In this blog post, we’ve put a lens over all of the costs that you need to factor when implementing a loyalty and reward programme. From technology infrastructure to the allure of rewards, we'll explore the elements that contribute to the overall investment, providing insights to help businesses strike a harmonious balance between cultivating customer loyalty and managing the bottom line effectively.
Contents:
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Initial setup expenses
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Ongoing operational costs
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Platform or software costs
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Integration expenses
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Customer rewards and incentives
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Types of rewards
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Budget allocation
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Measuring return on investment
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Value generation
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Strategies for cost effectiveness
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Segment your audience
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Use tiered rewards
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- FAQs
See the costs associated with an inhouse built vs an outsourced bought platform. Download the cost comparison guide which includes 12 factors to consider when planning or revamping your loyalty programme.
Key Takeaways
- Over 90% of businesses have a loyalty programme, and members generate 16-18% more revenue than non-members.
- The costs of a loyalty programme depend on whether you build it in-house or buy a third-party solution.
- In-house programmes have higher upfront costs for planning, development, testing, technology, maintenance, support, and marketing. Ongoing costs include hiring experts, customer service, training, optimisation, and scaling.
- Third-party platforms offer more economical pricing models with low upfront costs and fixed monthly pricing.
- Technology investments are crucial for a scalable, purpose-built, customisable, user-friendly loyalty programme with robust security.
- In-house solutions provide more control and seamless integration, but are time-consuming to build. Third-party platforms are faster to market and increasingly flexible.
- The cost of rewards and incentives depends on the reward structure, types of rewards, and budget allocation. Personalised experiences and brand partnerships can be cost-effective.
- Measuring ROI involves analysing net gain, expenses, cost-benefit, customer behaviour, and long-term value of loyal customers.
- Strategies for cost-effectiveness include audience segmentation, tiered rewards, A/B testing, and leveraging digital channels.
- The value a loyalty programme brings can significantly offset the costs with the right solution and strategies.
The mass adoption of loyalty programmes across industries proves just how valuable they are to businesses. Not to mention their customers. Nurturing customer loyalty keeps them satisfied and benefits businesses in several ways.
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More than 90% of businesses have some form of loyalty programme in place.
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A study on US consumers found that the average person is signed up to over 16 loyalty programmes.
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And businesses that implement a loyalty programme report members generate 16-18% more than non-members.
As for customers signed up to one, 83% claim that being a member of a loyalty programme affects their purchase decisions with the brand.
It’s clear that many businesses implementing loyalty programmes are finding great value and ROI. If it’s something you’ve been looking into, chances are you already know this. Yet, no matter how good something is, there’s always a cost and this could be making you feel a little apprehensive committing to a solution.
Let’s get to it!
Understanding cost components
The costs of a loyalty programme depends on your route down the build versus buy road. Initial setup expenses and ongoing operational costs of a loyalty programme will look very different in either of these scenarios.
Initial setup expenses
You’ll find that building a loyalty programme in-house requires substantial upfront costs. These costs usually cover:
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Planning.
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Software development.
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Product testing.
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Technology.
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Ongoing maintenance.
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Customer support.
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Marketing.
You will need to hire customer loyalty experts and marketers, the dev team to develop, test, monitor, optimise and scale the software. In addition to that, there’s also a requirement for a customer support team to handle customer queries and troubleshoots.
On the other hand, many third party platform providers like Propello offer more economical pricing models. Low upfront costs and monthly fixed pricing evens the playing field for brands of all sizes. Which is one of the reasons why we offer affordable options.
Ongoing operational costs
Planning and launching your loyalty programme is just the start of your journey nurturing customer loyalty. In fact, the majority of the costs are found in the ongoing operations. Customer expectations constantly change. Savvy competitors never stop innovating and loyalty trends will always adapt.
With an in-house loyalty programme, it will be up to you to hire the experts that can keep on top of all of that. Also, let’s not forget the dedicated customer service team and additional training. This is critical for ensuring the loyalty programme runs as designed.
Your dev team will also need to keep optimising and scaling the programme and/or your in-house platform. As more customers become loyal, there will also be an opportunity to develop your loyalty initiatives. For example, implementing a referral programme. This may prove even more costly and time consuming in-house.
Whereas a third party platform that you licence could come with various types of loyalty programmes. These are plug and play solutions designed to be fast to market and highly convenient.
Technology investments
As we’ve already mentioned, technology is integral to any loyalty programme. A professional dev team needs to be on hand to design technical infrastructures. It needs to be:
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Scalable.
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Purpose-built.
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Fully customisable.
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Be user friendly.
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Boast robust security and anti-fraud measures.
