When implementing a loyalty programme, it is very important to determine the so-called incentive factor. What is this value and how is it calculated?

One element of the process of implementing a loyalty scheme is setting the so-called incentive ratio. This figure determines what percentage of every zloty of revenue generated by a scheme participant will be returned to them in the form of points, discounts or cashback.

Incentive factor – a measure of a loyalty scheme’s appeal

Although discussions on this subject are often quite difficult, final decisions are made on the basis of three main criteria: the expectations of end customers, an analysis of competitors’ activities, and the profit margins on sales of products in the range.

For obvious reasons, incentive rates in loyalty schemes will vary across different market categories. For example, in the clothing retail sector they are usually higher than, say, at petrol stations. At the same time, within a given chain, due to differences in profit margins, individual product lines are subject to different incentive levels. At petrol stations, the number of points awarded for buying a coffee or a hot dog is much higher than the value of the rewards obtained for filling up with fuel for the same amount.

It is essential to understand the expectations of potential programme participants and the structure of the incentive scheme. If you wish to prepare a competitive market offer that genuinely contributes to increasing customer loyalty and the value of the shopping basket, it is essential to bear these issues in mind.

Information relating to the levels of incentive coefficients is strictly confidential. For this reason, to obtain this information, you must calculate it yourself. This process requires all the rewards on offer to be taken into account in the calculations. In the case of points-based schemes with extensive categories, this is therefore an extremely laborious and time-consuming process.

How do you calculate the incentive factor for a loyalty scheme?

The incentive ratio is calculated as the ratio of the market price of the reward to the amount of money that must be spent in order to claim it. This calculation is best illustrated with an example. If a customer has to spend 100 zł gross to receive a prize worth 1 zł gross, the incentive ratio will be:

(1 zł/100 zł) × 100% = 1%

In the case of discount schemes, the discount or cashback is included in the counter at its face value, in place of the reward value.

Finding out the market price of prizes from a catalogue is not a difficult task – you simply need to use online price comparison websites, such as ceneo.pl. In accordance with the current interpretation of VAT regulations, the valuation should be based on the gross value, i.e. the price including VAT. Price comparison websites present a wide range of options, so it is best to ultimately use the median value as the prize value.

However, this solution contains a certain estimation error. Such calculations do not take into account the discounts that are applied when purchasing rewards for loyalty schemes. This error, however, has a similar impact on all programmes, so it can easily be corrected following a more detailed analysis. It should also be borne in mind that the larger the number of programme participants, the higher the discounts on larger order volumes.

Distribution of incentive coefficients on the Polish market

Let’s take a look at the distribution of incentive coefficients calculated using the methodology outlined above for selected programmes operating on the Polish market.

The graph shows the distribution of incentive coefficients as a function of the point value specified in the rules. This form of presentation provides a single measure of a programme’s attractiveness, combining objective criteria (the value of the incentive coefficient) and subjective criteria (the value of a single point as specified in the terms and conditions). In this way, aggregate data for points-based, discount and cashback schemes can be presented on a single graph.

What conclusions can be drawn from an analysis of the distribution of incentive coefficients?

This analysis makes it possible to determine which loyalty programme is actually the most attractive to participants – that is, which one offers the highest-value reward for every zloty spent. The distribution of the calculated incentive coefficients as a function of the number of rewards also enables a subjective comparison to be made. Participants generally rate programmes more highly when they offer a wider range of rewards to choose from. Research of this kind also helps to position the programme more effectively loyalty scheme on the market.

Given the amount of calculation involved, most organisers are banking on the fact that none of the participants will actually take the time to do the maths. Most loyalty schemes operating on the Polish market are based on incentives of no more than 3%. In the case of petrol stations, however, this figure does not exceed 1%. In practice, this means that for every zloty spent on fuel, the customer receives less than 1 gr back.

Incidentally, this analysis helps to uncover all the flaws in the programmes’ design. One such error is a blunder by the organisers of the Żappka programme. Under this scheme, participants receive 150 żapps simply for registering, which, according to the points conversion table, are only enough for half a Snickers bar or three-quarters of a Chupa Chups lollipop.

The following assumptions were made for the calculations:

• Each prize in the catalogue has been priced in zlotys (gross) using the ceneo.pl website;
• The median of the prices published by ceneo.pl was used to value the rewards. The gross value in PLN was then divided by the amount that must be spent to earn the number of points required to claim the reward;
• In the case of loyalty schemes:
  • petrol stations – points awarded for purchasing fuel were accepted, in accordance with the terms and conditions. For other programmes, the point value specified in the terms and conditions was used. The analysis does not take into account the programme organiser’s own rewards featured in the rewards catalogue (e.g. a hot dog at a Lotos petrol station);
  • offering rewards in the form of a discount – programmes offering discounts (e.g. a voucher worth 10 zł) were included;
  • which offer rewards in the form of a discount or cashback – the difference between the original price and the discounted price is settled using the appropriate number of points.

Beyond the scale shown on the chart are loyalty schemes from brands such as Biedronka, E. Leclerc and Itaka. For the analysis of Biedronka’s scheme, rewards from the „Gang Świeżaków” promotion were selected.

If you are interested in having an analysis carried out for your market segment, please do not hesitate to contact our Sales Director, Mr Dawid Łuciuk (dawid.luciuk@i360.trejka05.pl).

This text was produced with the assistance of Ms Karolina Rojecka from the Białystok office of i360 Sp. z o.o.