shutterstock_314796932.jpgIn 2004, Joseph Nunes and Xavier Dreze conducted a study at a car wash. For two weekends, they handed out 300 loyalty cards where customers would earn a stamp on their loyalty cards each time they purchased a wash. One hundred and fifty of the cards offered a free car wash after eight paid washes. The other 150 cards offered a free car wash after receiving 10 stamps, but two washes were already stamped. Both required eight additional purchased car washes to be eligible for the free wash, but the results were strikingly different: The redemption rate for those with the option to buy eight and get one free was 19%, but the redemption rate for those with the option to buy 10 and get one free—with two washes already accounted for—was 34%.

 

% Redemption

Buy eight, get one free

19%

Buy 10, get one free (with two already stamped)

34%

 

The study showed that car wash consumers were more engaged in the program if there was a perception of already having received some credit. The researchers call this “the endowed progress effect.” In sales compensation, we often refer to a similar concept: “engagement rate.”

Engagement rate is the percentage of the sales force who are “in the money” with the sales compensation plan. We often use this as a measure for how many of the sales reps are engaged and thus motivated by the incentive plan. What the car wash research shows us is that once a person is engaged, he/she is more likely to make it to the end goal. In fact, they are almost 80% more likely in the case of car washes. In order to increase engagement in your incentive plan, you would want to look at lowering the quota threshold for starting payout. However, you’ll also want to pay at a lower level than you do now.

For example, assume that you currently start paying 40% of target at 75% attainment. To increase engagement, you plan to lower the attainment threshold to 50% attainment. When doing so, you should also lower the payout at the threshold to 15%. This will help ensure that the overall budget is kept in check while collecting the benefits seen with the car wash experiment.

So next time you’re considering a change to your payout scale, think about the entry point into earning bonus dollars. Oftentimes it can feel like “free money” and there will likely be some pushback on paying for low performance. But if we consider that by providing this entry point we’re encouraging higher overall performance, then the return will certainly be worth it.

 

Topics: Mike Martin, Loyalty Programs, sales rep engagement, car wash study, sales comp plan