The cost of building a successful loyalty program

Customer loyalty is the golden goose of any ecommerce brand, and the best way to ensure a steady stream of golden eggs is by implementing a loyalty program. However, before you dive in, it’s important to think about the costs involved. While the exact costs of building a loyalty program vary widely (initial setup costs can be anything from $100 to $40,000), there is no need to feel intimidated. You can start small – with minimal investment – and build a program that grows alongside your business, delivering big results without a big upfront investment.

This article will break down both the upfront setup costs of getting a loyalty program started, and the ongoing expenses you’ll likely encounter as you invest more in your program. 

Why invest in a loyalty program?

Sure, costs are important, but before we get there, let’s talk about why you’d want to implement a loyalty program. A well-designed loyalty program can be the key to unlocking sustainable profitability and long-term success for your ecommerce brand. Here’s how:

Increasing customer lifetime value (CLTV)

Loyalty programs significantly increase customer lifetime value by building long-term relationships. When customers feel valued and rewarded, they’re more likely to remain loyal to your brand. This ongoing loyalty translates into repeat purchases over time, boosting the total revenue each customer generates throughout their relationship with your business. 

Boosting average order value (AOV)

Members of loyalty programs often spend more per transaction compared to non-members. This is because loyalty programs incentivize larger purchases through rewards and exclusive offers. For example, offering bonus points for spending over a certain amount or providing exclusive access to premium products can encourage customers to increase their order size. As a result, the average order value increases, leading to higher overall sales without needing to acquire new customers.

Reducing customer acquisition costs (CAC)

Acquiring new customers is more expensive than retaining existing ones. Loyalty programs help reduce customer acquisition costs by focusing on customer retention. Additionally, happy customers often become brand ambassadors, recommending your products to friends and family, which leads to new customer referrals at a lower acquisition cost.

Decreasing reliance on discounts

Frequent discounting can erode your profit margins and encourage customers to wait for sales before making a purchase. Loyalty programs offer an alternative by providing value through rewards rather than discounts. This approach maintains your profit margins while still giving customers a reason to stay engaged. 

Running a cost-benefit analysis and estimating ROI

Before investing in a loyalty program, it’s a good idea to perform a cost-benefit analysis. This exercise not only helps you understand your potential return on investment (ROI), but also equips you with powerful data to secure buy-in from senior stakeholders.

While we have a dedicated resource on measuring the ROI of a loyalty program, we’ll briefly touch on the basics here. To run a cost-benefit analysis of your loyalty program, you’ll want to look at key metrics like: 

• Increased sales and order values. Loyalty programs incentivize repeat purchases and encourage higher order values as customers strive to reach rewards. Factor in the expected uplift in sales to offset program costs.
• Customer retention and lifetime value. Track how the loyalty program influences customer churn and retention rates. Retaining customers for longer translates to more purchases over their lifetime, significantly impacting your overall ROI.
• Customer acquisition costs. Improved customer retention rates and any referral elements within your loyalty program should result in reduced customer acquisition costs.
• Loyalty program management costs. Consider the costs associated with running your loyalty program, which we will cover in this article. 

When you’ve estimated all the gains from your loyalty program, subtract the total investment (to estimate the net gains) and then divide this figure by the total investment. Multiply that by 100 and this will give you your estimated ROI. For simplicity, here’s the formula. 

ROI = (net gains – total investment) / total investment x 100.

Average costs of setting up a loyalty program

It’s important to acknowledge that there is no one-size-fits-all approach to a loyalty program.  The beauty of retention strategies lies in their scalability, and you can start small and build a program that grows alongside your business. There are plenty of low-cost options to get the wheels turning and set the stage for future expansion!

With that in mind, here’s a breakdown of the set-up costs you might want to consider.

Software and platform costs: Your customer loyalty platform is the backbone of your loyalty program. Off-the-shelf solutions typically come at a lower price point, whereas a more complex offering with extensive tracking and data analysis capabilities will require a higher monthly investment. Many providers such as LoyaltyLion also offer free plans and trials to get you going.

