without fail, the day after the card, rehearsing all the card holder benefits but telling the prospect there was another “secret” benefit which could only be had by calling a special toll-free number.

Having determined in advance, the allowable cost per active card, we knew that we could afford to offer $50 per active card user. The caller was not to be asked to “deblock” or “activate” their card (unnecessarily bureaucratic words in our view) but rather, “May we credit your card account with a $50 gift you can spend right away when you use your card within the next five days?” (We also tested $20, $30, and $40 as alternatives to determine the most profitable offer.)

Want to know which was best? Ask me.

While the cost of the mailing package nearly got us fired, the results turned client fury into joy. We achieved the client’s objective of conversion, even after consideration of the cost of the reward, at a cost-per-conversion of less than half of what the client had been spending. And it was right away, a significant cash advantage.

Not exactly the proverbial rocket science, is it?

I had drilled into me over the years by the iconic Dick Benson and by others that Rule No. 1 of what was then called direct marketing was:

It doesn’t matter a damn how much you spend in marketing money so long as in the end, the unit cost of achieving your order gives you the pre-determined profit you desire, or more!

Why many marketers have the least trouble getting their minds around this is a total mystery to me. It should be hardwired into them.

However, taking advantage of the isolation of the pandemic, it seemed worthwhile to have another go at trying to explain it and providing those readers who are interested, with the tools to build a simple model to help them calculate it for themselves.

Using the activation of distributed credit cards as an example, let’s assume that the bank has determined it can afford to spend a maximum of $87.50 to generate each active credit card. In arriving at that assessment of the “allowable,” the bank has determined that it wishes to achieve a profit of a similar $87.50. And to make certain that their marketing geniuses won’t forget the need for that profit, the bank’s managers have made believe the profit is a “cost” and reserved it so the marketing guys cannot get their mitts on it.

Now, if the actual cost of generating the activation is exactly the $87.50 allowable, the profit will still be there. And if, due to the marketing team’s genius (or luck, or a combination of the two), the activation costs less than the allowable, the difference will go right to the bottom line and the applause will be deafening.

Let’s look at this starting with the knowns:

Determining the allowable figure 1For this hypothetical example, let’s accept that the historic active card revenue is $350 and that operating the card system and covering general and administrative costs is 50% of this revenue. Now let’s reserve an additional 25% ($87.50) for profit before determining how much we can spend for marketing.

As you can see, that leaves us with $87.50 which we can afford to obtain an activated card user and make a 25% profit. Put another way, if we spend exactly $87.50 for marketing including the cost of any incentive, then we will make the mandated 25% profit. Spend more and we will make less profit or even have a loss; spend less and the saving against the $87.50 allowable will add to the profit.

Now the fun starts.

What we wish to project is how much our response needs to increase from a non-incentivized baseline to justify the incremental cost of each level of incentive. Let’s assume that including the variable cost of converting the incoming telephone calls, the per-thousand marketing cost is $1,500. Before adding the cost of any incentive, the baseline at different response levels looks like this.

Non-incentivized cost per activated card, figure 2
Note that the white outlined cells are inputs and the shaded cells are driven by formulae. In working with the model, this allows you to play “what ifs?” and input your own assumptions, for example, different percentage responses or cost per thousand.

As you can plainly see, only the cost of a 1% response exceeds the $87.50 allowable and eats into the reserved profit. At 2%, the cost is $75 which means that the bottom line is the $87.50 allowable plus the $87.50 reserved profit objective, less the $75 cost per response, for a total contribution of $100 or 35% of revenue, a comfortable ROMI of 1.33.

But as aggressive marketers, we want more responses and profit. And we are prepared to offer an incentive of $20 to achieve that. Our question must be: How much does the addition of this incentive have to increase the percentage return to justify the additional $20 (or some other number you choose)?

To find the answer to this and provide a tool for answering other questions with different inputs, we built this model. It references the ACPO model above and matrixes the calculated cost of a given response percentage with the addition of the incentive.

Actual Cost, Figure 3To this has been added a table which permits us to input any combination of response rate and incentive and generate how much additional percentage response would be required to justify using the specified incentive, in the case of this example a $30 cash promise.

Incentive Justification, Figure 4
To help you should you care to build your own model, the equations which drive it are explained below the numbers.

