Transcript of the episode: https://youtu.be/Yvk7Jpu0OBo

KN: Lotteries supporting loyalty schemes. Katarzyna Nawrocka: „Loyalty Schemes by Night”. My guest today is Dr Tomasz Makaruk, Chairman of the Board of i360. Tomasz’s professional passion is organising lotteries, a field in which he has been active for over 20 years. In this episode, we will discuss the reasons why organisers of loyalty programmes support their operations with promotional lotteries. We’ll pay particular attention to the issues that managers responsible for running loyalty programmes should discuss with those in charge of tax, legal and personal data processing matters. We hope you’ll join us.

TM: Good evening, Tomasz, thank you for joining me today.

KN: Good evening. We’re going to be talking about prize draws in loyalty schemes.

TM: As for lotteries that support loyalty schemes, yes.

KN: And why are prize draws organised as part of loyalty schemes?

TM: There are four main reasons why organisers of loyalty programmes run prize draws as part of their schemes, i.e. for participants in the loyalty programme. The main reason is to enhance the impact of the programme itself. Every well-designed loyalty programme leads to an increase in sales. A prize draw is designed to reinforce the key factors that are intended to drive this increase in sales. Namely, the factor driving an increase in the average basket value and the factor driving an increase in the frequency of purchases. A third factor, which has a particular impact in lotteries – namely, a change in the brand usually purchased by the participant – is of lesser importance here, as we are addressing participants in the loyalty programme – people who are loyal to a particular retail chain or to the brand organising the programme. This is the main, overriding reason, which is why I mention it first. The second reason relates to making the rewards catalogue more attractive. In loyalty programmes, wherever reward catalogues exist – that is, in points-based and points-for-discount schemes – the value of rewards is capped at 2,000 zlotys gross. This restriction is strictly tax-related. Now, the possibility of offering an attractive prize in a prize draw – such as a car, a round-the-world trip, or even flats or houses, as some do – is a significant argument for the consumer – programme participants to take notice of the prize catalogue itself, and consequently to renew their interest in the loyalty programme. And that is reason number two. The third reason is, in fact, the argument that we have something to talk about with our participants. Because even the most attractive programme, with the highest incentive rate – a programme that has an attractive rewards catalogue – will, over time, run out of communication arguments to use with participants. How many times can you repeat the message „you’ve got 1,000 points, but if you make purchases, you’ll get another 100”? And this is where organising a prize draw provides a great talking point and a compelling message – one that isn’t entirely transparent to the participant. Consumers – participants in programmes of this type – perceive such messages very well when something attractive suddenly appears in the rewards catalogue; and that’s really what it’s all about from the participant’s point of view. And the fourth reason. It is extremely important from a financial point of view. Namely, the lottery allows us to write off balance sheet provisions which, in their financial statements, programme organisers maintain for points that have been issued but not yet „redempted” – meaning „not exchanged for prizes and not expired”. Every finance director always strives to reduce such provisions and the level of such provisions. And a lottery, in which participants can exchange points for a chance to win, rather than for a guaranteed prize that is subsequently invoiced as an expense, allows this objective to be achieved in a relatively low-cost, i.e. cost-effective, manner. That is the fourth argument. These are precisely the four main arguments for organising lotteries as part of a loyalty programme.

KN: So, shall we mix things up a bit?

TM: Yes. This element of variety is particularly important from the participant’s point of view. Yes, for the participant, it does add variety. From the organiser’s perspective, there are actually four different sets of reasons why this happens.

KN: And what types of lotteries can we organise in Poland?

TM: Under the Gambling Act, four types of lottery may be organised. Promotional lotteries, audiotext lotteries, quantum lotteries and cash lotteries. The latter is subject to a state monopoly. Consequently, organisers of loyalty schemes can, in practice, choose from three types of lottery. The main and most commonly used lotteries, which add variety and serve to support loyalty programmes, are precisely these promotional lotteries.

KN: Who are these lotteries aimed at?

