Feature | Cashback | Immediate discount | Delayed discount |
Perceived value | Tangible return; feels like a reward | Instant savings; clear price reduction | Future savings; value depends on the redemption process |
Impact on profit margins | Predictable, tied to redemption rates | Direct reduction of revenue per sale | Depends on redemption; less immediate impact than an instant discount |
Customer behavior | Encourages active spending and engagement | Encourages immediate purchase; the habit of waiting for sales is less relevant | Encourages delayed gratification; customers may wait or take action to redeem |
Customer loyalty | Builds long-term loyalty through repeated interaction | Primarily drives short-term purchases | Moderate loyalty; limited by redemption conditions |
E-commerce tips
What you need to know about cashback programs before starting
By Emma on Oct 31, 2025
Table of content
- Introduction
- 1. What is a cashback program and how does it work for eCommerce?
- 2. Cashback vs points vs discounts: Which program works best?
- 3. How to develop the best cashback programs
- 4. How to implement cashback programs for your online store
- 5. Practical guide on how to create a cashback program for eCommerce
- 6. Common pitfalls and warning signs to avoid when building cashback rewards for customers
- Bottom line
- FAQs
Introduction
In an economy where building lasting ties with customers matters, cashback rewards have become a smart move. Not only do they align with shoppers’ love for value, but they also help businesses boost customer retention and loyalty.
Despite that, creating a cashback program that actually works for both sides isn’t always simple. Merchants often face challenges like fierce competition, low profit margins, and rising costs. If the offer feels too generous, it eats into profit. Yet, if it’s too modest, no one joins.
Looking to launch a cashback program but unsure where to start? We’ve got you covered. This guide walks you through the key steps to build one that attracts, rewards, and sustains growth. By the end, you’ll have a clear view of:
Cashback programs and how they work
Core factors in cashback program design
Best channels, tools, and loyalty platforms for implementation
Practical setup using Shopify and cashback tools
Common pitfalls in cashback marketing and ways to improve
1. What is a cashback program and how does it work for eCommerce?
Without understanding the fundamentals, you will never build an effective strategy. In this section, we’ll cover everything you need to know about cashback programs. The areas in focus include the basic definition of cashback offers, their mechanics, common types, and typical redemption methods.
1.1 How cashback rewards programs work: The earn-track-redeem cycle
A cashback program, or a cashback offer, is a reward system provided by businesses that returns a percentage of customers’ spending or transaction value. The return value can be in the form of store credit or gift cards.
Most of the time, brands roll out cash back strategies when they want to drive sales, build customer loyalty, or boost customer acquisition. A typical process of cashback reward programs involves:
Product purchase: The customer buys a product from the brand.
Transaction tracking: The system records and confirms the purchase details.
Reward validation: The platform verifies the transaction’s eligibility.
Cashback reward: A percentage of the spending is then credited back to the customer’s account.
In the simplest term, the return amount is calculated by multiplying the transaction value by the cashback rate. For instance, a customer spends $100 and is eligible for a 2% reward rate. Then, they earn $2 back. That’s the basic concept, though. In reality, different rebate structures determine how the percentage is applied. We’ll dive deeper into each model in the following section.
In the context of customer rewards and loyalty programs, cashback is commonly confused with rebates and discounts. It makes sense. All three return part of the spending to the buyers. However, cashback incentives differ because they are granted right after the purchase is completed. On the other hand, rebates often require customers to submit claims or proof of purchase, and discounts are usually deducted upfront.
1.2 The 5 common cashback program structures for your online store
Cashback programs come in various structures. The following are the five main types:
Flat rate cashback: This structure is the most common. All orders that meet certain spending or conditions earn a fixed percentage of the total amount.
Tiered cashback: In this model, the cashback percentage varies based on the customer’s spending levels. For instance, purchases between $100 and $500 earn 2% and those over $500 receive 3%. This tiered rewards structure aims to boost higher purchase frequency and larger basket sizes.
Category-based cashback: The merchants assign different cashback rates to specific product categories. All items within each category then share the same rate. Multi-category or marketplace-style stores often adopt this format.
