We’d all like to think we’re Spock from Star Trek when it comes to making big decisions: totally rational and calculated. But people aren’t really very Spock-like. Not only are we missing the pointy ears, but behavioral science shows that humans are irrational decision-makers – even when we make business purchases. Strong relationships matter as much as company capabilities and effective B2B customer loyalty and incentive programs are key.
On a recent episode of the Wholesale Change webcast and podcast, we asked industry expert Lincoln Smith of HMI Performance Incentives about building B2B customer loyalty and incentive programs that strengthen customer relationships to win mindshare and increase share of wallet.
Distribution Strategy Group: Is there a difference between loyalty programs and incentive programs?
Lincoln Smith: Loyalty programs are designed to create mindshare with your customers and thank them for their business by returning value to them for the retention of that business. Incentive programs engage your customer to grow their business with you with a goal in mind. Customers earn rewards when they reach purchasing benchmarks.
Loyalty and incentives are part of the same family, but people often mix up the two ideas or use them interchangeably, which can result in misaligning company goals.
In wholesale, programs usually fall into one of three different categories. Some distributors run group incentive travel programs where your top customers qualify by reaching certain growth or volumes. These have been historically very popular and effective. The second category that wholesale is using is points-based incentive programs. These are similar to frequent flyer programs or American Express rewards or Starbucks points, but they’re branded specifically for you. Your customers build up currency in points, and redeem them for very individual or personalized awards. And the last cateogry is promotions, with a fixed time period, clear goals and objectives and you might be rewarding something that’s very specific within a defined timeframe.
DSG: How does misunderstanding the distinction between loyalty and incentive result in missed opportunities?
Smith: If a company intends to pay for the program by performance (incentives) and mistakenly structures it to reward loyalty, they’re going to be disappointed with the results or by the financing of it. They could end up rewarding customers who have not earned entitlements yet. Companies must design programs from the outset around their concrete goals and objectives.
DSG: Can you give examples of distributors who are customers of yours?
Smith: We’ve worked across industries from automotive aftermarket and industrial to building materials and high tech. These principles apply to all industries. Over the years, I’ve personally worked with Anixter, Ferguson, US Air Conditioning, Dakota Supply Group, CDW, Beacon Roofing, Wesco, XL Parts and others. That gives you a good cross-section of the types of organizations that are utilizing these strategies to engage their customers to gain mindshare and share of wallet spend.
DSG: What customer loyalty program works best for the average distributor?
Smith: It’s hard to generalize, but over the past several years, a particular rule structure that wholesale has adopted more predominantly than others is running programs that are growth-based. And those growth-based rewards programs are where we go out to your customer base and take a look at their historical sales and set realistic goals and objectives that they must meet in order to earn rewards. So it’s almost like this perfect reward strategy where you are getting the loyalty, the retention, showing the appreciation, getting that mind share for all the purchases that they’re giving you, but we’re really putting the carrot and the accelerator on those growth dollars. Of course, every wholesaler has its own specific goals and objectives that influence how you structure the program
DSG: How does behavioral science affect successful customer loyalty programs?
Smith: Humans are irrational, right? We would love to be like Spock on Star Trek, where he takes emotion out of everything that he does so it’s all about logic. But the human race’s mindset isn’t to do rational decision-making. And so, understanding what the drivers are in people’s decision-making is really important. The behavioral science of how you frame things, how you can offer certain benefits, that might pull in on those emotions will certainly influence their current buying decisions and their future buying decisions. Understanding those elements can really help make a big difference on that discretionary purchases.
DSG: That reminds me of the process of purchasing construction supplies. Buyers use blueprints, specified products and multiple bidders to make it a rational transaction; the process is designed to take the emotion out of the decision-making process. Instead, it ends up being very much about the relationship between the buyer and seller. Often, distributors lose customers after certain account managers leave whom customers had formed a relationship with. It’s an emotional decision, but doesn’t that reflect the same value of building ties with customers that loyalty programs capture?
