Average loyalty program cost: Retailers' common mistakes when budgeting and how to avoid them

Would you agree its hard to estimate loyalty program costs – in advance?

CMOs are expected to accurately estimate the ROI of all their initiatives, which is not easy when talking about loyalty. Leaders of retail loyalty programs should be thinking out over years, versus other departments such as sales, which predominantly think around quarters.

The right loyalty budget for retail companies varies according to many factors, including goals, strategy, company growth rate, profitability and others.

How loyalty program budgets are spread

Budget for loyalty programs is spread across different areas of investment, from staffing, to IT, operations and marketing.

Let’s dive into each one of these areas:

Business overhead: payroll and staffing.

Business overhead represents the total manpower that works behind a loyalty program in all stages of development, from design to launch and maintenance.

How many people does it take to run a loyalty program?

Unfortunately, this is not an easy question to answer. It depends on the size of the retailer, the platform they choose, the number of members they expect to enroll, the type of program they’re running, etc.

The good thing about working with a loyalty software provider like Loyal Guru, however, is that our platform allows you to do more with less, for example, generating millions of personalized offers in minutes, not weeks.

According to The Wise Marketer, this is the team you will need to consider in order to successfully launch and manage your loyalty program:

Retrieved from The Wiser Marketer

IT infrastructure.

Technology infrastructure costs represent all the money you spend on the loyalty program’s backend. Technology has developed a lot over the past decades, and the problem is that many retailers are still operating with legacy systems, fragmented data silos and multiple vendors, which can make it difficult to collect and unify data into a single customer view.

Loyalty tech for retailers typically include a customer data platform, a loyalty engine, marketing automation, point-of-sale integration, retail analytics reports and dashboards and consumer-facing technology, such as a customer app.

Building this tech from scratch is obviously the most expensive route, with the up-front and maintenance costs being steep and unpredictable. So for businesses that don’t have unlimited IT resources, a reliable SaaS loyalty partner such as Loyal Guru is invaluable, because you benefit from the scalability, flexibility and ongoing support of a much lower recurring fee.

Statista forecasts the global loyalty management market size to grow from USD 4,54 billion in 2021 to USD 24,4 billion by 2029, at a CAGR of 16.3% during 2021 –2029. Major growth drivers for the market include increasing adoption of omnichannel and multi-channel programs, technological advancements, and a growing need for competitive differentiation.

Source: Statista

Loyalty program operations.

Program operations includes everything you do to get a return on your loyalty investment: the structure of your program, the rewards currency you use, how you finance rewards, what kinds of discounts and promotions you offer and how you acquire and retain program members.

Regarding the cost of your program’s rewards and incentives, it is more difficult to estimate upfront 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 the program is successful, your rewards, offers, and promotions should increase customer engagement, drive revenue, and grow the program’s reach, so you should calculate this investment with the right mindset.

Otherwise, the loyalty program might feel like a cost center, and then your loyalty budget will be harder to justify. Even programs with major funding and deep internal resources can fail if they have a poor rewards scheme or rewards are too difficult to earn.

Marketing your loyalty program.

The marketing budget covers any form of advertisement, especially during the weeks prior to its launch to make customers aware of the program’s existence.

Once the program is launched, keep investing to promote the loyalty program on every channel and invite more members into your program. Make sure your POS staff is trained to communicate about it, it is visible on your website or e-commerce site, and promote it through ads, social media and email. Encourage your new members to refer the program to other member’s incentivizing them with extra points and benefits.

Marketing will determine how well you communicate the value of your program, grow your membership base and engage existing members.

How is the cost of a loyalty program calculated?

Finance firm PWC suggests a simple formula to evaluate the performance of a loyalty program: incremental revenues subtracted by incremental costs.

Incremental revenues include:

• Extra revenue from membership fees or partner payments (minimal or non-existent in retail loyalty programs)
• Increased purchase frequency or volume
• Lowered customer churn rate
• Higher referral rates
• A willingness to pay for premium offerings
• Additional revenue from CPG negotiations

Incremental costs include:

• Research and development
• IT investment and subsequent maintenance
• Business overhead like payroll and staffing
• Rewards redemption and accrued liability
• Marketing and advertising
• Vendor contracts

What many retail companies get wrong about loyalty program budgets

Retailers measure the wrong data.

US brands spend $30.61 million every year on marketing data—they’re starved for information about their campaign performance.

But data is tricky: your marketing team needs to track the right metrics to truly understand how marketing affects the bottom line. For example, vanity metrics like total number of members are attractive, but of little value if they don’t correspond with more relevant metrics such as engagement rate and others.

Your budgeting decisions are only as accurate as your data. Loyal Guru will help you track the correct metrics for your unique business situation. With our software, you can use customer segmentation from our customer data platform to isolate the effects that different customer segments have on those 4 important metrics. This way, you can make decisions based on data, not gut feelings.

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Retailers don’t know the timeline.

A loyalty program done right will more than make up for the implementation and maintenance costs, though you need to make sure your proposed strategy is sustainable given your current business model and financial health. Loyalty programs can become profitable within 12 to 24 months after launch, but not often does ROI happen before that.

One of the most costly mistakes you can make is not fully understanding your loyalty program’s timeline. Even established retailers forget to do this, or don’t do it properly.

So how can companies right-size their marketing budget?

In a simple way, we can suggest you watch out the following KPIs:

• Track the number of new members (especially by channel or acquisition source) and the churn rate over time.
• For a points-based program, you need to breakdown the number of points earned and points used by month.
• For programs that include tiered benefits, it is important to show the attainment of these tiers, how long it takes to attain a tier and the likely claim rates.
• Account for the profitability pertaining to cash flow and income statement considerations.
• Account for the both member and non-member AOV, and show the baseline of total AOV if there was no program. (As the program ages, total revenue with the program should grow with an ever increasing gap between forecasted total revenue with and without the program.

As an example, Starbucks states that one of their loyalty customers will spend 3x more than a non-loyalty customer.

How can CMOs and loyalty leaders get alignment around spending priorities?

In order to create trust from your CEO or CFO, a lot of it is showing your work, explaining the plan, explaining your model. It’s basically applying the scientific method to marketing, which is a very reasonable thing to expect.

Organize your pitch in the following way:

Conclusion

Loyalty programs are not risk-free endeavors. The right loyalty budget for retail companies varies according to many factors, but if you invest well in fundamental areas, such as IT, program operations, marketing the program well, training employees, communicating with customers, you can flawlessly execute an excellent loyalty program.

If you’re a retailer and you’d like to talk about any of the customer engagement strategies outlined in this article in more detail, then get in touch with our team – we’ll be happy to show you examples or talk through your brand’s unique challenges.