Discounts reward the people who pay for goods or services, not the people who buy or use them, and if they are not the same person, are an ineffective form of incentive. This is one area where a B2B incentive is very different to a B2C incentive, where the consumer is usually both buyer and user of the service or product being sold.

An incentive scheme aimed at increasing sales should always be aimed at those who make buying decisions.

Extending this further, it is clear that an incentive that is based on rewards rather than on discounts should be targetted at individuals, not organisations. If the people making the buying decisions are not the ones receiving the reward, then it is obvious that the reward has no influence to the person buying that service or product. There is no added incentive for them to buy that brand, or from that supplier, or to buy more, or a better model – the reward has no effect.

Only individuals can be influenced to change their behaviour through the emotional lure of a reward. Considered in the abstract, organisations make decisions based entirely on logic. But individuals within that company will still act emotionally. Buyer Decision Processing is still an emerging field of cognitive science.

There is no point in rewarding a company, you should be rewarding the person within the company who makes the choice to buy from you. Rewarding customer loyalty involves engaging individuals.

In an interesting presentation from the July TED conference, career analyst Dan Pink makes a convincing case that incentives are ineffective at enabling innovative thinking. This is something that social scientists know, argues Pink, but that business seems keen to ignore. Incentives are only effective at improving performance along already established paths, not in enabling the forging of new paths.

It’s an interesting presentation because it should force all operators of incentive solutions all to think about whether they are stifling the behaviours we are trying to promote.

There is a flip side to this, and this is the success of prize funds such as the X-Prize, or the Netflix recommendation engine prize.

Called the Netflix prize, a reward of $1 million dollars was offered by the movie rental company, to any team that could improve film recommendations that were 10% better than those produced by its current system. Earlier this year, a team managed to achieve this, after nearly 3 years and a massive collaborative effort. In fact, thousands of people entered the competition, many of whom would have had no chance of winning, but saw the opportunity to learn about machine intelligence with a state of the art set of test data.

So the question is whether the prize hindered the finding of a solution, or enabled it? Certainly Netflix has earned marketing and PR coverage and respect from the development community to more than justify the $1 million prize, but how many teams would have persevered if there had been no prize at the end of it.

Perhaps the answer lies in a blog post by one of the participants of the Netflix contest, Justaguyinagarage. In his post, Reflections on the Netflix competition, he gave kudos to Netflix for running the competition in such a well structured way:

“It was run in an exemplary fashion throughout and should, I believe, become the model for other competitions that people might choose to run. Some of the key features that made it such a success are:

a. A clear, unambiguous target and challenging target. How a 10% target was chosen, will I suspect, remain forever a mystery but it was almost perfect – seemingly unattainable at the beginning and difficult enough so that it took almost 3 years to crack – but not so difficult as to be impossible.

b. Continuous feedback provided so one could identify whether the approaches you were investigating were going in the right direction.

c. A forum so that the competitors could share ideas and help each other (more about that later).

d. Conference sessions so competitors could meet and discuss ideas.

e. Zero entry cost (apart, of course, from the contestant’s time).

f. A clear set of rules.”

As a set of guidelines for anyone looking to run an incentive, these could hardly be bettered. An objective, unambiguous target, a clear set of rules, feedback and discussion forums to promote knowledge sharing – these are surely the ingredients for successful incentives, whether the objectives are simply to sell more stuff, or something that requires creativity or innovative thinking.

For Dan Pink, the answer lies in what he calls “intrinsic motivators”, understanding peoples inner desires, which Pink subdivides into three categories: autonomy -”the urge to direct our own lives”; mastery – “the desire to get better and better at something that matters”; and purpose – “the yearning to do what we do in the service of something larger than ourselves”, which can be achieved giving employees more freedom to choose their own destiny. So is it possible to use incentives to drive people to achieve these goals? The Netflix prize would seem to show that it can.

The low risk of incentives make it easier to fail often, and fail better.

People are conditioned to try and avoid failure, but this often prevents them taking chances. In looking to create a marketing promotion, too many companies avoid creating memorable and effective campaigns because the costs of implementing the campaign are so high that they can’t afford to get it wrong. “Not getting it wrong” is more important than “getting it right”, so the results are often just “kind of okay”. Or worse still, having invested so much money into a marketing campaign, more money is poured in, trying to turn a donkey into a racehorse. Economists call this a sunk cost fallacy.

The low cost of implementing an incentive campaign, using a system like iD-points, allows a company to try different approaches to drive sales. If one approach is not working, it’s easy to change the parameters, to move the goalposts, to create a different set of drivers and incentives, until an effective one is found. It’s possible to take a risk, get the feedback and measure the success, without incurring high sunk costs where the temptation is to keep plowing in more money. If something isn’t working, try another approach. Crucially, if the effectiveness of incentive activity starts to fall away, the parameters can be shifted and the activity refocused.

Incentives are the low risk marketing option.

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.