Transcript of the episode: https://www.youtube.com/watch?v=i4yD9lMJAJQ

KN: Incentives – the benefits of taking part in a loyalty scheme. Katarzyna Nawrocka invites you to listen to today’s episode on loyalty schemes at night.

Today we are joined by Ms Karolina Rojecka, who will discuss the concept of incentives in loyalty schemes. We will outline the benefits of participating in schemes aimed at end consumers. There’ll be a bit of maths for number lovers, as well as some interesting facts for bargain hunters. In this episode, we’ll focus in particular on the benefits of taking part in loyalty programmes. Good evening, Ms Karolina, I’m delighted you’re here with me today.

KR: Good evening, Kasia.

KN: We’ll be discussing incentives and the benefits that loyalty schemes offer customers. Let’s talk a bit about these benefits, because I think we can all agree that the aim of a loyalty scheme is to reward the customer, isn’t it?

KR: That’s right. This is the main aim of loyalty programmes. The benefits offered by such programmes can be divided into direct and indirect benefits. Direct benefits include, for example, discounts or cashback. According to research by ARC Rynek i Opinia, these are the benefits most sought after by consumers in loyalty programmes. Indirect benefits, on the other hand, are points-based schemes. These merely bring us closer to a reward; the points themselves do not generate any added value for us. It is only the reward we are striving for that is the actual benefit of the loyalty programme for us.

KN: Before I ask you how this incentive coefficient is calculated, I’d like us to go back for a moment to what the incentive coefficient actually is. Let’s explore this concept a bit further and explain it. I’ve already touched on this topic here, and we discussed it in one of our conversations with our guests. We’ll include the link in the episode description, but let’s come back to it and break it down into its basic components.

KR: All right. The incentive ratio is the percentage of the return on the consumer’s expenditure in a loyalty scheme – in other words, how much I’ll ultimately receive for every zloty spent in a particular retail chain. For example, if I set the incentive rate at 1 %, this means that every zloty I spend will earn me a reward of one grosz.

KN: And how is that calculated?

KR: It is a very complex process. Perhaps we should start by describing what I do step by step – that is, the steps involved in calculating the final figure. First, of course, I check whether a given programme has a rewards catalogue. The easiest way to explain this is using the example of a points-based scheme with a rewards catalogue. I make a list of products from the rewards catalogue and assign them a points value, which is usually shown next to the image of the reward. Next, I check what the value of a single point is within the scheme. This is usually specified in the terms and conditions – that is, how many zlotys I need to spend to earn one point. Next, I check how much my reward is actually worth on the market – in other words, what its average market price is. The next steps are purely mathematical. I work out how many zlotys I need to spend to earn enough points for a particular reward. And the final step is to calculate the ratio of the reward’s market price to the number of zlotys I had to spend on it.

KN: And now we’ll show you the formula that describes these calculations, and I’d like to ask you to help us explain the methodology behind the calculations.

KR: The general formula we have adopted for our calculations is as follows. I calculate the quotient of the market price of the prize and the total amount spent in zlotys required to claim the prize. The total amount spent in zlotys required to claim the prize is the product of the number of points required to claim the prize and the value of one point in the scheme.

KN: Ms Karolina, do the market segments differ in terms of their average incentive rate?

KR: Indeed, market segments can be divided into various groups. Today, we have taken a closer look at the most consumer-oriented of these: grocery chains, the catering sector, hotels, petrol stations, chemists and the fashion industry. Among these, the catering sector stands out the most. There, the ratio reaches almost 12%. This is an exceptional ratio, as it is a double-digit figure, which is rarely seen. Conversely, participation in petrol station loyalty schemes is, one might say, the least favourable. There, the ratio does not even reach 0.9%.

KN: Could we now briefly explain why the percentages in points-based loyalty schemes are lower than, for example, in discount schemes?

KR: Perhaps we should start by considering loyalty schemes that include a rewards catalogue. Such a catalogue cannot be limited; it must contain a wide range of rewards. Secondly, such a catalogue cannot consist solely of low-value rewards; it must also include high-value ones. Customers must want to take part in such a programme, so the rewards must automatically be attractive. The value of a single point in the scheme is also important here. All this means that, in order to obtain an attractive reward with a high point value, a sufficiently long period of time must elapse to accumulate the points required for it and be able to claim it. Another important point is that, in points-based programmes with a high incentive ratio – where I’m effectively earning zlotys at every turn – there is no maximum shopping basket value for which I can receive these points. Therefore, programmes with a high incentive ratio would be unprofitable for the organisers. This means that a long period of time must pass before I can accumulate enough points to claim a reward.

