Loyalty program costs: 5 things to remember when budgeting loyalty programs

Rewards programs come with many benefits. A good loyalty program can boost repeat visits, boost purchase frequency, increase brand affinity, and hike up the average spend in ways previously inconceivable. Pretty sweet, right? Of course, as with any good investment, the other side of the medal is the need to contend with all the different costs involved in launching and maintaining loyalty programs. 

As always, there are multiple moving parts you need to account for to juggle these costs effectively. Luckily, Monika Motus, yet another inspiring loyalty expert, is at hand to talk you through some of the most crucial elements.

Best practices from an ex-Starbucks loyalty expert

Loyalty program budgeting is no walk in the park; it’s a juggling act not all loyalty marketing professionals ever have to think about in much depth. With an impressive career path and a true passion for all things loyalty, Monika Motus was the first person who sprung to mind.

And so, together, we have prepared a breakdown of all the costs to account for when launching a loyalty program, and some tips to help you along both in your program’s early stages and as it evolves.

Who is our interviewee?

Monika Motus is a loyalty expert with experience at some of the world’s top brands: Starbucks (AmRest), iSpot and Douglas. She’s a true loyalty enthusiast, carefully following the loyalty industry, always eager to extra valuable insights from both loyalty programs and trends unravelling in the loyalty industry.

Dive in and learn everything you need when budgeting for your upcoming loyalty program. Ready to onboard your first loyalty customers soon? Read on!

Q: How has your career as a loyalty expert evolved over time?

Well, there is no doubt that our entry-level positions determine our professional careers significantly.

Just after university, I got a job as a Junior CRM Specialist at Douglas Poland, where I had my chance to discover the loyalty world. It was a great chance to learn - Douglas already had a strong loyalty program in existence for years, and a solid base of loyal members behind it. The iSpot experience, in turn, helped me understand the relationship between a brand and the customer better. Even though we didn't have a loyalty program, forging meaningful relationships with the user and providing an exceptional customer experience made up the company's DNA.

Finally, a fantastic journey at AmRest, which is where I expanded my horizons and gained an international perspective, particularly when developing the Starbucks Rewards loyalty program in CEE.

Q: What major developments have you seen take place in the loyalty industry in recent years?

COVID-19, in particular, changed the perception of consumers’ loyalty, revealing its impact on business stability, and naturally putting loyalty programs in the spotlight. As an effect, we see more and more companies launching and adapting their loyalty strategies with unprecedented vigor.

Moreover, we’ve seen the development of decentralized technologies, which unlock the full potential of loyalty programs. We can already observe some brands (Saint Laurent, Starbucks) exploring Web 3.0 to unlock new value propositions for loyalty program members.

Last but not least, there’s increasing pressure to run businesses in a responsible manner, which has led to incorporating ESG initiatives within the core mechanisms of loyalty programs, and rewarding members for responsible and sustainable behaviors (Roxy, Adidas, Kiehl’s).

Q: Who owns the costs of customer loyalty programs at bigger organizations?

It all depends on the organizational structure, the size of the loyalty program, and its position on the organization's priorities list. I know many examples of marketing teams being solely responsible for loyalty programs and managing their costs. On the other hand, with the increasing interest in loyalty itself, more companies are choosing to allocate additional resources, or even hire dedicated teams to develop loyalty programs. 

Loyalty program costs can - and often will - impact multiple other teams making up an organization (IT, operations, etc.), which is why alignment across all of these departments is essential.

Q: How do you align multiple stakeholders on the loyalty program's costs?

This depends on how deep the program is embedded into the business model. Multiple direct and indirect costs are connected with the everyday running of the loyalty program, like marketing communication, discounts, points accruals, and technology costs. It is essential to include and estimate all of them when working on the business model, understand the impact on the P&L, and align all with the relevant stakeholders.

It’s worth keeping an eye at this topic over the long term, as costs will often change in line with the loyalty program growth and overall condition.

Of course, it might happen that after the launch, the assumptions we've made are not reflected in reality, therefore, it is crucial to keep monitoring program costs from the very beginning and optimize them as we go.

It is essential to identify all of the above aspects and align them with business, marketing, finance, accountancy, IT, etc., and decide how to monitor, control, and book those costs accordingly.

Q: What are the 5 most important ingredients of implementing a customer loyalty program?

Launching a new loyalty program is always a huge undertaking, especially since we get the chance to make a first impression on our customers only once. Therefore, running a pilot is a good idea (where and when possible) - it is a fantastic opportunity to verify whether everything works properly, collect feedback, improve the pain points or even adapt the business case before the big launch.

There are a few elements that seem essential to me when planning a successful launch:

1. Crew training

All the people who have direct contact with the customer (team members in the physical stores, customer care) must know when the loyalty program starts and how it works. The team must know how to recommend the loyalty program, explain the rules and how to advise in case of any problems. They also need training on the implemented software.

A one-pager with all the essential info can be a huge help. Feel free to include the exact questions the employee should ask in the training materials or a simulation of a conversation with the client. In many industries, sales representatives having direct contact with the customers are the key to making the loyalty program successful, especially at the acquisition stage.

Take some time to train your team and clearly demonstrate the benefits of the loyalty program, so all stakeholders are aligned. 

2. Clear loyalty targets

From day one, it is worth having clear loyalty targets. For example:

• How many users do we want to recruit in the first week/month?
• How many transactions do we plan to have?