Fix rate cashback: This one is similar to the flat-rate model, but the return value is a set figure instead of a percentage. A common example is getting $10 back for all orders of over $100.
Referral-based cashback: The store owner gives a reward back to the referral for each successful conversion. This one is a bit different from the standard four, as (1) you don’t need to be the person making the purchase and (2) the "transaction value" is the value of the newly acquired customer. For example, you share a unique link to buy this item. If the referred customer performs a qualified action, you will receive a reward.
1.3 How customers redeem cashback rewards (3 methods)
In modern programs, the businesses can reward the buyers with:
Bank transfer: The cashback value is sent right into the customers' bank accounts and customers can deposit or use it freely. This option is common in digital wallets and banking apps. For example, the PayPal Cashback Mastercard program offers a flat rate of 1.5%-3% back to the users’ PayPal or linked bank account.
Gift cards: Shoppers redeem cashback in the form of gift cards. These cards are typically issued by the program provider, and customers can choose to spend them at either the brand itself or their partner retailers.
Store credit: Store credit is another popular cashback redemption option, especially among eCommerce brands. It is a non-transferable value credited to a customer’s account, which they can use for future purchases at that specific store.
💡FYI: As a business owner, you can choose between setting up instant vs accumulated cashback. Instant cashback is essentially an immediate discount. The reward is activated as soon as the purchase is made, and can be redeemed right at the final checkout. Accumulated cashback is the standard, where the reward is credited only after the transaction is fully processed/validated and is available for redemption in future orders.
2. Cashback vs points vs discounts: Which program works best?
As a form of incentives, cashback programs are frequently mistaken for points-based systems and strategies in the same category of loyalty programs. Despite sharing the goal of rewarding customers, they actually differ in structure, mechanics, and use cases.
2.1 Cashback vs points-based loyalty programs
Many merchants believe loyalty points are a form of cashback, but is that so? Let’s look at the definitions.
In the case of cashback programs, customers receive a percentage of their spending back. So, the condition to receive the reward is that customers must actually spend money.
Points-based systems, on the other hand, are part of customer loyalty programs, where members receive points as a reward for performing certain actions. Compared to cashback programs, the actions here are not only purchasing items. They can also be writing reviews, referring friends, participating in surveys, or other activities.
As you can see, there is some functional overlap. Yet, cashback is apparently narrower in scope.
Feature | Cashback | Points-based |
How it works | Direct rewards returned per purchase | Points accumulated per activity, redeemable for rewards |
Simplicity | Easy to understand and redeem; clear monetary value | Can be complex; value depends on point accumulation and redemption options |
Customer appeal | Customers seeking immediate financial benefit | Customers are enjoying gamified rewards and milestone achievements |
Cost control | Easier, predictable cost per transaction | Harder, depends on point issuance and redemption rates |
Flexibility | Rewards monetary spending | More flexible; rewarding multiple behaviors |
Best use cases | Commodity products, price-sensitive customers | Gamification needs experiential rewards, long-term loyalty programs |
2.2 Cashback vs discounts
Discounts are a form of price reduction that lowers the purchase cost for customers. The most common form of discount programs is immediate discounts, in which the product price is reduced straight away at checkout. The amount deducted is usually based on a fixed value or a percentage of the purchase price.
A less common form is delayed discounts, which are often rewards given to customers for completing certain actions, such as making a purchase, signing up for a program, or reaching a spending threshold. In these cases, the discount reward can be percentage-based or fixed-value and used for specific products, specific categories, or across the entire store.
Comparing cashback vs immediate discounts, a cashback program differs in timing and accumulation functionality. The cashback reward is always earned after the purchase.
The case with delayed discounts is trickier, as both require customers to wait or take action to redeem the perk. Yet, cashback typically allows reward accumulation over time and collective use in future purchases, whereas each delayed discount is usually valid for a single use or tied to specific conditions per campaign.
