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When launching a customer loyalty program for your company, one of the first steps should be to calculate the total cost of the project. If you opt for a plug-and-play solution, this estimate will be quite simple — all you need to do is start by looking at the price list of your preferred loyalty software provider.
But what if your company needs a tailor-made loyalty program?
The truth is that the cost of creating a fully personalized loyalty platform from scratch is often higher than you think.
Before implementing a customized loyalty system, it's essential to grasp the financial intricacies of in-house software development. The actual expenses involved extend beyond basic workforce management. When budgeting, you also need to account for bankrolling and funding:
Below, we 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.
Sometimes, the choice between building and buying a loyalty program is a false dichotomy. If your company requires a solution tailored to meet the needs of multiple internal stakeholders and the freedom to integrate various services into the program, a "build and buy" approach may better suit your needs.
This way often involves significantly lower costs while providing high flexibility. How is this possible?
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:
The "build and buy" approach also offers several benefits that neither components of the traditional "build vs. buy" dilemma do 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.
Establishing a loyalty program typically requires choosing between two main approaches: creating a customized system internally or purchasing a pre-made solution. While both options have pros and cons, the primary distinction lies in cost. Generally, opting to buy a solution is more cost-effective compared to developing proprietary software in-house.
If you're interested in gaining a deeper understanding of the variances between purchasing and constructing your loyalty programs, we recommend exploring one of our earlier articles. This resource provides a comprehensive discussion on the build vs. buy dilemma when building a loyalty solution.
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 notorious resource- and time-consuming process.
The challenges and expenses involved in developing a custom rewards program include fixed and variable costs during development, implementation, and maintenance, as well as a level of trial-and-error that is inherent in projects of this magnitude.
Here's a comprehensive breakdown of all 13 elements to consider when developing a fully customized loyalty program in-house:
Creating a loyalty program from scratch requires significant investment in software development. This sum includes the costs of designing the user interface, developing the backend infrastructure, and creating features like point tracking, rewards redemption, and customer segmentation.
For example, a retail chain might need a custom-built system to integrate with its existing inventory and sales software, which could cost tens of thousands of dollars.
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 the US, market rates for these specialists range from $104,000 to $180,000 per year.
In addition to the cost of human capital, you'll certainly need to include additional expenses related to software licenses, development tools, and other resources necessary throughout the entire development process.
Like any software, a loyalty program needs ongoing maintenance to fix bugs, update security measures, and ensure compatibility with other systems. Additionally, as technology evolves and customer expectations change, the program may require significant upgrades. For instance, incorporating AI to personalize offers or migrating to a cloud-based solution can be costly but necessary for long-term success.
Maintaining a bespoke loyalty program also involves money and resources. Regular delivery of updates, bug fixes, and 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.
Moreover, cloud hosting and other infrastructure-related costs should be budgeted as ongoing operational expenses while the loyalty program is running. Hosting prices depend on the providers, but your most common options will be pay-as-you-go tariffs or fixed plans with tiers. Regardless, your costs will increase over time, even as you grow the number of loyalty members in your program.
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.
Read more: Loyalty program costs: 5 things to remember when budgeting loyalty programs.
Once the core functionalities of the loyalty program are developed, the platform needs to be integrated into your existing systems. Depending on your company's internal processes and architecture, 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 to $8,500 per month for each specialist involved in the implementation process.
Note that the implementation phase can be incredibly complex and time-consuming for enterprise-level companies with intricate system architectures and the highest security standards on the market.
Integration costs can be substantial, especially if the existing systems are outdated or use different technologies. For example, integrating a loyalty program with an older point-of-sale system might require custom middleware development, which can be both time-consuming and expensive.
Read more: How to integrate an API-first loyalty engine with your tech stack.
Hiring a team to develop and manage the loyalty program is a significant ongoing expense. This team might include software developers, data analysts, marketing professionals, and customer service representatives. For a medium-sized business, the annual cost of such a team could easily reach hundreds of thousands of dollars.
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. For instance, launching a nationwide marketing campaign for a new loyalty program can cost several hundred thousand dollars.
In some cases, you'll need to allocate the budget for employee training if the physical point of sale is your expected location for 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.
Ensuring the security of customer data is both a legal and ethical necessity. This might involve investing in secure servers, encryption technologies, and regular security audits.
Compliance with regulations like GDPR or CCPA can also require legal expertise and possibly changes to data handling practices.
Understanding customer behavior and program performance is key to optimizing a loyalty program. Acquiring customers' insights might require sophisticated data analytics tools and expertise. For example, a company might need to invest in a business intelligence platform like Tableau or Power BI, along with hiring data analysts to interpret the data.
Building custom loyalty programs in-house often means diverting time and resources away from other projects and initiatives within your company. For instance, the funds and manpower allocated to develop the loyalty program could have been used to expand the product line or enter new markets.