Initial setup and design: This covers the initial planning, program design, and creative assets needed to launch your program.

Marketing and promotion: Spreading the word about your loyalty program is essential for attracting new members. This could involve email marketing campaigns, social media advertising, in-store signage, or influencer partnerships. The cost involved depends on the chosen marketing channels, campaign duration, and advertising spend.

Staff and training: Depending on your loyalty program’s size and complexity, you might need to allocate staff resources for admin, customer service inquiries, and data analysis. You should also think about training your existing staff on the loyalty program to increase impact and integration across the business.

Remember, you can start small and build up from there. The costs involved in setting up a loyalty will vary considerably based on your business size:

• Small businesses might find success with a basic points program and leverage free marketing channels like social media.
• Medium sized businesses can benefit from off-the-shelf loyalty software and targeted marketing campaigns.
• Large businesses might require custom-built programs with sophisticated features.

Software costs: off-the-shelf vs. bespoke 

Choosing the right loyalty software is critical for the success of your loyalty program, and platforms like LoyaltyLion offer plans that cater to businesses of all sizes, making robust features available to all for an annual or monthly fee. On top of your loyalty platform, you’ll also need an email marketing platform, such as Mailchimp and Klaviyo. Email platforms also scale with you, typically increasing costs in line with the size of your mailing list and database.

Alternatively, you could choose to have a custom-built loyalty program. Bespoke solutions provide the advantage of tailor-made features and complete control over the program, but the high initial investment and ongoing maintenance costs are significant drawbacks. Some data suggests that the initial investment alone can be as much as $500,000. 

To build a bespoke loyalty program in-house, you’ll also need to consider: 

• Development costs
• Maintenance and updates
• Integration with existing systems

HR costs: the team behind your loyalty program

When you first get started, you and your team may well be juggling the responsibilities of running a loyalty program alongside other tasks. This can be a benefit as it encourages all team members to consider how the program can be integrated into other activities and technologies they’re running to generate efficiencies. We often see Marketing, Ecommerce, CRM or Customer Success Managers taking on – or sharing – the initial tasks associated with running a loyalty program.

As you grow and scale your program, you might consider bringing together a dedicated team to ensure smooth program operation, drive member engagement, and ultimately maximize your return on investment. Here’s a breakdown of some of the key players you might look to hire:

• Loyalty Program Manager: The Loyalty Program Manager (LPM) is the mastermind behind your program! This person oversees the entire loyalty program lifecycle, from initial planning and strategy development to launch, ongoing optimization, and data analysis. They’re responsible for defining program goals, crafting reward structures, and ensuring program alignment with overall business objectives.
• Ecommerce Manager: While not solely focused on loyalty, the Ecommerce Manager plays a crucial role in integrating the loyalty program with your online store. They work closely with the LPM to ensure smooth implementation, analyze customer behavior data to refine loyalty program offerings, and identify opportunities to leverage the loyalty program for upselling and cross-selling.
• Retention Marketing Manager: The Retention Marketing Manager focuses on developing and executing marketing campaigns specifically targeted at existing customers. They leverage email marketing, social media advertising, and other channels – including the loyalty program – to incentivize engagement, encourage repeat purchases and reduce churn.

For small businesses with less budget available, contractors or part-time staff can be a more cost-effective solution to support the running of your loyalty program. 

The cost of marketing your loyalty program

Building a thriving loyalty program is all about attracting new members and fostering ongoing engagement. Put some budget aside for these marketing strategies to help you grow your loyal community: 

• Launching with a bang. Generate excitement around your program launch with a targeted campaign. Use a mix of email marketing to existing customers, social media announcements, and influencer partnerships to spread the word. Consider offering bonus points or exclusive rewards for early sign-ups.
  
• Ongoing digital marketing campaigns. Investing in ongoing digital advertising is vital if you want to reach a wide audience. Budget for costs like:

• Google Ads
• Social media ads
• Content marketing
• Social media and influencer campaigns. Use social media platforms like Instagram, X, and TikTok to promote your loyalty program. Run contests or giveaways to encourage participation and user-generated content, and partner with relevant influencers to spread the word and build brand trust. Check out our blog on using a loyalty program to increase your social following and vice versa for more ideas.

