How Much Does A Loyalty Program Cost?
August 21, 2025
– 10 minute read
Understanding the total loyalty program cost is key to success. Learn about initial setup, ongoing expenses, and how to optimize your budget for a high ROI.
Cormac O’Sullivan
Author
A loyalty program is a powerful tool for building lasting relationships with customers and driving business growth. But before you launch one, you need to understand the financial commitment involved. This includes not just the initial setup, but also the ongoing costs. A successful loyalty program is an investment, not an expense. When managed well, it can deliver a significant return on investment (ROI). However, many businesses underestimate the total cost of a loyalty program.
Why Invest in a Loyalty Program?
A loyalty program is a strategic asset for any business. It helps you retain customers, which is often far more cost-effective than acquiring new ones. This demonstrates the direct link between loyalty and financial performance.
Beyond retention, a well-designed program can increase customer lifetime value. Loyal customers tend to spend more over time and are more likely to recommend your brand to others. This word-of-mouth marketing, especially through social media, can lead to new customer acquisition at a lower cost.
A loyalty platform is more than just a points system; it's a way to enhance customer engagement and gather valuable data. This data allows you to personalize offers and better understand customer behavior, leading to smarter business decisions. The ultimate goal is to build a community of brand advocates, transforming your customers from one-time purchasers into long-term partners.
Types of Costs in a Loyalty Program
Understanding the total cost of a loyalty program requires looking at more than just the initial price tag. The expenses are layered and occur at every stage, from planning to daily operation.
Initial Setup & Technology
The first major investment is the technology that powers your program. This can be a significant cost, especially if you opt for a custom loyalty program. You'll need a platform to manage the loyalty program, track points, and handle redemptions. This could be a purpose-built loyalty software or a module within a larger CRM or e-commerce platform.
Technology costs include software licensing fees, which might be a one-time purchase or a recurring subscription-based model. You also have to consider the expense of integration with existing systems, like your point-of-sale (POS), e-commerce site, or mobile app. This ensures a seamless customer experience. For instance, a report by Antavo highlighted the various technology costs associated with a loyalty program, from platform fees to integration expenses.
Rewards & Fulfillment
The rewards themselves are a core ongoing cost. This is the financial commitment you make to your customers in exchange for their loyalty. The cost of a loyalty program is directly tied to the value of the rewards you offer. This includes the cost of the products or services given as rewards, as well as the administrative costs of getting those rewards to the customer.
Fulfillment costs can include shipping for physical rewards or the labor required to process redemptions. Businesses must carefully balance the value of the rewards with the program's profitability. For example, a successful loyalty program must ensure the cost of rewards does not outweigh the increased revenue from loyal customers.
Staff Training and Operations
To manage the loyalty program effectively, your team needs to be trained. This includes frontline staff who will explain the program to customers, as well as marketing and IT teams who will maintain it. The cost here is not just the training itself, but also the time your employees spend on it.
Operational costs also include the labor required for daily tasks, such as customer service for program inquiries, fraud detection, and data analysis. These are often hidden costs that can add up over time if not budgeted for properly.
Marketing & Promotion
Launching and promoting your loyalty program is essential for success. You can't just build it and expect people to join. Marketing expenses include creating launch materials, running advertisements on social media and other channels, and creating ongoing campaigns to keep the program top-of-mind.
This is a key part of the ongoing cost of a loyalty program. You need to continuously promote the program to both new and existing customers to maximize participation and ROI. These costs can be significant, but they are crucial for driving enrollment and engagement.
Ongoing Maintenance
Finally, there is the ongoing maintenance cost. This includes regular updates to the software, security patches, and server hosting fees. Just like any other digital platform, a loyalty program requires continuous upkeep to function smoothly.
Data compliance, especially with regulations like GDPR, is another crucial aspect of maintenance. Ensuring your program handles customer data securely and legally is a non-negotiable expense. These maintenance costs are essential to protect your business and maintain customer trust.
Build vs. Buy: Which is More Cost-Effective?
The decision to build a custom loyalty program in-house or to buy a third-party loyalty platform is one of the most critical choices you'll make. This choice has a huge impact on your total cost of ownership.
In-House Development Costs
Building a loyalty program in house gives you complete control. However, the financial commitment is substantial. You'll face high upfront technology costs for hiring a team of developers, project managers, and designers.
The average cost for an in-house build can range from hundreds of thousands to over a million dollars. This figure doesn't even include the ongoing maintenance and security updates. It’s a long-term project that can take a year or more to launch, putting you at a competitive disadvantage. Or you can check out leat.com the best Loyalty platform.
Third-Party Platform Fees
Choosing a loyalty software means you're often paying a subscription-based fee. While there might be an initial setup cost, it is significantly lower than in-house development. These platforms offer pre-built functionality and established best practices.
You can get a program up and running in a matter of weeks. Loyal Guru reports that off-the-shelf solutions can deliver a return within weeks or months, as opposed to years with a custom build.
Total Cost of Ownership Comparison
The true measure of cost is not just the initial expense, but the total cost of ownership (TCO). While the custom loyalty program in house may seem to offer more value, it comes with hidden costs. You are responsible for all ongoing maintenance, security, and updates.
A third-party loyalty platform handles these issues, freeing up your internal resources. The predictable, recurring fees of a third-party solution often lead to a lower TCO over time.
Scalability & Flexibility Considerations
A major benefit of third-party loyalty platforms is their built-in scalability. They are designed to handle growth in your customer base and transactions. As your business expands, the platform can easily scale with you, usually with a simple upgrade to your subscription plan.