Again, depending on your organization, this lost opportunity could be quite significant, especially if the in-house development process takes longer than planned, or you encounter unforeseen challenges.
What's more, you have to learn how to build loyalty, which is probably not your core business, so you have to hire or educate existing employees. This is difficult, expensive, and time-consuming. Not to mention that it'll also be an ongoing cost if you want to prevent switching suppliers in a few years.
While this missed potential of in-house resources is difficult to measure, 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.
Offering support to loyalty program members can be resource-intensive. This includes handling inquiries, troubleshooting issues, and managing account changes. For a large consumer base, this could mean setting up a dedicated call center, which involves significant staffing and operational costs.
These costs should be carefully evaluated against the potential benefits of a customized loyalty program, such as increased customer loyalty, higher sales, and valuable customer insights. It's also essential to consider these costs in light of alternatives, such as partnering with third-party loyalty program providers, which might offer more cost-effective solutions with quicker deployment times.
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 the 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.
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've considered creating a mobile application with rewards in 2007? Probably not! Step back 15 years to find yourself in a world of mobile-based 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.
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 put together a list of resources based on average market rates (SODA 2023) to put the costs into perspective. Let us start by listing all the necessary resources and their respective monthly costs in the following table.
In explaining the real financial implications of the internal development of the loyalty program, we meticulously divided the total expenses into separate categories with a detailed breakdown of monthly costs meticulously plotted along a timeline.
Recognize the significant differences in the rewards programs' scale, each exhibiting a unique development trajectory. We conducted an in-depth analysis of prevailing market rates and project schedules to substantiate the veracity of our total cost of ownership (TCO) calculations. These metrics were compared with empirical insights gathered from the actual experience of Open Loyalty's founders in building customized loyalty programs.
The resulting calculations represent only the TCO incurred during the first year. It's worth noting that if the projected life of a loyalty program extends for several years, some expenses, such as hosting, maintenance, project management, and hiring at least one programmer for ongoing feature development, will persist.
According to our projections, the total cost of developing a loyalty program internally is about $500,000. This sum includes expenses related to developer recruitment, project management, quality assurance, cloud hosting, maintenance, and UX/UI design, with due consideration given to the appropriate duration of these financial outlays.
By compiling the prevailing average market rates, it's possible to clarify the total cost of ownership (TCO) associated with developing a tailored loyalty program against the alternative of procuring an off-the-shelf platform.
For illustrative purposes, Capterra's Customer Loyalty Pricing Guide used to reveal a spectrum wherein plug-and-play solutions typically span from $200 to $4,000 monthly (as of writing, only data from 2019 is available). Naturally, the market also accommodates more economical or even cost-free loyalty software, as well as premium platforms demanding as much as $150,000 per month. Ultimately, the pivotal factor guiding your choice should be a meticulous alignment with your specific requirements and overarching business objectives.
While acquiring a pre-configured solution is likely to incur a substantially lower financial outlay, it may not fully meet the expectations of all stakeholders. A comprehensive analysis comparing the TCO against the expenses associated with a loyalty platform tailored to your preferences can empower you to make a reasonable and well-informed decision.
Let’s not forget about the main reason for launching the program — growing the number of loyal customers. Given the premium associated with the in-house development of loyalty software, one must ponder whether the outcome genuinely culminates in an enhanced customer experience. The critical question revolves around realizing the targeted return on investment, set at $500,000 annually.
The answer, yet again, is contingent on various factors. When implementing a loyalty program, the primary emphasis lies in elevating customer engagement through an enriched overall experience throughout the customer journey. This necessitates the agility to adapt to evolving purchasing patterns and seamlessly integrate novel services.
The enduring success of loyalty programs hinges on factors such as bestowing high-quality rewards, consistently escalating engagement levels, and maintaining a competitive edge. However, ensuring that the foundational technology facilitates this triumph becomes a responsibility if the custom development route is chosen.
Acknowledge that the initial expenses associated with in-house development merely mark the commencement, as sustaining customer value mandates continuous resources throughout the entire lifecycle of the program. That's why contemplating the long-term budgetary implications of technological costs is imperative. Prioritizing customer experience stands as the foremost objective and shouldn't be compromised in favor of internal development efforts.
Understanding the actual development costs of implementing a bespoke loyalty program is essential. If you opt for a fully tailored solution, the costs and time required for implementation are substantial, with an initial investment of nearly $500,000 and ongoing expenses for development and maintenance.
This significant financial commitment may raise concerns within your company, prompting questions from your CFO such as "Are loyalty programs worth the investment?" or "When can we expect a substantial return on this significant investment?" If faced with these queries, it's important to construct a compelling case and explore more cost-effective options available in the market.
While a well-executed loyalty program has a high likelihood of success, success depends on the careful execution of the initiative. When deciding, consider the total cost of ownership and evaluate the financial advantages of adopting a "build and buy" approach in specific scenarios.
Make your decision wisely, keeping in mind both the upfront costs and long-term benefits.
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