When it comes to pricing out an incentive program, there are essentially two types of costs: marginal costs and service costs. Marginal costs are some of the most obvious, and the easiest to wrap your head around in their entirety. Marginal costs include the following:
- Debit cards: The actual debit cards used in your incentive program, along with their design fees.
- Card carriers: The paper that the debit cards are affixed to, and which includes all of the card’s terms and conditions.
- Envelopes: The mailing envelopes used to distribute the debit cards.
- Postage and shipping fees: The cost of shipping out debit cards to recipients.
Pretty simple, right? Next up are service fees. This is where things get complicated. Some of these service fees will exist whether your work with an external firm or do things in-house, while others are specific to contracting an outside company. Keep in mind, though, that you don’t get to simply avoid those fees by running your program in-house. Instead, they show up on your payroll.
Service costs include:
- Bank transaction fees and international wire fees: Don’t underestimate the cost of bank transaction and international wire fees, as they can add up quickly.
- Website development, testing, and maintenance: Depending on the size and complexity of your incentive program, the cost of developing, testing, and maintaining your web portal can vary widely. We’ll discuss this more below in terms of working with an outside firm.
- Web hosting: This is an ongoing independent consideration apart from the cost of developing, testing, and maintaining the site.
- Project management: Designing and implementing an incentive program is a complex task, and you’ll need dedicated project management to make it work.
- Customer service: This includes the cost of email support, chat support, and phone support.
- Reward/submission verification: For each reward or rebate claim submitted, you have to verify whether the submission is legitimate or not. This verification process becomes a cost center.
- Reward auditing and report generation: It’s essential to stay on top of the numbers as you’re launching the program and getting it up and running. You’ll also want to periodically check in so that you can measure ROI and make adjustments as needed.
- Client meetings and document collection: Working with an outside firm involves meetings and communication, and the firm will likely take this time into account in developing its pricing. Collecting and processing documents will also have to be accounted for.
- Card and merchandise orders: Ordering new cards, ensuring that they’ve been shipped out, and processing merchandise orders all takes time and resources.
- Card reloads: When cards need to be reloaded, you’ll be charged for the service.
- Travel coordination: When employee travel rewards are redeemed, someone has to handle the actual travel booking and coordination process. This comes at a cost.
- Program announcements, updates, and newsletters: Your program is only effective if participants understand it and are kept up to date. The more engaged your participants are, the more likely they are to take part in the program. You’ll need to make regular announcements in the form of email newsletters, and sometimes print mail announcements.
- Tax and bank processing: Various accounting and administrative tasks such as 1099 tax processing and bank processing will also become cost centers.
This list isn’t meant to be exhaustive, but it gives you a good overview of what you can expect to pay for.
How Incentive Firms Handle Pricing
So, let’s assume that you opt to pursue the assistance of an outside firm. Again, this is something we highly recommend. As you’re going through the process of evaluating various firms, you might receive cost estimates for launching and running your incentive program.
On the surface, this sounds fairly straightforward. You get a handful of quotes, compare their line item and total costs, and then take those costs into account when determining which incentive firm is the best choice for your organization’s need and budget. Right?
In reality, this approach doesn’t always go as smoothly as you might think. The reason is simple: Different firms tend to use very different strategies for pricing and billing, which can make comparing two quotes side-by-side a real challenge. Let’s look at the two most common ways that an incentive firm will price its services.
The most common pricing approach that you’ll encounter involves turning every single cost into an individual line item. Each item is accounted for on its own, leaving little question where your cost centers are going to be. When a firm takes this approach, you’ll receive an invoice that looks something like the following:
|Cards||3,256||New Card Orders for March||$9.9||$999|
|Card Carriers||3,256||Card Carriers for March||$9.9||$999|
|Envelopes||3,256||Envelopes for March||$9.9||$999|
|Customer Service||421||Minutes of Customer Service for March||$9.9||$999|
|Technical||26||Unexpected Technical Fixes March (hours)||$9.9||$999|
|Reload Fees||1||X% Reload Fees
on outstanding cards March
|Bank Fees||4||Wire Fees for Batch Payment Loads for March||$9.9||$999|
|Web Hosting||1||Fixed Web Hosting Fee
|Travel Fees||32||Hours for Travel Services
|Travel Costs||1||Total Travel Fees for March Trip Winners||$9.9||$999|
|Verification||27.5||Submission Verification Hours for March||$9.9||$999|
|Client Meetings||3||Client Meeting Hours for March||$9.9||$999|
|Reporting||4.75||Report Hours for March||$9.9||$999|
|Tax Services||1||Final Costs for Year-End Tax Filing||$9.9||$999|
|Postage||8,742||First Class Postage for March incl Tax Forms||$9.9||$999|
|Management||1||Fixed Management Fee for March||$9.9||$999|
As you can see, there are a LOT of different line items here and there could easily be more on some invoices. Most of these fees above are variable, and tied to March’s actual volume. However, there are also fixed fees, and unknown fees such as the unexpected technical fixes.
