You’ve decided to run a loyalty program and you already have great ideas for every aspect of the customer experience, from rewards to in-store events. But one critical question that all companies face is: How much will the loyalty program cost?
Many of our clients ask our team what kind of costs to expect in a turnkey loyalty program so they can better plan according to their budget.
If you’re feeling like cost is a grey area, don’t worry. We’re here for you.
Here is a checklist (with a worksheet, an ebook and a video among other things) to help you begin calculating loyalty-related costs. It’s not all-inclusive, since no two loyalty programs are alike, but it’s a great place to start. I’ll also share some tips for making your plan budget-friendly.
So grab a notepad and a pencil, and let’s get calculating!
#1. Choosing the Development Approach
Before diving headfirst into budgeting, there’s one decision that will influence the entire budget planning process: choosing who will develop your loyalty program? There are three options to choose from:
- In-house development: When the loyalty program is developed in-house, you have full control over the whole process. On the other hand, realizing a loyalty program on your own could take a lot of time. It’s up to you to figure out everything about designing and running a loyalty program from scratch.
- Custom development by an agency: Working with a third-party agency is similar to working with your in-house team, except you’re outsourcing the work to a company that already has the manpower. However, keep in mind that asking them to do the whole project is the most expensive route.
- Implementing a Loyalty Software: The main benefit of an SaaS loyalty software is that the company behind it has both the knowledge and technology to set up and run your loyalty program faster than either of the previous solutions. Since the backend is already set up and ready, you only need to take care of the concept and the frontend.
#2. Predictable Costs: Management, Marketing, Technology
This section is meant to cover any expense that can be mapped with relative ease. For example, how many employees do you plan on dedicating to loyalty program management? How big should the launch campaign be? If you’re opting for a SaaS solution, you can also anticipate how much the subscription fee will be in the upcoming years.
- HR costs: This represents the total manpower working behind the loyalty program, including maintaining it and running new campaigns. The good thing about working with a loyalty software provider, however, is that the platform they offer is made with accessibility in mind.
- Marketing costs: The marketing budget should cover any form of advertisement, especially during the weeks surrounding launch. Once the program is launched, spare no costs to promote the loyalty program on every channel. Ensure it is visible on your website, and make sure to promote it as part of your value offering through ads, social media, and videos.
- Technology cost: The most straightforward of the three, technology costs represent all the money you spend on the loyalty program’s backend. If you choose to develop the program itself, this can be an unpredictable cost. If you choose to go with a SaaS loyalty management platform, there will most likely be a fixed or scalable recurring fee.
#3. Less Predictable Costs: Rewards
Contrary to expenses related to marketing and technology, it is more difficult to come up with a bottom line for your reward system, because incentives tend to fluctuate a lot. Based on customer feedback, you will need to make adjustments, such as removing unpopular rewards or introducing new rewards for holidays or special occasions.
If you calculate the reward costs with the right mindset, they’ll contribute to your revenue growth, instead of detracting from it. Check out how LuisaViaRoma managed to use rewards to their advantage:
Despite its ever-changing nature, there are some cold, hard facts about the most popular reward types. Here’s what you need to know about them:
Coupons and discounts
In terms of redemption, there are two types of coupons: redeemable ones and automatically distributed ones. When customers need to use their points to get a coupon, they’re basically ‘paying’ for it, which is more beneficial for your business. Discounts that are given to members as a welcome gift, a birthday reward or a tier-up bonus have a bigger use rate and generate more interest, but are riskier simply because they come at a higher cost.
While planning your loyalty program, take into account the kinds of services you offer already. Making your extended warranty into a members-only benefit gives you a powerful incentive, at no additional cost to you, while heavily boosting your enrollment rates. Another approach is to lower the cost of certain services, e.g. express shipping, for those who sign up to the program. If you have tiers, the size of the discount can depend on the member’s rank.
Events come in all shapes and sizes, ranging from in-store community gatherings to huge anniversary celebrations filled with influencers and special guests. For this reason, it’s difficult to put an exact price tag on them. To ensure community building doesn’t cut too deeply into your profit margins, lavish events like cocktail parties should come at a cost that only your highest ranking members can afford, whereas movie nights or store openings should be available to everyone.
Very few know it, but early access is a golden opportunity among rewards. In brief, all you need to do is give a select number of customers the opportunity to purchase upcoming products before the general public. This not only has zero cost on your part, but those members who have this privilege tend to go out of their way to capitalize on this opportunity, thus increasing their lifetime value. Early access should always be a top-tier or VIP benefit, so other members will have the motivation to climb the ranks.
These can be members-only blog posts or videos featuring tips and advice about a topic you’re an expert on. These are ideal entry-level rewards for tiered or perks programs that have the power to boost your enrollment rate. Content creation can either be outsourced or made in-house by your staff. Nevertheless, you can make a calculation about the overall cost of the production, based on how much content you wish to publish each year.
Since one of the most important elements of a loyalty program is the rewards (which can include both monetary and experiential rewards), we included a template here, which can help you design your loyalty program reward system. Download it here.
#4. [Video] Online Loyalty program ROI
Despite careful preparation, many companies worry about whether they will see a return on their investment. When asked about the topic, I always point out that loyalty programs – when done right – will help your business grow.
Still, ROI is a deep and complicated subject, which is why we decided to discuss it with Jörn Roegler, VP of Strategy & Insight at Antavo, in an episode of Customer Loyalty Minutes. In the episode Jörn pointed out that loyalty programs generate money in several ways: by using loyalty points as a currency, by changing customer behavior, and by teaching you more about your customers. Here are some other highlights from the video:
Knowing the theory behind loyalty program costs is half the victory, but I wanted to give you some practical advice too. And no one’s more knowledgeable about this topic than our brilliant in-house loyalty strategist, Timi Garai.
“Many companies are uneasy when it comes to setting up a loyalty program, as they fear customers will start exploiting the system to pile up free coupons. But if you’ve already distributed free discount vouchers, which didn’t even require customers to make a purchase, then loyalty program discounts are actually an improvement. So let me give you a few pointers on how to avoid the pitfalls many companies fall into.”
Senior Loyalty Strategist at Antavo
Here are some more tips that Timi shared with us:
- Create coupons with a minimum spend limit to ensure that loyalty discounts don’t hurt your margins. This value should depend on your margins and product pricing.
- It’s better to start off strict and adjust the details later, as customers would see it as a sign of good grace on your part.
- Involve other brands that provide a different product or service as reward providers in your program. It’s free advertisement for them and helps you provide relevant rewards to your customers.
- Avoid showing open favoritism towards top-tier customers at store locations. Practices such as providing VIP cash registers can brew anger and dissatisfaction among other shoppers.
- Sweepstakes are alluring and capable of mobilizing every participant within the program, though you only need to give the prize for a handful of lucky winners.
- Points, credits, or whatever currency you use in your loyalty program are the most optimal reward for a sweepstake, because customers can spend them on anything their heart desires.
- Always plan your strategy with care and foresight, as cancelling a fan-favorite loyalty program can lead to backlash from your audience, and your sales will drop, too.
Now Everything Is Under Control
Those are the basic loyalty program costs you should consider when planning your loyalty program. If you would like to consult with an expert on loyalty program budgeting, ROI and optimization, our team is here to help. Book a demo with us to learn more.
If you would like to dig deeper into the world of loyalty program business case, and learn more about Budget Planning, download our “Budget Planning 101 for Loyalty Programs” ebook.