Loyalty programs have a variety of design and development costs

The costs of building a customer loyalty program can vary and depend on factors such as the program’s complexity, the size of your customer base, the features you want to include and, of course, your industry.  

The golden rule for building your customer base and increasing your market share starts with creating memorable experiences that lead to lifelong loyalty. Engaging new and existing customers with interactive programs provides the best chances of repeat purchases – a concept that applies to both B2B and B2C organizations [1].

What are the business benefits of a loyalty program?

A competitive advantage, more loyal customers that continue to buy for years to come and a strong position in the industry are just some of the business benefits effective loyalty programs can provide. Here’s a quick list to help you visualize the benefits:

• ARPU (Average Revenue per User): An effective loyalty program can drive higher ARPU. More orders and efficient marketing spend equates to higher revenue for every user who lands on your website.

• Higher AOV and/or Order Frequency: Loyalty programs often require a minimum purchase or significant threshold to generate customer benefits.

• Increase Share of Wallet – boosting the percentage of a partner’s total business spend towards a particular company’s goods or services can secure a more significant portion of the partner’s business, leading to increased revenue and profitability.

• Enhance Partner Retention – A loyalty program can boost partner retention rates, as program participants are more likely to continue doing business with the company, distributing and selling their products or services to end-users.

• Increase Cross-Selling and Upselling – incentivizing partners to try new products and services, loyalty programs expand the range of offerings available to partners can translate into increased sales opportunities [2].

What makes a loyalty program great?

As with most solutions, there is no one-size-fits-all. And loyalty programs are never really perfected. A great loyalty program requires ongoing market research, development, management and innovation. It will also require education and dedication from all members of your team and your partners. 

Building a successful program can deliver outstanding results that last. Referencing the Global Consumer Loyalty Report of 2023, here are several facts about the results a successful loyalty program can deliver:

• Loyalty program members equate to 44.8% of a company’s sales.
• 4.9X more revenue than cost is reported by the vast majority (80%) of companies who measured a positive ROI of their loyalty program.
• The average lifetime spend of members who redeemed their points at least once is 6.3X higher than those who have never redeemed.
• The average annual spend of members who redeem personalized offers is 4.5X higher than members who have never taken advantage of such offers [3].

Effective loyalty program design and implementation is essential. Here are some of the key components that make a good loyalty program:

• Rewards that Matter – if you’re offering rewards that don’t provide value to your customers, you’re wasting resources. Learn about your customers, then provide them with rewards that satisfy needs and desires accordingly.
• Being Accessible – Use multiple channels to allow customers to engage with your brand. Be omnipresent with your messaging and communications. 
• Personalized Offers & Communications: Use customer analytics to learn your customers in and out, then provide relevant and timely offers to them in a friendly, personalized manner, such as offering discounts to customers while they’re in-store or on your website. 
• Effective Management & Communication: Communicate reward opportunities clearly and often. Be transparent with terms and conditions and make it simple for customers to redeem rewards. Take customer feedback and improve your program regularly.

While these key components are important, think creatively to build a custom strategy that works for your business. Identify your business goals, analyze competition, understand customer expectations and use the right technology to level up your loyalty program.

What Does it Cost To Create A Loyalty Program?

The Global Customer Loyalty Report of 2023 reports that companies have invested or plan to invest around $375,000 USD in the launch or revamp of their loyalty programs. On average, 28.2% of a company’s total marketing budget is allocated to customer loyalty program management and Customer Relationship Management. In 2022, 28.2% rose another 5.4%, denoting the importance of loyalty marketing [3].

In addition to the obvious costs such as technology, staffing, marketing and communications, there are several hidden costs associated that businesses should be aware of:

• Opportunity Cost: Implementing a loyalty program may divert resources (time, money and effort) from other potentially profitable initiatives. This opportunity cost can be significant if the loyalty program does not yield the expected results.
• Fraud and Abuse: Some customers may try to exploit the program, engaging in fraudulent activities to gain rewards. Businesses must invest in fraud prevention and detection measures, which can be an ongoing cost.
• Technical Issues: Maintaining the technical infrastructure of a loyalty program can be more complex and costly than anticipated. Unexpected technical glitches or downtime can lead to customer frustration and support costs.
• Over-Discounting: Offering excessive rewards or discounts can erode profit margins. It’s important to strike a balance between rewarding customers and maintaining profitability.
• Customer Churn: In some cases, loyalty programs may attract price-sensitive customers primarily interested in discounts. When the discounts end, these customers may leave, resulting in customer churn and the need to acquire new customers, which can be expensive.
• Data Security: Handling customer data as part of a loyalty program carries responsibilities for data security and compliance with privacy regulations. Data breaches can result in financial penalties, legal fees and damage to your brand reputation.
• Complexity: As loyalty programs evolve and add more features, they can become operationally complex. Managing and maintaining this complexity can lead to increased operational costs.
• Customer Expectations: Successful loyalty programs create high expectations among customers. If the program’s rewards or service levels decline over time, it can lead to customer dissatisfaction and the need for costly service recovery efforts.
• Cannibalization: Loyalty programs may inadvertently encourage customers to shift their spending from higher-margin products or services to those that provide better rewards, impacting overall profitability.