As you’ll see, to justify the $30 incentive, response must rise by 0.86% from 2.0% to 2.86%. Any increase greater than 0.86% would make the use of the $30 incentive a winner.

There is no question that money talks. We just need to understand the language.

Any interested reader who wishes to have a copy of this Excel model, email with “Model Please” in the subject line.

Goodbye, Amazon HQ2 — But With Luck, Not So Many Tech Jobs

As a taxpayer and resident of New York City, it was hard to see Amazon reverse its decision to locate in Long Island City — the part of Queens that sits opposite Manhattan, across the East River.

As a taxpayer and resident of New York City, it was hard to see Amazon reverse its decision to locate Amazon HQ2 in Long Island City — the part of Queens that sits opposite Manhattan, across the East River.

I mean what city (and state) would say “no” to 25,000 to 40,000 middle-class jobs?

Well, apparently some loud mouths — elected and otherwise — in New York City.

Which is kind of a cruel joke, knowing that Amazon was only taking advantage of existing tax incentives offered to any enterprise that might want to locate there — the world’s new leading tech hub. Sure, the company may have wanted to add a helipad, but that’s not such an unusual request for celebrity CEOs. Its future tax incentives would be earned — with the city and state likely to collect 10 times the return in various revenue.

Credit: Office of Comptroller of the State of New York | “The Technology Sector in New York City”

Only Fools Would Say ‘No’ to That

Indeed, lots of industries — including another one from the West Coast, Hollywood — get loads of incentives to locate work there (and elsewhere). No one carries on much about the film industry. New York or Virginia had hardly landed — and in New York’s case, ultimately lost — an exclusive on Amazon HQ2. Cities and states across the country cut deals for jobs all of the time, including those that passed on the Amazon dog-and-pony show. Common sense says bring these jobs home.

Now, 25,000 to 40,000 New Yorkers have missed out on good-paying positions in a 21st century economy. Remember this blunder next election. Perhaps other companies — by the dozens — will generate and compete for these livelihoods in this dynamic local economy. Still, Amazon’s new managers will go elsewhere, undoubtedly benefiting other cities.

Someone has to answer for this.

It didn’t help, perhaps, that Amazon fashioned itself as some golden calf — a national prize. I mean, other tech giants — Google, for one — have brought thousands of jobs into the city. Google works with neighborhoods and the city to improve credentials. Google has its detractors, but it works from within and reaches out, and is growing outside the city’s more tax-friendly enterprise zones.

Perhaps, then, Amazon has to take some of the blame.

Bezos & Company could have done the same — invest in the community, build local coalitions — and weathered the initial resentments … all very successfully. But it made a decision to quit the city too quickly, and it’s not sitting well with me. I mean, Bezos bought The Washington Post to build a global brand, make more money and save democracy — yet, the company undermined democracy in its decision here (and so did elected officials who assailed the company).

According to the governor, eight in 10 New Yorkers backed Amazon’s expansion in New York State. The company still walked away because of a cabal of activist “Progressive Democrats”— many of whom never have built a business — who don’t seem to care for profits and future tax revenue, or see any reason to use incentives to attract jobs.

That’s not democracy — that’s Venezuela.

A business is a business — and whether old economy or new economy — it must answer to shareholders, investors, owners, and to customers and employees, too. It has a fiduciary responsibility to do so. Some socialists simply hate that, and chose to demonize the world’s richest man and his company — just as some demonize the collection of data that makes Amazon, and so many other disruptive innovators, so successful.

Profit Under Fire — What Does This Portend?

We need to repel these no-growth influences that now have a voice seemingly in all levels of government.

Regarding Amazon, in Albany (New York’s capital) and New York City, these activists won the day. They’d rather have a city and state go wanting — than to have a tax base that might begin to fund at least some of their generous schemes. The Economist calls this “Millennial Socialism” — though no insult intended to the former. (Bernie Sanders wasn’t born in 1990.)

The incentive-for-job-growth debate is not unlike the data-for-value concept. Both require trust, transparency, local control, self-regulation and willing partners. When in sync, wow – look at the undeniable dividends. When out of step, what a blunder.

Now, Long Island City and Queens may never know the opportunity they had. Let’s hope better for the rest of New York City, and of the country, before we, too, fall out of step.