When launching a customer loyalty program at your company, one of the first steps on your journey should be calculating the total cost of the project. If you opt for a plug-and-play solution, this estimation will be fairly straightforward - start by exploring the pricing of your preferred loyalty software provider. But what if your company is in need of a tailor-made loyalty program?
The truth is - the costs of building a fully custom loyalty platform from the ground up are often more than you think.
Before implementing a bespoke loyalty system at your company, you need to understand all the financial intricacies of developing software in-house. The true costs involved in building a loyalty program independently go beyond most basic workforce management. When budgeting, you also need to account for bankrolling and funding:
- back-end developers,
- front-end developers,
- project management,
- UX/UI designers,
- quality assurance,
- updates and bug fixes,
- development of new features.
Below, we have created an in-depth breakdown of costs to help you navigate the inevitably convoluted development process with your financial department.
Read this article to understand all possible budgetary challenges you may face when implementing a custom loyalty program - including costs, resources, and time to market.
The "build vs. buy" dilemma
Implementing a loyalty program usually involves two options: building a custom system in-house or buying an off-the-shelf solution. Each option has its benefits and disadvantages, but the most notable difference is obviously the cost. Buying is generally cheaper than building software in-house.
Would you like to better understand the differences between buying and building your own loyalty programs? Check out one of our previous articles for a more detailed discussion on the build vs. buy dilemma: build vs. buy dilemma when building a loyalty solution.
The true cost of loyalty programs built in-house
Despite the pros of building a loyalty program from scratch, there are inevitable financial strains associated with this option. Sure, if you develop the platform in-house, you end up having full control over its functionalities and customization. However, you need to keep in mind that developing bespoke software is a notoriously resource- and time-consuming process.
Overview of resources and potential challenges
The challenges and expenses involved in developing a custom rewards program include fixed and variable costs during development, implementation, maintenance, and a level of trial-and-error that is inherent in projects of this magnitude.
The resources necessary for developing bespoke loyalty programs in-house include stakeholders with diverse technical skill sets, expertise, time, and equipment, none of which come cheap.
Integrating the new loyalty software with existing system architecture also requires a significant financial investment, not to mention the complexity of plugging into an existing network in a way that does not compromise what already works.
To put it bluntly - you should account for all the possible worst-case scenarios in the quality control phase.
Cost categories when developing a bespoke loyalty program
As we stated before, expenses incurred while building custom loyalty programs go beyond merely coding the solution. Here is a comprehensive breakdown of all the elements you need to keep in mind when developing a fully tailored loyalty program in-house:
1. Knowledge costs
While building a custom loyalty program allows for full flexibility and control over the final product, the associated knowledge costs during the development stage can put a strain on your total budget. Hiring skilled technical professionals, such as backend and frontend developers, UX/UI designers, and project managers, adds up quickly. In Europe, market rates for these professionals range from $4 000/month, up to $8 500/month.
In addition to the cost of human capital, you will certainly need to include additional expenses related to software licenses, development tools, and other resources necessary throughout the entire development process.
2. Platform implementation costs
Once the core functionalities of the loyalty program are developed, the platform needs to be integrated into your existing systems. Depending on the internal processes and architecture at your company, the complexity of this stage can range from a minor challenge to a never-ending cycle of back and forth communication, bug fixes and lost time. And with time comes money - the clock is ticking at a rate of $4 000 - $8 500/month per each professional you involve in the implementation process.
The implementation phase can be an especially complex and time-consuming process for enterprise-level companies with intricate system architectures and highest security standards on the market.
Implementation costs can include additional development work, integration testing, employee training, and potential downtime during the integration stage. On a large scale, these expenses could add up to seven-figure budgets.
3. Maintenance, performance and scalability costs
Maintaining a bespoke loyalty program also involves money and resources. Regular delivery of updates, bug fixes, as well as security patches are necessary to ensure the customer loyalty program remains functional and secure. You'll need to allocate resources to a maintenance team, which may include software developers, Quality Assurance (QA) engineers, IT support staff, and likely a project manager to coordinate the work.
