A prospect recently said that a customer loyalty program was not needed because they got 80% of their revenue from 20% of their customers.

This company wasn’t unique – most small companies’ business also fits the 80/20 rule – also called the Pareto principle or the law of the vital few

Like any other small company, they get the majority of their income from a small number of regular customers to whom they probably have to give exceptional service for fear of losing them. There’s no requirement to run a loyalty incentive for those customers.

But that is exactly the point – how does a company engage with and increase it’s business with the other 80%?

How about an incentive for those customers that may buy occasionally? A customer loyalty incentive is something that could turn an intermittent client into a regular, valued customer.

Read the warnings of the man who said no to Walmart as a salutary warning against aggressive price-cutting.

It tells the tale of how a gardening equipment manufacturer Simplicity, the maker of the Snapper brand of lawn-mowers, took the brave decision not to continue supplying retail behemoth Walmart.

“If you know nothing about maintaining a mower, Wal-Mart has helped make that ignorance irrelevant: At even $138, the lawn mowers at Wal-Mart are cheap enough to be disposable. Use one for a season, and if you can’t start it the next spring (Wal-Mart won’t help you out with that), put it at the curb and buy another one. That kind of pricing changes not just the economics at the low end of the lawn-mower market, it changes expectations of customers throughout the market. Why would you buy a walk-behind mower from Snapper that costs $519? What could it possibly have to justify spending $300 or $400 more?

That’s the question that motivated Jim Wier to stop doing business with Wal-Mart. Wier is too judicious to describe it this way, but he looked into a future of supplying lawn mowers and snow blowers to Wal-Mart and saw a whirlpool of lower prices, collapsing profitability, offshore manufacturing, and the gradual but irresistible corrosion of the very qualities for which Snapper was known. Jim Wier looked into the future and saw a death spiral.”

Beware of the high cost of low prices – discounting is a race to the bottom. At IncentiveDirect, we believe that customer loyalty incentives, and staff sales incentives that encourage sales staff to be knowledgeable, articulate and passionate about the products they sell are the alternative to discounting. As Snapper believed, the value is not just about the price. At the end of the day, Walmart, (and as mentioned before, Amazon), don’t care what you buy, as long as you buy something.

“Selling Snapper lawn mowers at Wal-Mart wasn’t just incompatible with Snapper’s future – Wier thought it was hazardous to Snapper’s health. Snapper is known in the outdoor-equipment business not for huge volume but for quality, reliability, durability. A well-maintained Snapper lawn mower will last decades; many customers buy the mowers as adults because their fathers used them when they were kids. But Snapper lawn mowers are not cheap, any more than a Viking range is cheap. The value isn’t in the price, it’s in the performance and the longevity.”

To “do more than just reward” also means doing more than just selling.

It is the icing that sells the rest of the cake.

Icing is the decoration, the attractive adornments that catch the eye and lure the customer. But the real quality of the cake is in what lies beneath.

In incentives, rewards are the icing, communication is the cake. The real value of an incentive is the chance to drive knowledge, understanding, and a two-way communication channel. Rewards are the lure to get people’s attention, to create that opportunity.

Think rewards. Think communication. Think cakes.

In a study by the Department of Economics at Purdue University, a experimental study called “Entry into Winner-Take-All and Proportional-Prize Contests” revealed that:

” In a winner-take-all tournament, the highest performing contestant wins a prize. In the proportional-payment design, that same prize is divided among the contestants according to their share of total achievement. We find that proportional prizes elicit higher entry rates and thus more total achievement than the winner-take-all tournament. The proportional-prize contest performs better because it encourages significantly more entry among low ability contestants, without discouraging the entry of high ability contestants or limiting entrants’ performance.”

If we consider a competitive sales incentive as a kind of contest, then the same findings apply.

By rewarding only the winners, the overall performance improvement is not as great as a proportional reward system that recognises growth by all participants.

The reasons are obvious. Even if they recognise that they wont be the star performer, in a proportional contest every participant knows that it they can up their game, they can reap the benefits.

A winner-takes-all situation can breed resentment and disengagement. By definition, everyone else is a loser. Once a participant realises they are not going to win, they will generally lose motivation and give up trying. The resentment can come if they feel the odds are stacked against them, that due to external factors – such as not having the high-yield accounts, or the best store location – that it’s not a level playing field.

Proportional rewards can help improve team spirit, especially if the size of the overall pot is variable too. Now everyone is pulling together to improve the overall value of the prize fund, as well as competing to increase their own share of it.

Basing a sales incentive based on percentage sales improvement rather than sales volume actually reverses the problem. It’s much easier for a smaller dealer or low level salesperson to grow their sales by 10%, for instance, than the star salesperson or premier retailer.

Our mantra as always is to keep mixing it up. If you keep rewarding the same behaviours and on the same basis, you’ll only engage, motivate and drive the performance of the same band of participants in your incentive. The key is to keep experimenting with new ways to get different groups of users in tune with your activity.

The recent two-and-a-half percentage drop in VAT won’t make a difference to customer spending, but it could make your incentive campaign.

Instead of passing the saving onto a customer in the form of lower prices, why not use the money that would have gone to the VAT man to fund your sales incentive? Those 2 and a half percentage points won’t be noticed by the customer, but they could drive your sales team or reseller to help make that sale. Discounting will only get you so far – customers are more likely to buy from knowledgeable and friendly sellers they can trust. An incentive that inspires and encourages sales teams can be the most effective way of driving sales, and is more sustainable than lowering margins.

Think of the drop in VAT as a boost to your incentive fund.