2.3 Standalone cashback vs full loyalty program: Which should you start with?
Here comes the question of the year: Should you implement a cashback program or a full loyalty program? By employing a hybrid approach, you can combine cashback with other loyalty features, such as points accumulation, tiered rewards, or exclusive member benefits.
Feature | Cashback | Full loyalty program |
Pros |
|
|
Cons |
|
|
Cost | Predictable, tied to redemption rates | Higher, depending on program complexity and reward structure |
Complexity | Low; easy to track and manage | High; requires tracking points, tiers, and multiple reward types |
Customer impact | Encourages repeat purchases; drives short-term loyalty | Encourages holistic engagement; builds long-term loyalty and brand advocacy |
To answer the question of which to start with, we recommend starting with a cashback program due to its simplicity and lower cost. Additional loyalty features can be added later as the program matures and customer engagement grows.
3. How to develop the best cashback programs
Thus far, you have probably gained a solid understanding of a cashback program, including its common reward structures, redemption options, and how it differs from other loyalty incentivizing programs. It’s high time you set up your own cashback program.
Coming up with a successful program is not a walk in the park. It requires meticulous planning and strategy. Below is a step-by-step framework to help you build a cashback program that actually works.
3.1 Assess the product type and industry fit
The purpose here is to ensure that your products and industry can afford cashback. Because part of the brand’s revenue is deducted to reward the customer, your business must maintain a sufficient profit margin buffer to sustain even after the reward is applied.
According to Sentinel Finance Group, an average annual profit margin of 10% is the bare minimum, and 15% is considered healthy. Brands operating in an industry that has a higher profit margin often enjoy a stronger advantage in implementing cashback schemes.
Average gross profit margin by industry:
Fashion & Apparel: 40 - 60%
Beauty & Cosmetics: 50 - 70%
Food & Beverage (retail): 20 - 40%
Electronics: 10 - 20%
Digital services/SaaS: 60 - 80%
Average order value (AOV) also affects cashback feasibility. Brands with low AOV products often face tighter profit margins and have limited flexibility in offering appealing cashback rates. Furthermore, cashback for high AOV items, such as electronics and luxury goods, typically comes across as more tangible and rewarding.
3.2 Analyze your customer base
In this step, brands analyze their customer base to identify where cashback delivers the highest return. By customer base, it refers to all the customers who interact with your brand, be they potential, new, or existing ones.
The areas in analysis include:
Customer acquisition cost (CAC): how much it costs to acquire a new customer.
Customer lifetime value (CLV): the total profit one customer generates over time.
Purchase frequency: how often they buy from your brand.
Price sensitivity: how strongly their purchase decisions depend on discounts or rewards.
With all these insights, you can segment your customers into groups of similar value and behaviors. Then, try to think about different cashback approaches that may resonate with each group.
For example, loyal, high-CLV customers may appreciate smaller cashback combined with exclusive perks or early access offers. One-time or price-sensitive buyers are likely to engage better with higher cashback rates. And new customers tend to be well motivated by a limited-time welcome cashback.
3.3 Research the competitors and define your cashback structure
As with any strategy, competitor analysis is just as important. It gives you insights into what’s working and what’s not.
Look up all the brands that are implementing cashback programs and note down their cashback types, rates, expiration rules, redemption channels, and communication tactics. In case you are doing this for the first time, feel free to rely on competitor analysis frameworks like SWOT (Strengths, Weaknesses, Opportunities, and Threats), Porter’s Five Forces, or Benchmark Matrix.
Once you’ve gathered enough data, map out both the similarities you can learn from and the gaps you can leverage. Identify where you can improve to create differentiation. From there, you can finalize the “perfect” cashback rewards structure.
Pro tips: Consider using store credit as a cashback redemption option for eCommerce. It performs better at maintaining profit margin and retention because the value stays within your store, avoiding cash outflow. It also feels more direct and meaningful.
3.4 Evaluate ROI
ROI, or Return on Investment, measures the net profit generated by a cashback program relative to its total cost. The purpose of this step is to assess whether your current program structure generates a positive return or not.