Remember - your loyalty program has to be blazing fast and fail-safe to make a good impression. Any performance issues may scare the users off. Slow response times will inevitably curb the growth of your loyalty program or might very well contribute to the failure of your project.
Moreover, cloud hosting and other infrastructure-related costs should be budgeted as ongoing operational expenses while the loyalty program is running. Hosting pricings depend on the providers, but your most common options will be pay-as-you-go tariffs or fixed plans with tiers. Regardless, this means your costs will increase over time, even as you grow the number of loyalty members in your program.
4. Lost opportunity costs
Building custom loyalty programs in-house often means diverting time and resources away from other projects and initiatives within your company. Again, depending on your organization, this lost opportunity could be quite significant, especially if the in-house development process takes longer than planned, or if you encounter unforeseen challenges on the way.
Moreover, you need to learn how to build loyalty which is probably not your core business, so you need to hire or educate current employees. It's hard, expensive, and time-consuming. Not to mention - this, too, will be an ongoing cost, if you want to prevent switching to a vendor within several years.
While this missed potential of in-house resources is difficult to measure, it is important to keep it in mind when negotiating the budget with the financial department. After all, the team responsible for building the bespoke loyalty program could be allocated to other growth-driving initiatives or core product development. This point will likely be raised by your CFO.
5. Marketing and promotion costs
Successful loyalty programs need well-planned marketing strategies to attract and retain loyal customers. This may include creating marketing materials, launching campaigns, and leveraging social media, PR and other digital channels to raise awareness of the program.
In some cases, you will need to allocate the budget for employee training, if the physical point of sale is your expected location of capturing loyalty members.
Additionally, ongoing efforts to analyze customer behavior, segment users, and develop data-driven loyalty tactics can further enhance the effectiveness of your program. These marketing and promotion costs could be included when calculating the true cost of ownership - especially if your rewards program will require high volumes of user data crunching.
6. Risks and uncertainties
Like with any software, developing a custom loyalty program in-house comes with inherent risks and uncertainties. For instance, the program may not deliver the expected return on investment (ROI) or fail to meet the actual needs of your customers. In such cases, by the time you realize you need to pivot from the initial ideas, you would have already spent a substantial amount of the budget.
This sounds gloomy, but remember - these risks are inherent to development of any software from scratch. Fingers crossed, your loyalty program will resonate with the customers. Just beware of the not insignificant chance of incoming obstacles.
7. Cost of innovation
The modern landscape of loyalty programs is evolving quickly. Some rewards programs that rule the hearts of customers today may become obsolete tomorrow. This is why staying ahead of the competition and keeping up with the industry are crucial to the success of your program.
This may involve investing in emerging technologies, integrating with new platforms, or continuously innovating and reconfiguring your reward strategies. Would you consider building a rewards mobile app back in 2007? Likely not! Fast forward 15 years just to find yourself in a world of mobile-first customer loyalty.
Building in-house, however, may limit your ability to quickly adapt and innovate long term. Unless, of course, you can allocate the necessary budget and keep bankrolling your team to constantly work on the value proposition of your rewards program.
The Total Cost of Ownership in numbers
Now that you have the big picture of the loyalty program cost categories, you must be wondering - how do I calculate the total cost? The Total Cost of Ownership (TCO) for building a bespoke loyalty program consists of multiple must-have components that you need to account for.
We have put together a list of resources based on average market rates (SODA 2023) to put the costs into perspective. Let us start with listing all the necessary resources and their respective monthly costs in the following table.
Example calculation of TCO for basic loyalty programs
To help you understand the actual cost of building a bespoke loyalty program in-house, we have broken down all expenses by category and monthly cost, and put them on a timeline.
Keep in mind that rewards programs differ in scope - as do their development timelines. To ensure our TCO calculations are authentic, we have researched average market rates, average project timelines, and stacked the data up against the real-life experience of Open Loyalty founders in building custom loyalty programs.
