Incentive Industry Analysis December 2001 Industry Overview 2

Incentive Industry Analysis December 2001

Industry Overview 2

What is an Incentive Marketing program? • Employee incentive programs - provide incentives such as merchandise and gift certificates to reward good employees with the goal to retain them, lift loyalty, boost performance and eventually increase company sales • Consumer incentive program - provide incentives such as travel mileage and merchandise to consumers with the goal to retain valuable existing users and attract new customers, and to eventually maximize profitability. 3

Incentive industry had a total revenue of $26. 9 B in 2000 total revenue breakdown Consumer Incentives $4. 3 B, 16% Employee incentives $22. 6 B, 84% Source: 2000 Incentive Federation Study 4

Overall, the incentive industry has been expanding market over years 1997 Total Revenue Percentage of US firms using incentive programs 2000 Increase • 22. 8 B • 26. 9 B • 17% • 26% • 32% • 6% Source: Incentive Survey 2000 5

Travel accounts for almost half of the total consumer incentive revenue 7% 48% 45% Consumer Employee $26. 9 B Source: 2000 Incentive Federation Study 6

Award cost is the key driver in consumer incentive program (80% of costs) Typical Consumer Incentive Program Cost Structure Source: Incentive Marketing Organization 2000 7

The top 20 firms make up only 35% of total consumer incentive revenue Top 20 35% >5, 000 65% No. of firms % of total revenue contribution Source: Company reports and industry data 8

Largest players are created through vertical integration in the travel related industry Revenue distribution among industry players Source: Company, industry data and estimates 9

The manufacturing industry is leader in using consumer incentive programs Percentage of firms using consumer incentive programs by sector 10

The financial industry will increase incentive spend to acquire and retain customers Breakdown of consumer program users in financial industry regarding future budget plan Source: Incentive Survey 2000 11

And consumer incentive program users are usually large firms Distribution of program users by sizes Source: Incentive Survey 2000 12

Industry Business Models 13

Three potential transaction models exist for the consumer incentive marketplace Card Holders Service providers, merchant manufacturers and distributors Fulfillment Providers Only Full-solution Incentive Program Clients Model III 14

“Model III” has the highest complexity in supply chain Model I Characteristics Application • Directly working with services or products providers who normally have adequate fulfillment and customer service capability • Specialty products for niche, targeted programs • Usually service/product provider own relationship with customer Model II • Normally product-based rather than service-based • Client owns customer relationship Model III • Acquiring new customers • Small, commodity type gifts/awards for mass reward consumers • Retaining customers • Service/products supply chain are complex and diverse • High requirements for customer services • Both clients and incentive program providers own customer relationship • Full redemption solutions • Retaining and 15 attracting customers

Cash is the most effective incentive for consumers Effectiveness rating for loyalty items Effectiveness rating Source: Incentive Central 2000 16

Fu nc tio ns Fe atu re s “Freddie” award winners (best-in-class) use full redemption solutions Dinner Club AMEX AAdvantage Travel Related Cash Certificates Merchandise Status Upgrade Online Shopping Points/Miles Exchange Source: Freddie Award 2001 More than 90% of all reward cards provide full solution 17

Current Industry Forces & Dynamics 18

New entrants is the most important force in the industry Attributes New Entrants • Suppliers such as travel agency and airlines expand to reward program • Internet makes online entrants easier Supplier • Merchandise suppliers have little power in the commodity market • Specialty providers have more leverage Customers Industry Rivalry Substitutes Industry Impacts • New entrants emerge both online and offline intensifying competition • Fragmented, diverse supplier environment have minimal impact • Customers don’t have adequate information on this relatively young industry • Established, brand-name programs are favored • Competition is intense, due to low differentiation and easy entry, particularly for online players • Increasing M&A activities • In-house reward program vs. outsourcing • Minimal - non-competence for customers • Merger between online and traditional players 19

Program providers have been adopting four major strategies Strategies Goals M&A • Established players are buying smaller players, particularly online players • Increase service capability and bargain power Full Solution • Provide travel related, merchandise, certificates and almost all consumable services and goods • Increase appeal to mass market and meet competition • Provide online exchange, buy/give capability and others • Increase appeal to mass market and meet competition • Own travel agencies • Simplify complexity for customers and increase bargain powers Flexibility Vertical Integration • Build fulfillment processes 20

Sourcing Implications 21

High complexity and low differentiation indicate a opportunistic approach High Supply Complexity Low Opportunistic Approach Strategic Cooperation - Reduce supplier dependency - Increase supply certainty - Long term partnership - Maximize value creation - Focus on wants Incentive Program Commodity Sourcing Tactical Cooperation - Seek best deals - Focus on needs - Short-term and transaction based - Mid term partnership - Focus on improvement Low Source: Adopted from Peter Kraljic, HBR Supplier Differentiation High 22

Supplier Short List Tier One >10 million • Carlson Marketing Group • MARITZ Loyalty Group • Business Incentive • Marketing Innovators • SHC Direct Tier Two > 1 million • Enhancement Service Group • Incentive Solution • All Star Incentive Marketing • Dittman Incentive • MMS Incentive • Clarity Incentive Services • Xceleration • Hinda Incentive • Affina 23

Appendix 24

A 5% increase in consumer retention can achieve 25% profit and 100% revenue growth Source: Journal of Marketing, 1996 25