Opportunity costs: accounting for your time and resources 

Loyalty programs are a powerful tool when it comes to business growth, but for small brands, managing them efficiently is key. Smaller brands tend to have limited resources, meaning the more you can integrate your program into your existing activities the less it will compete with other priorities. Opportunity cost refers to the time and effort a brand owner invests in managing the program. Estimating the opportunity cost involves calculating the value of the brand owner’s time. For example, if their time invested is 10 hours per week, and we assume an hourly rate of $25, the opportunity cost is $1,000 per month.

A fully integrated loyalty program can limit that opportunity cost. For example, if time spent managing the program is time that is not spent on product refinement and research, offering top-tier members the chance to participate in focus groups could ensure you make progress in all areas simultaneously and offset some of the opportunity cost. 

Marginal costs of a loyalty program

One of the biggest cost considerations for loyalty programs is the impact on your profit margin. Rewards are essential for attracting members, but they need to be carefully calculated to ensure you maintain profitability. For example, if you offer a 10% discount on a product with a 30% profit margin, the effective margin drops to 20%.

Different types of loyalty programs and reward structures can have varying impacts on profit margins. Let’s delve into two examples to illustrate this point. 

Points-based loyalty programs

Points-based loyalty programs offer customers the exciting opportunity to earn points for their purchases, which can then be redeemed for attractive discounts or free products. Because the focus is on earning discounts, brands need to do the following things to protect their profit margins: 

• Proactively manage the points-to-reward ratio. The number of points customers need to redeem for a reward must be balanced to ensure it remains attractive to customers while still protecting your profit margins.
• Track accumulation and redemption rates. Regularly monitor how quickly customers are earning and redeeming points to adjust the program as needed.
• Adjust reward values based on product profit margins. Ensure that the value of rewards is sustainable. For instance, purchasing higher-margin products should lead to more loyalty points than lower-margin items.

Tiered loyalty programs

Tiered loyalty programs reward your biggest spenders with exclusive perks. The more customers purchase from you, the higher their loyalty tier climbs. Rewards in tiered loyalty programs tend to be more varied, usually involving experiential incentives like early access to sales or invites to VIP communities. By offering these kinds of non-financial based rewards, brands can protect their profit margins while still motivating their customers to return and spend again. This is just one of the reasons that brands with a tiered loyalty program report a 1.8x higher return on investment than those without tiers. 

To ensure your tiered loyalty program fuels profitability, it’s important to:

• Define clear spending thresholds. Set achievable yet challenging thresholds that encourage customers to spend more to reach higher tiers.
• Balance rewards and costs. Ensure that the rewards for higher tiers justify the increased spending without eroding profit margins excessively.
• Regularly evaluate the program. Periodically review your loyalty program to ensure that the benefits provided to top-tier customers are driving enough additional revenue to cover the costs.

Finally, it’s worth noting that not every point or reward earned will be redeemed. In fact, the typical redemption rate for loyalty program rewards is 14%, so you need to factor this in when calculating the marginal costs of your loyalty program. 

Loyalty programs: your cost effective marketing channel

Building a successful loyalty program requires some investment, but the long-term benefits blow those costs out of the water.

Acquiring new customers is expensive, often five times more than keeping existing ones happy. Loyalty programs incentivize repeat business, reducing churn and building a loyal base of brand advocates. Furthermore, loyalty programs build communities and foster genuine engagement. These happy customers become your biggest cheerleaders, spreading the word organically and saving you on marketing costs. All of this leads to sustainable, long-term growth for your ecommerce brand. 

And don’t forget – you can start small and scale up as you grow. Begin with a basic points system using free or low-cost software and leverage marketing channels like email and social media. As your business expands, gradually introduce features like tiered rewards, personalized offers, and gamification elements. This incremental approach allows you to test and optimize your program while effectively managing costs.

Wondering how LoyaltyLion fits into your budget? Take a look at our pricing page.