ROI is calculated by:
ROI = (Net return / Cost of investment)
In which:
Net return: The incremental revenue (revenue after implementing the program minus revenue before) minus all program costs.
Cost of investment: The total cost of the program, including cashback payouts, marketing, and operational expenses.
In case ROI is positive, the program is effective. It contributes to net profit. A negative ROI represents otherwise. The program results in a loss and needs adjustments.
Here’s an example. Suppose your brand has an average monthly revenue of $50,000 and a repeat purchase rate of 2 times per month. You implement a flat-rate cashback of 5% for all orders over $50, to increase repeat purchases and average order value (AOV) within one month.
By the end of the month, total revenue increases to $54,000. The program cost, including cashback payouts and marketing, is $2,000. Apply the formula, we have:
Incremental revenue = $54,000 - $50,000 = $4,000
Net return = $4,000 - $2,000 = $2,000
ROI = $2,000 ÷ $2,000 = 1
This means the program generates a net return equal to the cost of investment. It is profitable. You can consider scaling the program or increasing the budget to further boost results.
4. How to implement cashback programs for your online store
Once your cashback program is planned, the next step is implementation. Here are the three ways to set up a cashback program online:
4.1 Custom development
With this approach, you can build a fully customized cashback system using code or development frameworks. Most eCommerce platforms provide APIs where you can integrate custom features.
The best thing? You have full control over program rules, design, and integration with other systems. Yet, it is time-consuming and requires technical knowledge. Normally, building a custom system takes 2-6 weeks, depending on complexity and resources.
Potential costs:
Developer or outsourcing fees (estimated $2,000 - $10,000)
Integration and setup (estimated $100 - $500 one-time)
Maintenance & updates for bug fixes, new features, and system monitoring (estimated $200 - $1,000/month)
4.2 Third-party loyalty program apps
Another way to implement a cashback program is to use apps from third-party developers. Many popular eCommerce platforms have app libraries where you can browse various cashback and loyalty apps with different features and ratings. You can filter and find reliable plugins by reviews, badges, and certifications.
The main benefits of using loyalty program plugins are feature-rich functionality and fast deployment. They often include automated cashback calculation, customer dashboards, and email notifications. The redemption options are flexible, with configurable rules for instant cashback versus accumulated cashback, as well as for referral cashback programs.
The only drawback is that you cannot fully customize rules, design, or integration like in custom development. Yet, it is still the best option if you are seeking something easy, quick, and effective.
Potential costs:
App subscription fees, usually $10 - $200/month
Transaction or usage fees (small percentage per cashback redeemed, if applicable)
Integration or setup services ($50 - $300 if needed)
4.3 Platform-native features
Some eCommerce platforms do have built-in cashback loyalty program functions. They let merchants set up rewards, track cashback, and manage customers directly from the admin dashboard.
Although these native tools have fewer advanced features and less customization options than third-party apps, they are completely free, and the functionality is great for basic use. If you only want to create a basic structure, such as fixed percentage cashback or simple points-based rewards, they work just fine.
5. Practical guide on how to create a cashback program for eCommerce
Now comes the fun part. To make it concrete, we will demonstrate how to set up a cashback program for a Shopify store via the platform’s built-in store credit feature and the Koin cashback app. This guide focuses on store credit as the redemption option.
5.1 Using Shopify built-in feature of store credit
Shopify doesn’t have a dedicated cashback feature, but it offers the store credit option that can function as cashback. At the basic level, merchants can set up the cashback amount manually. Once the store credit is issued, the qualified customer will have the credit applied to their account and can use it for future purchases.
The built-in store credit tool offers:
Customer-specific credit linked to each account
Cashback (refund) issued as store credit
Use of credit at checkout for future purchases
Optional expiration dates for store credit
Integration with Shopify POS for in-person use
However, this tool doesn’t allow for large-scale applications. That means merchants have to go over the customer list, calculate the cashback amount themselves, and apply store credit individually. The entire process can be time-consuming. Furthermore, the credit issued here cannot be accumulated across multiple purchases but must be used in full at once.