TM: Lotteries are aimed at individuals. This restriction stems from the law – specifically, the Gambling Act. In Poland, lotteries may be organised for adults, with the exception of promotional lotteries, in which people aged 13 and over may take part. The same applies to raffle lotteries. However, as we are talking about lotteries supporting loyalty schemes, their target group is actually defined in the terms and conditions of the loyalty scheme itself, because only participants in that particular scheme may take part in this type of lottery. These may be loyalty programmes aimed at end consumers. Consequently, in such cases, the participants will be consumers – end consumers whose age is strictly defined, for example, in the terms and conditions of the programme. If these are lotteries supporting incentive schemes – business-to-business – aimed at commercial intermediaries, then in this case we will be dealing with either natural persons or representatives of legal entities. This is a method that allows us to organise lotteries for businesses as well. In such a lottery, of course, it is not the company itself that takes part, but a representative of that company. This does not necessarily have to be a member of the board of directors. In fact, it is most often a person who is registered for the incentive scheme and represents the legal entity as part of their participation in the scheme.

KN: But you mentioned that if private individuals are interested in this sort of lottery, they have to be members of the loyalty scheme – because it’s all part of the package.

TM: Yes, because we are talking here about lotteries today that support loyalty schemes. Of course, the vast majority of lotteries are organised for a broad range of end consumers. However, what we are specifically discussing today are those lotteries organised as part of programmes, meaning that only participants in a given programme – be it a loyalty or incentive scheme – can take part in these lotteries. Consequently, in order to take part in the lottery, one must first join and be a member of the programme in order to be eligible to win the prize on offer.

KN: So let’s also talk about which lotteries are the most popular.

TM: Definitely promotional lotteries. On the Ministry of Finance’s website, you can find a document entitled „Information on the implementation of the Gambling Act”. The most recent such document is for 2019, which is the last completed calendar year. And as we can see from this document, 519 lotteries were organised in Poland in 2019. These comprised 481 promotional lotteries, 36 audiotex lotteries and two raffle lotteries. And these 519 lotteries are only those organised on the basis of a licence issued by the Directors of the Tax Administration Chambers, as, in addition to this, lotteries may also be organised on the basis of a notification, which is submitted to the relevant Head of the Customs and Tax Office. Raffles can be organised under this procedure, and over 1,800 such raffles were organised in 2019. A characteristic feature of these raffles is that they have a limited prize pool. The prize pool may not exceed the base rate. In 2019, this amounted to approximately 4,800 zlotys, so these are small-scale raffles. The term „small raffle lotteries” is sometimes used, with the proviso that public benefit organisations may, subject to certain restrictions, organise raffle lotteries with a prize pool of up to 15 times this base amount. On the other hand, organisers of loyalty schemes can, in reality, choose between promotional lotteries and audiotex lotteries. The vast majority are promotional lotteries, so in fact, amongst this group of 481 promotional lotteries, there are also a dozen or so lotteries that were organised exclusively for participants in loyalty programmes.

KN: Tomasz, what steps do we need to take to organise a lottery?

TM: To organise a lottery, there is a whole administrative process that needs to be carried out. As I mentioned, a lottery can be organised either on the basis of a licence – which is issued by the Director of the relevant Tax Administration Chamber – in which case we conduct the process before that Director, as he is the authority issuing the licence. Or on the basis of a notification, in which case the lottery is notified to the Head of the Customs and Tax Office within the prescribed time limit. The process works as follows: if we follow the permit route – that is, if we conduct the proceedings for authorisation to organise the lottery before the Director of the Tax Administration Chamber – we must begin by submitting an application. This application must be submitted two months – as stipulated by the Act – before the anticipated start date of the lottery, and the requirements are very specific; the Act and its implementing regulations set out the documents that must be attached to the application. Of course, one of the main elements is the rules and regulations. Another element, which usually causes a few problems for organisers doing this for the first time, is the bank guarantee for the payment of prizes; this is the Director of the Chamber’s way of ensuring that we will actually pay out the prizes, and if we fail to do so, he will then use this guarantee as a means of ensuring that the funds, equivalent to the prizes, are paid out to the participants – the winners of the lottery, of course. So this is, this is an administrative process. A process involving documents. In fact, there is a whole series of letters that need to be prepared and submitted in good time so that, before the lottery begins, we can obtain the document that allows us to lawfully run a promotional, audiotext or raffle-style lottery.

KN: Once the organiser has received authorisation, what are the next steps? What are their responsibilities?

TM: Most people who do not organise lotteries professionally think that the moment we receive authorisation to organise one is the end of the process.

KN: That’s all there is to it.