On the one hand, this style of invoicing allows you to confidently assess exactly what you’re being billed for across all of your program’s cost centers. On the other hand, it’s easy to end up feeling a bit like you’re being nickeled and dimed. Wire fees? Postage fees down to the penny? If you’re running a particularly large program with a lot of line items, making sense of this type of invoice can be both time-consuming and frustrating. It can also make budgeting nearly impossible.
Not every firm takes this approach, though. Another fairly common way to handle invoicing involves charging a fixed monthly fee in addition to a variable service charge based on the total amount of rewards redeemed. For example, a firm may charge a fixed monthly cost of $X in addition to a variable rate of X% of all redeemed incentives per month. This type of invoice will include very few line items. While you may not get to see exactly what each individual program expense costs, this type of invoicing is cleaner, simpler, and a lot easier to plan your budget around.
At this point, you might be wondering what you can expect to pay for an incentive program of a given size. Are we talking a few thousand dollars? Tens of thousands of dollars? What’s a reasonable amount, and what’s excessive?
We’ve run a lot of incentive programs over the years, and we’ve used that experience to put together a cost calculator. You can find our incentive pricing calculator on our website at https://www.level6.com/calculator. Our pricing calculator takes the following variables into account when assembling a cost estimate:
- Where you’ll be offering your program (the United States, Canada, or both)
- Type of program you’re offering (salesperson incentives, customer loyalty, customer rebates, employee recognition)
- Types of rewards you’re including (prepaid single-use branded debit cards, reloadable branded debit cards, virtual debit cards, checks)
- Number of program participants
- Average amount per reward
- Expected total annual dollar amount of reward payouts
- Frequency of reward payouts
- Additional features to be included (custom website, customer service, etc.)
This pricing calculator will give you an instant, ballpark estimate of your costs, which you can use when shopping around for potential program providers. It’s not meant to be an exact quote, of course, but it will give you a ballpark number for what you can expect to pay.
Payment Terms for Incentive Companies
Aside from evaluating the costs associated with contracting an outside incentive firm, another important factor you’ll want to consider when choosing a firm is the payment terms. What should you expect? What’s normal, and what’s excessive?
While there’s some variability in terms of expectations surrounding the payment schedule for various cost centers, development is one area where you may be asked to fork over a large amount of funds all at once. In fact, some incentive firms will require you to pay for all development work up front. They’ll provide you with an initial cost estimate, and you’ll have to hand over the entire amount before they get started. Other companies are less demanding and will ask for some kind of a deposit for a portion of development costs (such as 50% of the total amount).
When it comes to pricing out these services, keep in mind that different firms take different approaches. Some firms will use development work as a real profit center, aiming to derive a large portion of total profits from it. Meanwhile, other companies opt to use development as a loss leader. In this scenario, the firm will price their development services as low as possible as a means of engaging and launching a project with a new, hopefully long-term client. Be aware of these various tactics and recognize the various pricing strategies when you see them.
At the end of the day, tactics for both pricing and payment terms can vary widely, as can the total amount you might expect to pay. Ultimately, though, a good incentive provider will generally incorporate both fixed costs and variable costs into their pricing strategy. This allows for predictability on the one hand while still maintaining flexibility according to the program’s scope and workflow. Your goal in signing a contract with an incentive firm should be to feel confident that you have a reasonably accurate estimate of what your program’s total costs will be, without worrying that you’re being overcharged for a level of service that you don’t need—or undercharged and short-changed when it comes to the actual program execution and follow-through.
At this point, you should have some sense of what it’s going to cost to launch your incentive program and keep it running over the long haul. In addition to understanding costs, though, there’s one more important thing to consider from a numbers standpoint: The tax implications of your incentive program. In article “Taxes and Incentive Programs” we discuss how you should think about taxes when it comes to implementing your incentive program—and when you need to issue tax forms related to the redemption of rewards. We’ll also address the question of how to treat points from a tax perspective.