Smith: The last thing you want with your customers is to be transactional; you want to create a partnership. Especially with top-producing accounts, return on experience matters as much as return on investment.
It’s the touchy-feely side of building good loyalty programs because it’s really about building up the trust and confidence customers have in their distributors. A great program helps companies clearly articulate their value proposition and create an emotional affinity with customers that results in greater mindshare.
Loyalty or incentive programs are also helping backfill benefits and touchpoints account managers historically provided. The program can act as a catalyst for communication and engagement with customers with unassigned accounts that need attention. As organizations transform their sales teams to become more digital, these programs can also help encourage customers to adopt more digital sales channels. The loyalty program can help ensure that your entire relationship is not dependent on this one person.
DSG: Do you think wholesalers should use incentive programs to drive online transactions instead of promoting transactions across all sales channels?
Smith: Great question. With the digital transformation that’s going on in wholesale, we understand that, there’s a lot of digital investment and there are customer behaviors need to be conditioned to get that adoption frequency of online purchases. So a lot of our rewards programs today in wholesale are rewarding for online purchases. It’s not typically exclusive for that; a lot of times we’re emphasizing it or weighting it at a higher value. We’re making sure that the outside sales organization is evangelizing adoption of the ecommerce platform and getting the customers familiar with the technology and changing that behavior over to it. So you might get one point on general purchases, regardless of how you make it, but you might earn three points in reward value if you make those transactions online.
DSG: Who is the best customer to target for distributors’ loyalty and incentive programs? Should it be open to the entire customer base?
Smith: There are defensive plays and offensive plays. For your top customers that are driving 80% of your revenue, you want to build a wall around that and say, “I don’t want you going to Amazon Business or down the street.” So, is there a loyalty or incentive or a benefit that we could use to engage that audience to keep them rock solid with us? That would be defensive. And then that middle 60% of your customers would be more of an aggressive or offensive play because you know there’s more on the table. That’s where we might design programs that are really growth-oriented and motivate them to shift that share of wallet spend over to you.
DSG: What percentage of customers generally enroll in loyalty programs?
Smith: That’s going to vary by organization, but oftentimes these are invitations; they aren’t just open to anyone off the street. These are programs that you’re offering to your customer base as a value of doing business with you. I’d say we would normally see maybe 50% of those that are invited will opt in within the first year.
DSG: Who is the right person to target within your customer base with the benefits of a loyalty or incentive program?
Smith: Finding the point of influence is about targeting the individual who is making purchases or picking up the product at a branch location. Points of influence are different for every industry and may be the contractor or the owner or even the technician or installer.
DSG: What kind of results can you expect from these types of programs.?
Smith: It all depends on the goals and objectives of your program. Have we designed the right strategy, the right reward system, the right financing of the program to the right audience? If we do a good job of that on the front end, then the results will come: Customers that are participating in this program will outpace the growth and the volume of those that are not. We’ll see organizations where they might outpace 2 to 1.
Often, 30% of engaged participants will try a never-before-purchased product or service, and 40% will have an improved perception of the company. Fifty percent will spend more and increase purchase level after joining the program, and 80% will say that the program is a moderate-to-strong influence on their purchase decisions, which probably is underreported because people don’t like to admit that.
DSG: How do some distributors fail at implementing customer loyalty programs?
Smith: One mistake is not vesting the sales organization. If you’re going to do a customer loyalty or customer incentive program, you want your reps to be vested and aware of how this is a sales tool for them. If you don’t get their buy-in and their understanding on how to use it as a real differentiator, then you’re going to be missing a lot of opportunities to create results. Another reason is under-communicating to customers. If you have the best loyalty and rewards program or value proposition and best suppliers and you don’t tell anyone about it, then, then why have it?
DSG: Thank you, Lincoln! Here’s Lincoln’s contact information.
Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at firstname.lastname@example.org.