The tech must also be capable of fully integrating with your existing systems.
Platform or software costs
There’s not just a financial cost to implementing a loyalty programme. Designing and building one from scratch is time-consuming. Equally, outsourcing it to a third party platform provider will cost you some control. Customisation, certain functions and features that you want, just might not be part of the repertoire of a licensed solution.
A slow time-to-market solution built in-house will ultimately cause you to lose money. According to Statista, just over half of businesses surveyed claimed to have built a loyalty programme in-house. Yet, loyalty management marketing was estimated to grow by over $4B between 2022 and 2026.
But what does a consolidating market of loyalty vendors have to do with you? Well, with positive market growth, the viability of third party platform providers is set to increase. That in large part is due to the benefits they offer clients. Their pre-built scalable solutions are built to purpose; designed to be:
- User friendly.
- Highly secure.
- And to offer more control and customisation with increasingly wider flexibility.
What’s more, they’re fast-to-market! You can deploy a viable loyalty building solution a lot quicker than the slight majority of competitors bogged down building their own. Saving time saves you money.
Integration expenses
On a technical level, licensing a third party solution may be cheaper. It’s also quicker. But that sometimes comes with a cost to fully fit your specific business needs. The proprietary nature of an in-house solution allows for completely seamless integration with existing systems thanks to their unique, purpose-built architecture.
Customer rewards and incentives
Pretty much all loyalty programmes boil down to customer rewards and incentives, right? After all, it’s their quality that attracts customers to businesses in the first place. Persuades them to keep purchasing products or services from the business and, even sometimes, advocate the brand to their friends and family. Referrals more often than not are an additional feature that come later in successful loyalty programmes. In a similar vein, relevancy and personalisation fall under the remit of well-designed tech.
But what about reward structures? Or different types of rewards? Can we put a number on them?
Types of rewards
The financial costs of rewards are very circumstantial. Discounts, free products, and the redemption rate of points in relation to the value of products vary from business to business.
With a well designed rewards structure – such as effective conditional rewards – the monetary value of your freebies and discounts can be drastically reduced. Modern consumers place more value in personalised experiences, tailored specifically to them. This tells us that it’s not so much about the value of the reward but where they’re offered…
In fact, this can actually inform your budget allocation.
Budget allocation
Leading with the philosophy of “where” and “why” rather than solely on the financial cost of a reward, helps you allocate more responsible budgets. For example, a 5% discount might be perceived as a little too economical. But as a welcome gift, it certainly sets very positive first impressions.
Likewise, offering repeat buyers of a certain foundation a complementary (cheaper) product goes a long, long way. It completes a set for the customer without extra cost to them and shows you’ve taken their behaviours and preferences into account.
Speaking of complementary products, what about brand partnerships?
Sure, businesses building an in-house solution would need to have an established network. As well as an audience of 500K+ to attract and keep valuable brands. But like us here at Propello, some third party platforms also offer access to reward catalogues.
These are based around partnerships designed to yield positive commercial outcomes. Through the power of unique, co-created rewards, brands can differentiate themselves from competitors at the fraction of a cost of building a huge audience.
Assessing ROI and value
Measuring the success of your loyalty programme requires an understanding of how the costs align with its outcomes. Having loyalty marketing experts and an experienced dev team certainly improves the chances of success for your loyalty initiative.
There’s also methodologies for measuring ROI that you can use to determine the financial gains of the programme. Bear in mind that the value of a loyalty programme accentuates over time.
As your experiences grow tailored, more unique and novel, the programme’s influence on customer retention and acquisition will take effect. Eventually you will see immediate gains extend to sustainable business growth.
Value generation
Where the real treasure lies is in understanding the long term value of loyal customers for your business. Loyal customers contribute to immediate sales, generate repeat purchases, and advocate the brand to others. Influencing others to purchase from the brand fosters a cycle of sustained revenue. Which is why loyal customers are much more valuable in the long term.
Strategies for cost effectiveness
The strategies below will help you trim expenses and elevate the efficiency and impact of your loyalty programmes.
Segment your audience
Not all of your customers will be equally loyal. That also means there’ll be various degrees of profitability from person to person. Segmenting your audience allows you to organise your audience into tiers of profitability.
Identifying purchase behaviours, preferences and the needs of segments informs your promotions and rewards. Making them more relevant and attractive. Which in turn, means your tailored promotions have a bigger impact.
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80% of companies that use market segmentation report increased sales.
Accurate, targeted promotions directed at customers identified as frequent buyers, maximises sales. Hence segmentation demonstrates ROI for your loyalty programme, ultimately making it more cost-effective.