TM: And this is, in fact, the start of the process. And if we were to compare the number of documents at this stage with those up to the point of authorisation and from the point of authorisation onwards, we would produce significantly more documents – to put it simply – once we already have the authorisation in our archives. Consequently, the first step is actually to inform the authority that issued the licence – in this case, the Director of the Tax Administration Chamber – that we do indeed intend to launch such a lottery. We are, in fact, launching it. And we have seven days to do so. Seven calendar days from the moment we launch the lottery. This is the main step that must be taken to comply with the law. The next step is to notify the Head of the Customs and Tax Office of the launch – this is the second authority responsible for carrying out inspections. So we inform the authority that issued the licence that we are implementing that licence, that we are launching the lottery within the timeframe specified in the licence – which is our obligation – and we inform the Head of the Customs and Tax Office that we are, in fact, subject to inspection, that we are carrying out activities subject to inspection, and we assure them that we are prepared for any potential inspection. Along with this notification, a copy of the licence and a copy of the rules and regulations must also be submitted to the Head of the Customs and Tax Office. These are the documents that allow us to consider the next two steps as completed. Next, at the next stage – if we have not already done so whilst awaiting the licence – we must register the records. A register of payments made, prizes awarded and winnings – that is, a document in which the details of individuals receiving prizes exceeding 2,280 zł are recorded, which is the tax-exempt threshold for prizes awarded – and a register of certificates of winnings, that is to say, by contrast, a document in which the details of individuals who have requested a certificate of winnings are recorded – a certificate confirming that I have received a specific prize in a given lottery. These documents are subject to disclosure. And the competent authority in the province where we conduct most of our proceedings is the Head of the Tax Office, as that is where – within that Tax Office – the department responsible for opening and, consequently, closing this type of register is located. So these are the steps that actually need to be taken before the first draw, well before the first draw. Usually, these steps must be completed even before the first entries for the lottery are received. Later on, there is a whole series of obligations relating to the conclusion of the lottery, but I think we’ll discuss that in a moment.

KN: You mentioned that we open and close the lottery at this institution, so let’s talk about how the settlement process works and how we close the lottery.

TM: This is the stage for which we have 30 days from the end of the lottery. Please note: this refers to the end of the lottery, not the end of the application period for the lottery. In this document, we must state how many and what types of prizes we have awarded, and whether we have issued certificates confirming the winnings I mentioned earlier – that is, the documents which winners may request within a strictly defined timeframe. A report drawn up in this way – colloquially, we might call it a „report on the lottery conducted” – must be submitted to the Head of the Customs and Tax Office as evidence that we have conducted the lottery and awarded the prizes. We then have a short time to prepare the records for closure; the relevant implementing act, the relevant regulation, states that we must submit the records for closure immediately after the end of the calendar year. In our case, this is always the first working day of the new year, when we begin by visiting the Tax Office to submit all the records from the entire year’s lottery for closure. So these are the main steps that need to be taken once the lottery has ended in order to settle the accounts properly with the authorities.

KN: Tomasz, let’s talk for a moment about the timeframe. How long does each of these stages take? The stage of obtaining authorisation, the stage during which the lottery runs, and the stage of closure and settlement.

TM: Under the Act, in order to organise a lottery, we must submit an application to the Director of the Tax Administration Chamber two months before the planned start date. In practice, however, this timeframe really depends on how busy the Chamber Directors are with applications to organise lotteries and, of course, on the other duties of the officials who handle these matters on an operational level, as, when conducting proceedings before the Director of the Chamber in western Poland, we once managed to obtain approval within a week. And this was only because it turned out that we were one of very few applicants in that particular year. So here, the statutory rule stipulates two months. After that, the duration of the lottery itself is, in accordance with the Gambling Act, a maximum of two years. That is 24 months, and we must fit everything within this timeframe, including the period after the deadline for entries has passed, during which we award prizes and deal with complaints. So this is a two-year period following the initial two-month period. Then, once the lottery has ended, we have 30 days to finalise the accounts. We must submit a report on the lottery so that, immediately after the end of the calendar year – in practice, on the first working day of the new year – we can present the records for closure. And here, the timeframe depends on when in the year the lottery ends. If it ends in December, we have just under a month; if it ends in January, we have 11 months. So these are the main deadlines. And of course, within this period, once we’ve received the licence, as I mentioned, there are several deadlines governing the submission of specific information, such as the 7-day deadline for notifying the licensing authority that we have actually commenced the lottery in question.