To mitigate these hidden costs, businesses must conduct thorough cost-benefit analyses, monitor program performance closely and continuously adapt their loyalty strategies to align with changing customer behaviors and market dynamics. Building a sustainable and profitable loyalty program requires careful planning and ongoing management.

What are the costs of B2B loyalty programs?

If you’d like to create or refresh a B2B loyalty program, costs will depend on your industry, your customers and the program’s complexity and objectives. Rewards programs contribute a 32% increase in total revenue and a 30% increase in market share, so it is important to develop a loyalty program while also keeping these costs in mind when budgeting [4]. 

The main costs associated with B2B loyalty programs:

• Technology Platform: Developing or implementing a B2B loyalty program software platform is a significant upfront cost. This may involve building a custom solution or licensing a third-party loyalty program software. Costs can range from thousands to hundreds of thousands of dollars, depending on the features and scalability required. Statistics show that 60% of all B2B tech buyers are millennials (age 25–39) and 32% are Gen X (42-57), which means catering to younger, more tech-savvy audiences are critical for the success of a B2B loyalty program [5]. 
• Rewards and Incentives: B2B loyalty programs often offer rewards such as discounts, rebates, product incentives or co-op marketing funds to incentivize business clients. The cost of these rewards can vary significantly based on the program’s structure and the value of the rewards provided.
• Program Management: Businesses must allocate resources or hire personnel to manage and oversee the B2B loyalty program. This includes developing program rules, managing member accounts, handling inquiries and ensuring the program’s effectiveness.
• Data Management and Analytics: To track customer behavior, preferences and program performance, you’ll need data management and analytics tools. These tools help in making informed decisions and optimizing the program over time.
• Marketing and Promotion: Promoting the B2B loyalty program to attract and engage business clients requires marketing expenses. This includes advertising, email marketing campaigns and other promotional activities.
• Training and Support: Providing training and support for business clients participating in the program is an ongoing cost. This can include educating them on using the program effectively and addressing their inquiries or concerns.
• Integration with Existing Systems: If the loyalty program needs to integrate with the company’s existing CRM (Customer Relationship Management) or ERP (Enterprise Resource Planning) systems, there may be costs associated with development, integration and ongoing maintenance.
• Legal and Compliance: Ensuring that the B2B loyalty program complies with relevant laws and regulations may involve legal consultation and compliance-related costs.
• Customization: B2B loyalty programs often require customization to meet the specific needs of business clients. These customization efforts may involve development and design costs.
• Reporting and Analytics: To measure the program’s impact and ROI, companies may need to invest in reporting and analytics tools that provide insights into the program’s performance.
• Member Engagement and Support: Maintaining engagement and providing support to business clients participating in the program is an ongoing cost. This includes communication, assistance with rewards redemption and addressing inquiries.
• Incentive Structure: The cost structure of the program, including the amount and type of incentives offered, impacts the overall budget. More generous incentives may require a higher budget.

It’s important for businesses to conduct a thorough cost-benefit analysis and budgeting process when implementing a B2B loyalty program. The costs associated with these programs can vary widely and aligning the program’s features and rewards with the budget is essential for long-term success. Additionally, consider the potential ROI in terms of increased customer retention, sales and strengthened B2B relationships to evaluate the program’s overall value.

What are the costs of B2C loyalty programs?

B2C (business-to-consumer) loyalty programs come with various costs depending on the program’s complexity and objectives. Much of the costs for B2C programs depend on keeping up with consumer trends, new technology, better, more competitive rewards and ongoing customer feedback. Here are the main costs associated with B2C loyalty programs:

• Technology Platform: Developing or implementing a B2C loyalty program software platform is a significant upfront cost. This may involve building a custom solution or licensing a third-party loyalty program software. Costs can range from thousands to hundreds of thousands of dollars, depending on the features and scalability required.
• Rewards and Incentives: B2C loyalty programs often offer rewards such as points, experiential rewards, discounts, free products or services, exclusive offers and other perks to incentivize consumer participation and loyalty. The cost of these rewards can vary significantly based on the program’s structure and the value of the rewards provided.
• Program Management: Businesses need to allocate resources or hire personnel to manage and oversee the B2C loyalty program. This includes developing program rules, managing member accounts, handling inquiries and ensuring the program’s effectiveness.
• Data Management and Analytics: To track customer behavior, preferences and program performance, you’ll need data management and analytics tools. These tools help in making informed decisions and optimizing the program over time.
• Marketing and Promotion: Promoting the B2C loyalty program to attract and engage customers requires marketing expenses. This includes advertising, email marketing campaigns, social media promotions and other promotional activities.
• Member Engagement and Support: Maintaining member engagement and providing support to customers participating in the program is an ongoing cost. This includes communication, assistance with rewards redemption and addressing inquiries.
• Integration with Existing Systems: If the loyalty program needs to integrate with the company’s existing CRM (Customer Relationship Management) or POS (Point of Sale) systems, there may be costs associated with development, integration and ongoing maintenance.
• Legal and Compliance: Ensuring that the B2C loyalty program complies with relevant laws and regulations may involve legal consultation and compliance-related costs.
• Customization and Personalization: B2C loyalty programs often require customization to meet the specific needs of customers. These customization efforts may involve development and design costs. 
• Reporting and Analytics: To measure the program’s impact and ROI, companies may need to invest in reporting and analytics tools that provide insights into the program’s performance. Integrating customer feedback analytics can be costly – cultivating feedback, analyzing data and then implementing improvements to the program.

It’s important for businesses to conduct a thorough cost-benefit analysis and budgeting process when implementing a B2C loyalty program. The costs associated with these programs can vary widely and aligning the program’s features and rewards with the budget is essential for long-term success. Additionally, consider the potential ROI in terms of increased customer retention, sales and strengthened customer relationships to evaluate the program’s overall value.

How to calculate the cost of a loyalty program?

Depending on the structure and incentives of a loyalty program, defining the cost and net gain can be a complex process. Finance firm PWC suggests a simple formula to evaluate the performance of a loyalty program: incremental revenues subtracted by incremental costs [6].

Incremental revenues include:

• Ancillary revenue, such as membership fees, point sales or partner payments
• Increased purchase frequency or volume
• A willingness to pay a premium
• Lowered customer churn rate
• Higher referral rates

Incremental costs include:

• Cost of soft benefits, such as perks, recognition and member events
• Rewards redemption and accrued liability
• IT investment and subsequent maintenance
• Marketing and advertising
• Business overhead: payroll and staffing
• Research and development
• Vendor contracts

In addition to the methods above, overall business performance metrics should be included in the loyalty program conversation. E-commerce and mobile app analytics are key drivers in understanding your program’s success in today’s digital age. Referral links, social shares, direct website visits and backlinks indicate happy customers who are spreading the word, some of which can become full-fledged brand ambassadors. Customer reviews – both written and visual (photos or videos) can also be directly linked to an effective loyalty program that pleases shoppers and can help drive new business [7].

With all of these thoughts in mind, you now have the power to revamp or design an effective loyalty program that can increase revenue, secure new markets and make customers truly happy. What will you do with this power? We’d love to hear from you! Leave a comment below or get in touch. If you need help building or refreshing a loyalty program, that’s what we do. Get in touch.

References:

[1] The Ultimate Guide to B2B Loyalty Programs for 2023. https://www.xstak.com/blog/b2b-loyalty-programs#What_Makes_the_B2B_Market_Unique_and_Challenging?

[2] https://www.annexcloud.com/blog/10-pros-and-cons-of-loyalty-programs/

[3] The Global Loyalty Management Market Report 2023-2028 https://www.globenewswire.com/news-release/2023/04/12/2645117/0/en/Global-Loyalty-Management-Market-Report-2023-2028-Growing-Adoption-of-Omnichannel-Customer-Loyalty-Strategies.html

[4] Tips for Creating B2B Incentive Programs https://blog.usetada.com/en/tips-for-creating-b2b-incentive-programs

[5]  Millennial B2B Buyers What You Need To Know About The New Wave of Decision Makers https://www.trustradius.com/vendor-blog/millennial-b2b-buyers-what-you-need-to-know-about-the-new-wave-of-decision-makers

[6] How to calculate the cost of a loyalty program and why it’s important

https://www.bigcommerce.com/ecommerce-answers/how-calculate-cost-loyalty-program-and-why-its-important/

[7] How Can You Encourage Repeat Customers https://www.bigcommerce.com/ecommerce-answers/how-can-you-encourage-repeat-ecommerce-customers/