How to issue store credit as cashback using Shopify's built-in feature:
Step 1: From your Shopify admin, go to Settings > Customers.
Step 2: In the Customer accounts section, turn on the Store credit toggle button.
Step 3: Go to Customers in your Shopify admin. Select the customer you want to issue store credit to.
Step 4: Scroll to the Store credit section and click Edit.
Step 5: In the adjustment section, select Credit. Enter the amount of store credit you want to issue. Optionally, set an expiration date for the store credit.
Step 6: Click Review changes, then click Credit {Amount} to finalize. Optionally, select Notify customer to send them an email with the store credit details.
5.2 Using Koin cashback app
If you are seeking a third-party app option, Koin is among the best free Shopify cashback apps. With a user-friendly interface and robust features, it gets a perfect 5.0-star rating from over 70 reviews on the platform.
The app supports:
Automated cashback rewards based on order or product
Store credit issuance for redeemed cashback
Multiple cashback reward options (percentage, fixed amount, tiered)
Bulk store credit management for multiple customers
Promotion widgets for displaying offers
Analytics dashboard for program performance
Multi-currency support for international stores
The thing about Koin is that it really focuses on cashback. It’s not just a basic flat-rate system, but also offers tiered options and lets merchants choose either a percentage or a fixed amount for rewards. Adding to that are comprehensive management and analytics tools and advanced customization options, including promotion widgets and store display settings.
Here’s how to create a cashback program with Koin:
Step 1: Visit the Koin Shopify App Store page and click Install.
Step 2: In your Shopify admin, go to Campaigns > Cashback > Create.
Step 3: Choose one of the following cashback modes:
Cashback by order: Credit is calculated based on the order subtotal.
Cashback by product: Credit is calculated based on each product price.
In case you have already set up your campaign with Koin, you can turn it on or off by clicking on the toggle switch. For program editing, choose Manage.
Step 4: Configure campaign details:
Amount of store credit: Set a fixed amount or percentage of the order/product price.
Maximum store credit per order (optional): Only for percentage mode.
Expiration date: Determine how long the credit remains valid.
Delay issue credit: Set a delay in days before the credit is awarded.
Campaign scheduling: Set start and end dates.
Applying to sales channels: Decide whether the credit applies to the Online Store, POS, or both.
Display settings: Customize messages shown on the store.
Step 5: Click Save. The campaign will become active with a small widget being shown on the Product or Cart page.
Pro tips: Communicate your program. Actively promote it within your store, such as adding banners or pop-ups on product pages. Also, share it on social media and send targeted emails to customers. Not everyone will take the time to discover the program on their own, so using these channels helps notify them and encourages participation.
6. Common pitfalls and warning signs to avoid when building cashback rewards for customers
That's about it. Before you launch your program, we would like to share some key pitfalls. For smooth execution, avoid:
Overly generous cashback rates that erode margins
Complex rules that confuse customers
Delayed or inconsistent reward issuance
Limited redemption options that frustrate users
Lack of clear communication and promotion
Also, watch for warning signs and act promptly. A failed cashback program typically shows low enrollment rates, low redemption rates, high customer service complaints, and margin erosion beyond projections.
You can try to fix things by simplifying rules, adjusting cashback amounts, or combining rewards with other offers to increase customer satisfaction.
Bottom line
In conclusion, cashback programs are a strong tool to boost customer loyalty, increase repeat purchases, and drive engagement. However, not every business necessarily needs one. When considering a cashback program, take into account product types, industry fit, customer base, and projected ROI.
Not sure how to start your program? Here’s a good piece of advice. Begin small, test the program, and scale based on real data. And for a quick and effective implementation, don’t hesitate to try Koin cashback and store credit!
FAQs
-About Author
Emma C.
As the Chief Marketing Officer at KOIN app, I’m here to build a robust ecosystem by collaping with Shopify apps. Together, we can create seamless integrations that add more value to our shared customers.
KOIN helps merchants retain customers, increase repeat purchases, and drive loyalty by offering cashback and store credit rewards.
📩 Let’s connect! emma@getkoin.io
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