KN: What budgets are allocated to organising lotteries?

TM: This is a matter that falls within the remit of the lottery organiser – or, in this case, the organiser of the lottery supporting the loyalty scheme. There are no legal restrictions in this regard. As regards lotteries in Poland, when we analyse the individual terms and conditions and examine what the competition is doing, these are lotteries with prize budgets of between 150,000 and 200,000 zlotys gross. Of course, there are some where the prize budgets run into the millions. And in such cases, these lotteries are naturally far more visible on the market than those with relatively low budgets. Since lotteries within loyalty programmes are organised by entities that have loyalty programmes with an established market position, backed by extensive datasets and a large number of participants, lotteries within loyalty programmes – particularly those aimed at end consumers – tend to have larger budgets. Of course, the budget alone is not a determining factor. However, we do see a direct correlation – the more valuable the prizes, the greater the interest from participants in the lottery, the more entries there are, and the greater the subsequent success, so, of course, the budget is of great importance here; however, apart from its size, apart from the actual value of the sum we allocate to prizes, what prizes we offer is also crucial. If we look at the research, it is the Poles themselves who are telling us that they want specific prizes – they want cash awarded in various forms, they want cars, they want round-the-world trips, they want flats and houses. Then, a long, long gap, followed by consumer electronics. So the formula for a successful lottery is precisely to offer the sort of prizes that Poles want to receive. And indeed, when you analyse the market, lotteries with these kinds of prizes predominate, whilst within loyalty schemes this is practically the norm, because there’s simply no room for error here. In reality, we’re addressing a specific group of participants who are loyal customers. So we not only know their shopping habits, but we’ve usually researched their preferences, attitudes and expectations. Consequently, we can tailor the prizes – and, by extension, the budget for those prizes – to specific needs.

KN: You’ve already answered my question to some extent, because I wanted to chime in and ask whether the key to a good lottery, one that’s successful and appealing, is to prepare well for it and simply research the market and look into which prizes will be most appealing to participants?

TM: Yes, that’s a very important point. It’s actually the case that this preparation involves, first of all, analysing what the competition has done, and analysing what we, as organisers, did 2, 5 or 8 years ago as part of the lottery – because we’re addressing participants who are loyal, and as such they often remember that far back. At the same time, however, we need to understand the participants’ needs. So tailoring the prizes to specific, specific needs, whilst always bearing in mind that lotteries organised as part of loyalty programmes have the particular characteristic that the factor of switching brands is less significant, because we are addressing loyal participants who may already have switched from another brand to the one we are promoting. Whether that’s a retail chain’s brand or a product brand. Consequently, it isn’t particularly important for us to tailor the prizes to people who buy competing brands. As long as we’re running a programme for a loyal group, for a local group of participants. So this is the difference between promotional lotteries – and also audiotext lotteries – aimed at the general public, as opposed to those lotteries targeted at participants in a loyalty or incentive scheme.

KN: Tomasz, but I’ve heard that your interest in lotteries isn’t just professional?

TM: Lotteries are my professional passion; that’s true. In fact, over 10 years ago, I also wrote my doctoral thesis on this subject and defended it at the Warsaw School of Economics. It focused on the impact that promotional techniques – both price-based and non-price-based – have on the attitudes and behaviour of end consumers. In other words, I tried to show the differences between a price-based lottery – where the main prizes are financial – and a non-price-based one – where we offer non-monetary prizes. How these different approaches affect how participants subsequently react to them, to put it as simply as possible. In fact, this is also an area of my academic interest.

KN: In that case, to round things off and sum up, is there a lottery you’ve organised that has stuck in your memory the most?