For an in-house solution, scaling can require a significant, and often unplanned, investment in additional development and infrastructure, as highlighted by Loyaltyxpert.
ROI Implications of Each Approach
Ultimately, the ROI of a successful loyalty program is what matters. While a custom solution can be perfectly tailored to your needs, its long development time and high cost can delay your return. A third-party platform's faster time to market allows you to start generating revenue and retaining customers much sooner.
Many businesses find that the lower risk, faster launch, and continuous innovation of a third-party loyalty software lead to a much stronger and faster ROI. The decision depends on your unique business needs, but for many, buying is the more cost-effective and strategic choice.
Cost Benchmarks by Business Type & Industry
The cost of a loyalty program isn't one-size-fits-all. It varies greatly depending on your industry and the scale of your business. Looking at benchmarks can provide a realistic view of the financial commitment required.
Retail: Percentage of Revenue Benchmarks
For a successful loyalty program in retail, the ongoing cost of rewards is a key metric. Many retailers budget a percentage of their revenue for loyalty. While this can vary, some supermarkets spend around 1% to 1.5% of revenue on their loyalty programs, while other retail businesses may spend between 2% and 5%.
The goal is to ensure the rewards, and therefore the program cost, are more than covered by the increased customer spend and retention.
Quick Service Restaurants (QSRs)
In the QSR industry, loyalty programs are focused on driving repeat visits and higher check averages. The costs often revolve around mobile app development and integration with point-of-sale systems. With 71% of sales in QSRs coming from repeat customers, the investment in a program is vital.
The cost per customer can be relatively low, but the volume of redemptions can make rewards a significant ongoing expense. For example, Starbucks' popular loyalty program is a key driver of their revenue, with members accounting for a large portion of sales.
Travel & Hospitality
Loyalty programs in travel and hospitality are often high-stakes, with tiered rewards and experiential benefits. The cost of a loyalty program in this sector is tied to the value of room upgrades, free nights, and other perks.
A significant expense is the liability of unredeemed points, which can be a substantial sum on a company's balance sheet. According to Hospitality Net, loyalty program fees can average 1.5% of total operating revenue for hotels. These programs are essential for encouraging direct bookings and reducing reliance on third-party booking sites.
E-Commerce Platforms
E-commerce businesses can benefit immensely from loyalty programs due to the ease of data collection and personalization. The cost is often tied to a subscription-based loyalty software model.
A major focus for these businesses is on driving customer retention and increasing customer lifetime value. For example, a study found that customers who are part of a loyalty program can spend 40% more on average.
How to Calculate and Optimize Loyalty Program Costs
To ensure your loyalty program is profitable, you must actively calculate and optimize its costs. This involves more than just tracking spending; it requires a strategic framework.
Budgeting Framework: Tools and Models
A structured budgeting framework is essential for managing your loyalty program cost. Begin by creating a detailed spreadsheet that breaks down all potential expenses. This should include initial technology costs, ongoing subscription fees, the estimated cost of rewards, and operational expenses.
Use a model that projects costs over a 3- to 5-year period. This helps you see the long-term financial commitment and avoid surprises. A key part of this is to separate one-time costs from the ongoing cost of the program.
Estimating ROI and Payback Period
A successful loyalty program is one that generates a positive return on investment. To estimate ROI, you need to project the increased customer retention and spending that the program will drive.
You also need to estimate the payback period—the time it takes for the revenue gains to cover the initial investment. A report found that 81% of consumers are loyal to brands that offer a relevant loyalty program, indicating a strong potential for ROI.
Cost-Per-Customer and Cost-Per-Redemption Metrics
To track the efficiency of your loyalty program, monitor key metrics. The cost-per-customer (CPC) is a good indicator of how much it costs to enroll and maintain a single customer in the program. You can calculate this by dividing the total program cost by the number of active members.
The cost-per-redemption (CPR) measures the average expense for each reward claimed. Lowering both CPC and CPR, without compromising customer value, is key to optimizing your budget.
Triggering Savings through Segmentation & Tiered Rewards
Not all customers are equally valuable. By segmenting your customer base and implementing a tiered rewards system, you can optimize your spending. For example, your most loyal customers in the top tier might receive exclusive, high-value rewards, while casual shoppers in a lower tier get smaller, more frequent benefits.
This strategy ensures you are spending the most on retaining customers who provide the most value to your business, as highlighted by Oracle. It also helps you manage the loyalty program in a more cost-effective way by focusing resources where they matter most.
Managing Hidden Costs (fraud, maintenance, data compliance)
Beyond the obvious expenses, there are hidden costs that can impact your bottom line. Fraud, such as account hacking or points misuse, can be a significant drain. Investing in a loyalty platform with robust fraud detection is crucial.
Ongoing maintenance is another cost, as the technology needs regular updates to stay secure and functional. Lastly, ensuring data compliance with regulations like GDPR is a non-negotiable expense. These costs must be factored into your total budget to avoid unexpected drains on your resources.
Conclusion
The cost of a loyalty program is a multi-faceted investment, not a simple expense. A successful program requires careful consideration of all financial aspects, from initial setup to ongoing maintenance and promotion. Whether you choose to build a custom loyalty solution in house or opt for a third-party loyalty platform, understanding the total cost of ownership is key.
By using strategic budgeting, tracking key metrics like ROI, and managing hidden costs, you can create a loyalty program that enhances customer relationships and drives significant long-term growth. The financial commitment pays off when a program is viewed as a strategic tool for retaining customers and boosting your bottom line.