The following calculations depict the TCO in the first year only - if you plan to keep the loyalty program in operation for several years, some expenses will be ongoing (most likely hosting, maintenance, project management and at least 1 developer to develop new features).
According to this estimate, the Total Cost of Ownership for building a bespoke loyalty program in-house is approximately 500 000 USD. This amount includes the costs associated with hiring developers, project management, quality assurance, cloud hosting, maintenance, and UX/UI design, as well as the respective durations of these expenses.
Custom loyalty program cost vs. off-the-shelf solution
Using average market rates above, the TCO for building a bespoke loyalty program can be compared to buying an off-the-shelf platform. For instance, Capterra’s Customer Loyalty Pricing Guide indicates that most plug-and-play solutions fall within the starting range of $200 - $4 000 per month. Of course, you can easily find cheaper, or even free, loyalty software. Equally, you can find platforms that cost as much as $150 000/month. In the end, your decision should boil down to your exact needs and business goals.
Purchasing a ready-to-use solution will likely cost significantly less, but might not satisfy all stakeholders' expectations. Comparing the TCO with the cost of a loyalty platform of your choice can help you make a more informed decision.
Bespoke loyalty program cost vs. Customer loyalty
Let’s not forget about the main reason for launching the program - growing the number of loyal customers. As developing the loyalty software in-house comes at a premium, you must wonder if the result translates into a better customer experience in the end. Will you get the desired ROI on your 500 000 USD annual investment?
The answer is, yet again - it depends. The main focus of implementing a loyalty program is to boost customer engagement through an improved overall experience on the customer journey. To achieve this, loyalty programs must move fast, keep up with buying trends, and integrate new services.
Loyalty programs that stand the test of time
High-quality rewards, steadily increasing engagement, and staying ahead of the competition are essential to success. However, making sure that the underlying technology enables this success is also going to be on your shoulders if you choose custom development.
Remember that the initial cost of in-house development is only the beginning, as providing customers with value requires resources throughout the entire program lifecycle. Therefore, if you are not sure about the budget for technology costs in the long run - think carefully. Remember that focusing on customer experience is your number 1 priority and should not be sacrificed in the name of building in-house.
The "build and buy" approach
In certain cases, the choice between building or buying a loyalty program is a false dichotomy. If your company requires a tailor-made solution to satisfy numerous internal stakeholders and the freedom to integrate various services into the program, the "build and buy" approach might better suit your needs.
This way will often involve significantly less costs, while still allowing a high degree of flexibility. How is that possible?
Headless loyalty programs
The “build and buy” approach involves leveraging composable architecture and API-first loyalty mechanics to create a custom solution. It incorporates the principles of MACH architecture (Microservices, API-first, Cloud-native, and Headless) widely used in modern e-commerce.
It essentially means that:
- you can enjoy the technological reliability of a ready-to-use solution
- the solution will be ready to integrate with a plethora of existing systems in your company
- you can still fully customize the front of your operating system
- all that comes at a relative fraction of the time and cost
The "build and buy" approach offers several benefits that either of the components of the traditional "build vs. buy" dilemma are able on their own. Short-term savings include shorter time to market, decreased human capital needs, and minimal software maintenance costs. Long-term savings include backend reliability and regular updates to keep up with the industry.
Curious about the “build and buy” approach? Read one of our previous articles on the topic and get an in-depth understanding of all possible ways to implement a loyalty program.
Understanding the actual development costs of implementing a bespoke loyalty program is essential. As you can see, if you decide to proceed with a fully custom-made option, the total expenses and time to market are significant. An initial investment of nearly $500 000 + additional development and ongoing costs of maintenance are likely to raise some eyebrows at your company.
Perhaps you might even hear your CFO ask “are loyalty programs worth it?” or “when will we see a return on investment of this magnitude?” If you hear this - build your case and present the cheaper options available on the market. A good loyalty program has a high chance of success, but only if done right.
Keep in mind the true cost of ownership when making a decision, and consider the financial benefits of the "build and buy" approach in certain cases. Choose wisely!