The more precise (e.g., targets per store), the more chances for a success.
It is always easier to run when we know the direction.

3. Verification & problem-reporting

When launching something new, everything can go wrong. The first days are crucial when it comes to identifying all the possible problems and challenges (technical, functional, etc.) and fixing them before the issues spread further.

Prepare a checklist, go to the stores/online, and verify all the possible scenarios (registration, log-in, points collection, points redemption, coupon usage, etc.) across all the available sales channels. 

Secure the availability of IT support - once you identify the problem, the team should be readily available to fix it. Crew members should be familiar with the issues reporting path.

4. Marketing support & incentives

Whether you decide on a pilot or a big launch, secure unified communication across all the touch points (e-commerce and in-store).

Program rules and benefits must be clearly communicated at the point of sale (within the app, landing page, leaflet) - at this stage, we focus on existing customers successfully registering as loyalty members. Sign-up bonus can help drive customer acquisition and provide an easy argument for the employees when promoting loyalty as a rewards program.

Speaking about the crew - incentive programs for the employees can effectively drive their engagement at this critical juncture. Plan it carefully - incentive programs should be fair and appeal to as many employees as possible.

5. Recap

When the first dust settles, it is time for the summary!

The loyalty program is live, and we are running toward our targets, but it is still worth to stop and verify what we’ve learned from the first few weeks.

What is the feedback from the customers and crew members? Do we have any pain points or blockers? Verify the numbers - are the assumptions we’ve made initially still valid, or do we need to adapt the business case for the loyalty program?

Take some time to analyze the first learnings after the launch. They can help you plan or adjust your long-term strategy.

Q: How is the ROI of loyalty program implementation measured?

The purpose of the loyalty program is to build a long-lasting relationship with program members through core program mechanics and ongoing direct communication, which in the end, should deliver incremental sales compared to the non-members.

Still, it is not enough to look at the top line, we need to monitor and control the costs connected to the loyalty program to ensure its profitability. 

To list a couple of them:

1. Core program discounts - whether we decide to run a point-based program or give the members access to premium services, those benefits are a form of a discount. 
2. Communication - on top of the standard program mechanics, loyalty programs usually offer multiple short time promotions to drive members' acquisition and engagement, supported by additional marketing communication.
3. Technology - reliable technology behind the loyalty program is one of the success factors as it impacts members' experience. Don't forget about the ongoing maintenance, SLAs, security, integrations, and general development costs. 
4. Customer support - as the program is a new touchpoint between a consumer and a brand, it naturally creates more questions and contact requests. 
5. Points accruals/liabilities - points are a program currency, have a specific monetary value, and are visible as liabilities in the reports. 

When building the business case and calculating ROI for the loyalty program, it is essential to remember that it is a long-term initiative and requires time and scale to pay back.

I also want to highlight another area where the loyalty program delivers value to the business. It is a perfect source of zero and first-party data. As a result, it provides valuable insights to the organization, which can use this knowledge to make effective business decisions with a broader reach. Of course, it is challenging to estimate the value of this knowledge and include it in the business case calculation. Still, it is one of the fundamental benefits delivered by a loyalty program. 

Read more: Loyalty Program ROI Worksheet: Measure and maximize your revenue.

Q: How do you plan the customer loyalty program cost after implementation?

The loyalty program's costs evolve over time and are strictly intertwined with the size of the database, its quality/activity, the technology solutions utilized throughout, and the type of activities you’re running.

The moment of planning your basic KPIs of a rewards program (loyalty sales, the number of members, purchase frequency, average basket size, etc.) and an activities calendar is also the best time to estimate the budget for the future planned period. As we have gain more access to the data, it makes it way simpler to use the generated insights to identify all the potentials and targets.

The more historical data, the better we understand how the program impacts the business and what actions we need to take to optimize it. It is more challenging for the newly launched programs, but all loyalty programs have to start somewhere.

Q: How can we optimize the costs of the running loyalty program performance?

Cost optimization for loyalty programs is a never-ending story. It’s always essential to take a helicopter view of our program's performance.

Without a complete, well-rounded perspective, we might be celebrating a massive increase in our members' database, while ignoring the number of inactive, unprofitable members at the same time; leading a fleeting sense of accomplishment followed by sore disappointment.

Sacrificing long-term vision to achieve short-term goals might significantly decrease the program's profitability. Healthy loyalty programs are profitable, so ongoing optimization of your discounts and points’ expiration policies, increasing customer lifetime value, and constant database commercialization are must-have points on the checklist.

The loyalty program owner must know all profit and cost elements, understand them and get a plan on how to optimize when/if necessary.

It may sound complex and intimidating at first, but it is part of the fun of working as a loyalty manager, and giving it your best and bearing the fruits of your hard work sure brings a lot of satisfaction!

Dear reader! Are you a loyalty expert?

We are so happy you have stumbled upon this interview! Our Loyalty Insider series is a handy guide designed to offer you the latest industry insights, so you never have to look far to get a regular dose of inspiration, or answers to any burning questions. Have you got a specific topic or conundrum that you would like us to explore on our blog? Be sure to let us know, as we’re always up for a good challenge.

Hungry for more knowledge? Download our Loyalty Program Trends Report - a comprehensive study made in collaboration with over 100 high-profile loyalty marketers.