As customer acquisition costs continue to soar, the value of customer loyalty has never been more apparent.
Today, leading brands recognize that a well-designed loyalty program can transform one-time buyers into lifelong customers, significantly boosting their bottom lines through repeat purchases and increased customer lifetime value.
Loyalty programs have also proven great at attracting new customers and giving access to a treasure trove of data to further optimize a brand’s marketing and operations.
While loyalty programs are by no means new, innovative new approaches like gamification and data-driven personalization are helping businesses fetch ever higher returns through them.
Even though the benefits of loyalty programs are clear, many businesses are hesitant about implementing them due to concerns about costs and complexity.
Read on for an in-depth look at key considerations when calculating the cost of implementing a loyalty program.
Types of Loyalty Programs
When considering a loyalty program, you face a crucial initial decision: build a custom solution from scratch or partner with an established platform provider.
Research indicates that satisfaction rates are higher among businesses with loyalty programs managed by a third-party technology vendor.
The advantages of choosing an experienced partner over in-house development are better performance, more features, ease of use, and cost savings.
It’s also important to note here that the costs of implementing various types of loyalty programs aren’t uniform. Different program types come with varying levels of complexity and associated costs.
For instance:
- Points-based programs that reward customers for purchases.
- Tiered systems that offer escalating benefits, such as gift cards or free merchandise.
- Paid membership programs with exclusive perks, such as free delivery or in-person experiences.
- Hybrid models combining multiple reward structures.
Although all loyalty programs require considerable financial commitment, brands continue to invest in existing programs or launch new ones because the benefits far outweigh the costs.
A recent Business Insider analysis shows that major brands are doubling down on loyalty programs at a time when many American shoppers are cutting back on spending. This is true for both well-established loyalty programs by the likes of Costco and Starbucks as well as new or revamped programs by brands like Etsy and Ulta Beauty.
Key Cost Factors of Implementing a Loyalty Program
As we already mentioned, the costs of different loyalty programs can vary widely.
A basic version of a points-based system is generally more affordable to implement, while more complex tiered or paid programs might have higher setup and maintenance costs.
According to the 2023 Global Customer Loyalty Report, businesses reported investing or planning to invest an average of $375,000 in the launch or revamp of their loyalty programs.
Let’s break down the major cost components of a customer loyalty program.
Software and Integration Infrastructure
Implementation costs begin with setting up the technical foundation of a loyalty program.
This includes the cost of software development, ongoing maintenance, and potential upgrades, as well as the cost of integrating with existing systems such as point-of-sale (POS), customer relationship management (CRM), and e-commerce platforms.
The good news is that loyalty management technology increasingly overlaps with technology for managing and unifying customer data. That is because data from loyalty programs is incredibly valuable for multichannel marketing initiatives, including personalization.
Design and Development
The initial setup phase involves costs related to branding, user interface design, and user experience optimization.
Adequate investment in this step is crucial from the point of view of returns because 70% of customers who have signed up for a loyalty program spend more and engage more frequently with the brand.
You want to ensure they remain in this ecosystem, which requires making the experience as seamless and satisfying as possible.
Reward Fulfillment Costs
Rewards are the backbone of any loyalty program because they incentivize customer engagement and repeat business. They also represent a direct cost to the business and, therefore, must be carefully balanced to maintain the program's profitability.
Reward Fulfillment costs can include product discounts, free merchandise, gift cards, exclusive in-house or partnership experiences, and the overall monetary value of points.
A successful loyalty program can recover these costs many times over.
In 2022, Costco’s paid loyalty membership model enabled it to keep a low merchandise markup of around 10.5%.
In return, membership fees generated over $4.2 billion from 54 million households, accounting for roughly half of the company’s yearly profits.
Marketing and Promotional Expenses
Launching a loyalty program and driving ongoing engagement requires a well-planned, multi-pronged marketing strategy.
This may include:
- Launching the program: Announcing the program to existing and potential customers through various channels, including hosting events to generate excitement and participation.
- Advertising campaigns: Running online and offline advertising campaigns to promote the program.
- Promotional materials: Creating brochures, emails, and social media content to communicate the benefits of the program.
According to the Gartner 2024 CMO Spend Survey Data Snapshots, 20.6% of Paid Media budgets were allocated for loyalty and advocacy.
Ongoing Operational Costs
Operational requirements are often more extensive than anticipated.
On average, loyalty program management involves 16.2 people, including program managers, customer support, marketing operations, IT personnel, designers, copywriters, and business analysts.
Training your existing staff on the program's features and benefits is essential to ensure effective implementation, communication, and customer support.
Due to their complexity, 40.7% of loyalty programs are managed by a dedicated loyalty team separate from the marketing team.
Hidden Costs
Beyond the key cost components mentioned above, there are some unexpected costs that can come up to catch businesses off guard.
It’s important to factor in these potential costs early on.
Program Monitoring, Data Analysis, & Optimization Expenses
Successful loyalty programs require ongoing analysis and optimization. This includes investments in data analytics tools, relevant specialists, regular customer surveys, and potential consulting fees for program evaluation and improvement recommendations.
As mentioned earlier, loyalty programs are also a valuable pool of customer data that can be used to optimize other marketing and business operations.
Their unique ability to capture detailed consumer preferences and intentionally volunteered or zero-party data is a big part of why 65% of B2C marketing decision-makers say they plan to increase their investment in relationship and loyalty marketing in 2024.
Security and Compliance
Legal compliance and data protection represent an often overlooked cost of implementing a loyalty program.
For example, the EU General Data Protection Regulation (GDPR) imposes strict rules on processing personal information and requires specific investments in data protection infrastructure.
In the US, loyalty programs must comply with Federal Trade Commission (FTC) regulations, particularly regarding gift card operations.
These compliance requirements may call for ongoing legal consultation and regular system updates.
You must also invest in safeguards to detect and prevent fraudulent activities, such as account sharing or point manipulation.
Cost Optimization Strategies
Strategic planning can significantly reduce costs while helping you score higher returns when launching or revamping a loyalty program.
Here are actionable tips you can use to optimize your program costs:
- Start with a simplified program that can scale over time.
- Focus on precise customer segmentation for targeted rewards and promotions.
- Consider partnering with established vendors like DataCandy rather than building from scratch.
- Make the most of automated systems for marketing outreach, program management, and reward fulfillment.
- Regularly analyze program metrics to adjust and optimize spending.
Choose DataCandy: Your All-in-One Loyalty Solution
While the cost of implementing a loyalty program can vary significantly depending on its complexity and features, partnering with the right loyalty platform can streamline the process, achieve better results, and save you more!
DataCandy offers a comprehensive gift card and loyalty platform that eliminates costly custom development, ongoing maintenance, and analytics.
With our user-friendly platform and pre-built features, we help get your loyalty program up and running in no time.
Our transparent pricing structure includes no hidden fees, and unlike many other vendors, we offer unlimited gift card transactions with no per-transaction commissions.
Why do it alone when you can trust a team of loyalty experts with a proven track record of successful loyalty programs for hundreds of brands?
Get started today, and we can set up your program in as little as 10 business days!
Get started with a loyalty program
Offer your regular customers rewards and keep them coming back for more!
