Client development director, Ian Mast-Hughes, explains how to work out whether your incentive travel trip or promotional event will create more return than it costs.

Businesses all over the world are obsessed, quite rightly, with ROI (return on investment) on all their discretional activities. After all, why spend the money if it does not provide a profit or some other kind of improvement?

Calculating the ROI on events is an important issue, especially if the event is high profile and only available to certain sections of your workforce or distribution network. Everyone agrees that an all-expenses incentive event abroad is a very attractive reward. But costs per head are expensive, especially if partners are invited to participate in the event.

Setting the benchmark

Let us assume you have a sales target of £10m to achieve. The first thing to agree is what sales could be with an incentive or some other kind of promotional intervention. Most sales directors would agree that a 20% increase would be doable. On a sales revenue of £10m this would suggest a potential increase in sales of £2m, so £12m sales in total.

Working out your margins

Can you afford to do it? With extra sales revenues of £2m, you have calculated that your normal margin on those sales is 33% or £660,000. You might then agree that your promotional budget on incremental sales is usually one third, so 33%. This provides a promotional budget of £217,800 to create £2m extra sales. Clearly, margins and promotional allowances will all be specific to any industry and the business mix you experience. But the principles of ROI prevail.

Calculating your break-even

So, you have £217,800 to spend to achieve £2m extra sales. What’s the break-even? After all, you need to know the minimum level of sales required for the activity to pay for itself.

In order not to lose money on the deal you simply divide the extra sales by the extra cost to find a break-even. In this case it is 10.9% (£217,800 as a percentage of £2m). So, you need to achieve 11% more sales than normal for the promotion to pay for itself. Any sales above that level will be shared, one third for the promotional budget and two-thirds for the company. Even if the company exceeds its projections… and therefore its promotional budget, the company wins, as it will always gather two thirds of any incremental gain.

Keeping costs in check

Of course, the budget is not completely made up of travel costs. Most budgets include elements of promotional marketing, database costs, logistics costs and subsidiary rewards for those who perhaps do not achieve the top places. There will also be tax to pay on rewards, depending on your local tax regime and fees to agencies if you are using an agency to organise the project. When you work through all these costs you will find that only, say 55% of the budget will be spent on actual travel or the rewards.

In this case a budget of £217,800 will only allow for an actual travel/rewards spend of £120,000. This needs to be understood from the outset, otherwise there will be a lot of disappointed potential winners.

Keynotes

• Be aware of ‘incentive fatigue’. Organisations new to incentives will often create sales increases of 30%-50% or more, simply because the technique is novel. Seasoned users may only experience an uplift of say 5%-10%, so the ROI for each type of situation will be different.
• Incentives work best in a neutral or growing financial environment. Using incentives to shore up a bad product or to fight a general downturn can only be a temporary solution.
• Try to reward as many people as possible rather than simply spending the entire all the budget on the top echelon. There are more incremental sales in the middle band collectively than in your elite performers as a group.
• Don’t forget to include taxes in your ROI budget…most rewards are benefits in kind and are therefore taxable at the winners’ highest rate. 20 winners at say, £2,000 travel cost per head at the top tax rate is a lot of money to have to recoup from the budget.