Use tiered rewards
On the back of segmentation you could also optimise your rewards structure with tiered incentives. Rewards and benefits that cost you more are locked to customers who don’t meet your criterias. Only those most profitable to your brand are qualified to earn exclusive rewards. This improves the cost-effectiveness of your loyalty programme because:
- Customers at higher tiers will be fewer in number. Meaning there’s less people redeeming special rewards that cost more financially.
- Tiered rewards demonstrate an unrivalled ability to make people fear missing out. They encourage customers to climb the ranks. In the process making them more profitable to your business.
Tiered loyalty programmes also add a social aspect. In the eyes of customers, reaching a higher rank implies higher social standing. Adding exclusive benefits (like free shipping, early access and invites to special events) also adds to the allure. And since these customers are your most profitable, the revenue they generate outweigh the cost of special incentives.
The costs have wider implications
But with the right solution and strategies, the value a loyalty programme can bring significantly offsets those costs.
There’s not just a financial cost of implementing loyalty programmes. Setting up loyalty initiatives takes time. Not only are they time-consuming, the ongoing management and maintenance of loyalty programmes require resources.
As we’ve explored, there are various ways you can optimise the costs of your loyalty programme. There’s also differences in cost implications for buying or building one in-house.
Refer to our full guide to see all the numbers you need in our cost summary. The guide also includes a table that scores an in-house loyalty programme and an outsourced one on 12 key factors.
FAQs
Q1: What are the main costs involved in implementing a loyalty programme?
The main costs of implementing a loyalty programme include initial setup expenses (planning, development, testing, technology), ongoing operational costs (maintenance, support, marketing), and the cost of rewards and incentives. The total cost depends on whether you build the programme in-house or use a loyalty software solution.
Q2: How can a loyalty programme impact customer relationships?
A well-designed loyalty programme can significantly improve customer relationships by providing personalised experiences, valuable rewards, and a sense of belonging. By nurturing customer loyalty, businesses can increase customer retention, encourage repeat purchases, and foster brand advocacy, ultimately leading to long-term, profitable relationships.
Q3: What marketing strategies can be used to promote a loyalty programme?
Effective marketing strategies for promoting a loyalty programme include audience segmentation, targeted email campaigns, social media promotions, and leveraging digital channels. A/B testing can help optimise promotional materials for higher conversion rates. Integrating the loyalty programme with the point of sale system can also increase visibility and participation.
Q4: What are the advantages of building a loyalty programme in-house?
Building a loyalty programme in-house provides more control over customisation and seamless integration with existing systems. It allows for unique, purpose-built architecture tailored to the business's specific needs. However, in-house development can be time-consuming and requires significant upfront costs and ongoing maintenance.
Q5: How do the costs differ between in-house and third-party loyalty solutions?
In-house loyalty programmes typically have higher upfront costs for development, technology, and staffing. Third-party loyalty software solutions offer more economical pricing models with lower upfront costs and fixed monthly fees. They also provide faster time-to-market and increasingly flexible features, making them cost-effective for many businesses.
Q6: What are the ongoing costs of running a loyalty programme?
The ongoing costs of running a loyalty programme include maintenance, support, marketing, and the cost of rewards and incentives. Businesses need to allocate resources for hiring experts, providing customer service, training staff, and continuously optimising the programme. The cost of rewards depends on the reward structure and budget allocation.
Q7: How can businesses measure the ROI of their loyalty programme?
Businesses can measure the ROI of their loyalty programme by analysing net gain, expenses, cost-benefit, and customer behaviour. Key metrics include increased sales, repeat purchases, and customer lifetime value. Surveys and feedback mechanisms can also help assess the programme's impact on customer loyalty and brand advocacy.
Q8: What strategies can businesses use to make their loyalty programme cost-effective?
Strategies for making a loyalty programme cost-effective include audience segmentation, tiered rewards, A/B testing, and leveraging digital channels. By targeting the most profitable customer segments and offering personalised rewards, businesses can maximise the impact of their programme while minimising costs.
Q9: How can a loyalty platform help businesses manage their loyalty programme?
A loyalty platform can help businesses manage their loyalty programme by providing a scalable, purpose-built, and user-friendly solution. It offers features such as audience segmentation, targeted campaigns, and real-time tracking of member activity and rewards. A loyalty platform can also provide valuable insights into customer behaviour and preferences.
Q10: What are the long-term benefits of implementing a loyalty programme?
The long-term benefits of implementing a loyalty programme include increased customer retention, higher customer lifetime value, and enhanced brand advocacy. By nurturing loyal customers, businesses can generate sustainable revenue growth and build a competitive advantage in their market. A well-designed loyalty programme can also provide valuable customer insights and inform future marketing strategies.
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