Incentive Industry Analysis December 2001

2 Industry Overview

3 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 salesEmployee 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.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.

4 Incentive industry had a total revenue of $26.9B in 2000 Consumer Incentives $4.3B, 16% Employee incentives $22.6B, 84% 2000 total revenue breakdown Source: 2000 Incentive Federation Study

5 Overall, the incentive industry has been expanding market over years 26% 22.8B B 32% Total Revenue Percentage of US firms using incentive programs Source: Incentive Survey 2000 IncreaseIncrease 17% 6%

6 Travel accounts for almost half of the total consumer incentive revenue $26.9B Consumer Employee Source: 2000 Incentive Federation Study 48% 45% 7%

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

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

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

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

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

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

13 Industry Business Models

14 Three potential transaction models exist for the consumer incentive marketplace Card Holders Service providers, merchant manufacturers and distributors FulfillmentProvidersOnly Full-solutionIncentiveProgram Program Clients Model I Model II Model III

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

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

17 “Freddie” award winners (best-in-class) use full redemption solutions Source: Freddie Award 2001 Dinner Club AMEXAMEX Travel Related Cash Certificates Merchandise Online Shopping Points/MilesExchange AAdvantageAAdvantage                Status Upgrade  Features Functions More than 90% of all reward cards provide full solution

18 Current Industry Forces & Dynamics

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

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

21 Sourcing Implications

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

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

24 Appendix

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