KN: Let’s leave the figures aside for a moment and focus on the rewards. Are there any categories when it comes to the rewards offered in loyalty schemes?

KR: Yes. The organisers are competing to come up with the most attractive rewards for their programmes, to encourage people to take part. The most popular, as I’ve already mentioned, are discounts. An immediate benefit: I go shopping, my shopping basket automatically gets smaller, and I pay less than the actual price. Next are cashback schemes – these are programmes where the benefit is usually immediate too. I can see it for myself and work out exactly how many zlotys I’ll actually get back. This is even simpler than discount schemes. Another category is loyalty points schemes; however, as I mentioned earlier, these bring me closer to a reward indirectly. Among these, we can highlight loyalty schemes that offer a rewards catalogue. These may include physical rewards, discount vouchers – for example, „collect 100 points and receive a voucher worth 10% for your next purchase” – financial vouchers, such as „spend 100 zlotys and receive a 10-zloty discount on your next purchase”. An interesting segment in this regard is the hotel industry, because not only do they offer points-based and discount schemes, but they also segment their participants. In other words, collecting points places me in a specific category and, depending on the tier I am in – which also corresponds to the total amount spent with that company – I receive specific benefits. The higher the tier, the greater the benefits. In the case of hotels, for example, these include: early check-in, late check-out and free internet. An interesting feature of loyalty programmes is that you can donate your collected points to charity. This is a new development here, but it is becoming increasingly common in foreign markets.

KN: I’d also like to ask you about the ways of claiming rewards, because we can claim a reward when we redeem the points we’ve collected, but there are also cases where we have to pay a small additional amount – even just a symbolic zloty – to receive such a reward.

KR: For us as consumers, this doesn’t make a significant difference when it comes to high-value prizes, because in those cases – as someone who works in analytics and calculates these incentive coefficients – I add that zloty to the market value of the prize. When I find out how much a particular product costs online or in sales offers, I add that zloty to it, so it makes no difference at all; the coefficient remains the same. However, in the case of low-value rewards, for example, I can redeem my collected points for a hot dog costing 3 zlotys. I set its market value at 3 zlotys and add 1 zloty to it; this is already one-third of its price, which is why this multiplier is automatically lower.

KN: But now we can mention one more very important thing: how do we collect it? Do we have to go to the relevant collection point ourselves? Can we at least book such a prize over the phone?

KR: It really all depends on the organiser and the methodology they choose. From the consumer’s point of view, and in our opinion, the most convenient way is to collect rewards at the point of sale, because I simply go there, show my card, the sales assistant sees how many points I have and automatically hands me the reward. From the company’s point of view – that is, the programme organiser’s – it is more cost-effective to post the rewards. This is not due to any logistical difficulties, because if rewards were to be collected at points of sale, I would have to stock each point of sale with those rewards. In fact, every point of sale must stock every product in the rewards catalogue so that participants can collect them at any time. On the other hand, sending prizes by courier is more of a hassle for the consumer, as they must provide their address and personal details, and also liaise with the courier to collect the prize.

KN: We’ve lightened the mood for a moment, but let’s get back to the figures and explain how to distinguish between the value of a single point in the programme and the definition of the incentive coefficient.

KR: The value of a single point in a loyalty scheme is simply set out in the scheme’s terms and conditions. The company or organiser of the scheme determines how many zlotys a participant must spend to earn one point. The incentive coefficient, on the other hand, is a very complex process, as we mentioned earlier, and ultimately it tells us how much of every zloty spent I will receive back as a reward for my purchases.

KN: Let’s put it more specifically: how much do I need to spend to receive a prize worth 100 zlotys?.

KR: Let’s consider the simplest example: a points scheme with a rewards catalogue, where 1 point is worth 1 zloty, and I set the incentive factor at 1%. So, ultimately, to claim a reward with a market value of 100 zlotys, I have to spend 10,000 zlotys on it.

KN: Ms Karolina, and finally, which of these segments offers the best value for money when shopping, in order to earn rewards?.

KR: The answer to this question is not straightforward and cannot be based solely on figures. Here, we need to take into account a great many factors from our perspective – that is, from the consumer’s perspective. How often do I shop at a particular shop? How much money do I spend there? All in all, how much do my shopping baskets add up to over the long term? And also, are the rewards offered by a particular shop or retail chain attractive to me? If I prefer discounts and cashback, I should focus on such schemes. On the other hand, if I want to collect a certain number of points for a physical reward, I should take part in loyalty schemes.

KN: Thank you very much for today’s interview. We now know all there is to know about the incentive factor, but if you have any further questions, please leave them in the comments and we’ll be happy to answer them. Thank you very much, and I hope to see you soon

KR: Thank you for inviting me.

KN: We invite you to the next episode.