Program Budgets

Many client conversations start with "... I have $500,000 to spend to increase in sales (or decrease in turnover, or whatever the goal is.)"  And in most cases the incentive provider will run back to the office and develop a program that uses all the $500,000.  Sounds like a good way to put a program together.  But this is backwards.  Most clients are not buying an incentive program - they are buying a result.  As Harvard Business School marketing professor Theodore Levitt put it, "People don't want to buy a quarter-inch drill. They want a quarter-inch hole!"

A better way to determine program budgets is to start with the goal/result you want to achieve - and be specific.  In the example above there are no specific goals - increase sales - decrease turnover - How much?  By when?  I know this is simple stuff but you'd be surprised how many people just gloss over it and develop a solution focused on spending $500,000 rather than achieving a goal.  One way to do this is to "dollarize" the problem or the outcome.

I ran into this concept when reading a book by Jeffery Fox called "How to Become a Marketing Superstar."  Here's a link to a PDF on his consulting practice site explaining dollarization.  It's a simple concept - find out what the cost of the problem or solution is and then work backward from there. 

In this example let's assume the result we want to achieve is a 10% increase in sales on $100,000,000 in total revenue.  Also, assume we have a 30% margin on those sales.  Therefore, the result we want to achieve is $3,000,000 gross profit ($100,000,000 x 10% x 30% = $3,000,000.) 

Now the big question!  Based on the client's historical point of view - what ROI would they like to see on an increase of $3,000,000 in GP?  Is 4:1 good based on their history - representing a budget of $700,000 or are they accustomed to seeing 10:1 returns - representing a budget of $300,000?  Only the client can answer that question.  Also, look to past programs and see what kind of return they achieved.  In some cases the client expectation can be much different than the normal return experienced on a program. 

This simply identifies the budget - how we use the budget is a conversation for another time.