TM: The lotteries that stick in the memory are those that either ended in spectacular success, or those that were the most difficult to organise, or those that really got the blood pumping whilst they were being run – to put it as colloquially as possible. And one such lottery, which actually combines these first two aspects – that is, one that ended in spectacular success as measured by market share and which caused enormous difficulty during its implementation – was a lottery from a few years back now, where we inserted banknotes and coins into the packets of washing powder for one particular brand, and consumers who bought that packet could find money hidden in the powder. And whilst this may seem straightforward from a technical point of view – it’s a classic ‘instant-win’ promotional lottery – I buy it and immediately find out whether there’s anything inside the washing powder or not, whether I’ve won or not. Have I won, or should I buy another one? However, from an implementation point of view, this lottery caused a whole host of problems. These were strictly organisational problems, because whilst organising it, we began to wonder whether we were even allowed to run such a campaign. Consequently, we even sought advice and wrote to the National Bank of Poland to ask whether, under Polish law, it was permitted to put banknotes and coins into the powder. Once we’d had this confirmed, the next task was to package these banknotes and coins in plastic bags that wouldn’t react with the highly chemical, corrosive environment of washing powder. So we had to carry out a series of tests. Tests which assured us that, several months after these cash prizes – wrapped in plastic – had been placed in the washing powder, they would indeed still be there. These were very, very interesting experiments. And in the end, it turned out that we had to put in a million zlotys, because that was the prize pool in specific denominations, and the denominations started, as I recall, with two zlotys – 2-zloty coins. Because there were 2-złoty coins, 5-złoty coins, and then there were 10-, 20-, 50- and, I think, 100-złoty notes, as far as I can recall. Ordering such a sum of money – money in specific denominations totalling a million zlotys from the bank – turned out to be several boxes, which the bank delivered on a pallet, so our task afterwards was to pack it all up. As this was several years ago, the entire process – all the packing – was done by hand. So, once we’d packed it and prepared it, sorting it into packages by denomination, it turned out there were several pallets of cash. And to transport it to the client’s factory, we had to drive several hundred kilometres on motorways, and of course in a convoy with people supervising to ensure that the money actually reached its destination. And later, the process of handing over the funds itself was quite spectacular, because it quickly became clear that if we’d wanted to count it coin by coin, banknote by banknote, it would have taken a week and a half even with ten people working on it. So we handed over the funds by weight. We weighed the money to an accuracy of a few decimal places of a gram. So lotteries of this sort stick in the memory, because on the one hand, like this one, they ended in a huge success, but on the other hand, well, it wasn’t a typical lottery organised by actually working on the rules, the website, the design or the advertising materials. Another example I can mention is one that particularly stuck in my memory because we had quite a headache trying to find a way out of a specific situation. It was a prize draw organised at one of the marathons. As you know, I run myself, so I also have the pleasure of combining running with my professional work. At one of the marathons, we organised a prize draw for those who finished the race; essentially, the draw involved checking from a vehicle that monitored whether a particular person had crossed the finish line – but in reality, whether a specific race number had crossed the finish line – we received information that everyone who was due to be at the finish line by a certain time had already arrived, so we set about processing the registration file for the draw. And so we drew the winner. The winner wasn’t there; they couldn’t come on stage to collect the prize, so we simply announced their first name, surname and race number, and later that night, internet users started reacting – because conflicts and crises of this sort usually erupt either at weekends or at night. They made it clear to us that the person who crossed the finish line with that number wasn’t the person who’d been registered, as even the gender didn’t match. Not to mention the age, so….

KN: A minor complication.

TM: Yes, complications of this sort are sometimes difficult to predict. However, these are the kinds of events that you remember for many years to come. And just like the first one, this one, of course, ended very, very positively and also brought a lot of benefits to the organisers of this particular marathon, as it attracted a record number of participants at the time amongst all the marathons held in Poland. However, from the point of view of the lottery organiser and the person supervising it, there were certainly a few interesting experiences.

KN: But as we wrap up this episode, let’s focus on the fact that, despite logistical problems and minor complications, it all ended in success.

TM: Yes, absolutely. Lotteries are organised to boost sales. The question is: which demand determinants are used? This, of course, depends on which demand determinants the organiser wishes to emphasise in particular. In the case of loyalty schemes, all of this must also be aligned with the rules of the loyalty scheme that the lottery in question supports. For participants, however, it is simply extra fun, an added benefit and a chance to win attractive prizes. For the organiser, it is a carefully thought-out, structured process designed to achieve a specific outcome, which will subsequently be reflected either in an increase in market share or in a rise in the volume or value of sales of the promoted product or sales within a given retail chain.

KN: Tomasz, thank you very much for the interesting conversation.

TM: The pleasure is all mine. Thank you, Kasia, and thank you all.

KN: See you in the next episode.