February 21, 2007

Orvis Rewards --- Is It Rewarding For Orvis?

DMNews reported that Orvis began a new Rewards Visa program for Orvis cardholders. The program offers free standard shipping, as well as a $25 reward for every $500 spent at Orvis (or $2,500 spent on the card at other retailers).

Rewards programs are tricky to manage. From the standpoint of a business, program managers need to give away just enough merchandise to increase customer spend --- yielding more profit than expense. From the standpoint of the customer, the business needs to provide a genuine incentive that sets it apart from the competition.

The numbers at the end of this article are not specific to Orvis. But they clearly illustrate a challenge with Rewards programs. Using simulated sales, margin and expense metrics, the simulated example indicates customers need to spend at least forty percent more in order to cover the costs of a rewards program. Again, the numbers are not specific to Orvis, they are for illustrative purposes only.

Another interesting quandary with rewards programs --- the better the business manages line items in the profit and loss statement, the easier it is to generate profit, and therefore, it is easier to pay for a rewards program. Businesses that mis-manage the profit and loss statement require a greater increase in customer loyalty to pay for the rewards program.

Current Rewards
3.0 4.4
Average Order Size
$167.00 $167.00
$501.00 $734.80
Net Sales 80.0% $400.80 $587.84
Gross Margin 50.0% $200.40 $293.92
Less Marketing Cost
$0.00 $12.50
Less Pick/Pack/Ship 20.7% $82.94 $121.65
Add Shipping/Handling $12.95 $38.85 $0.00
Variable Operating Profit
$156.31 $159.77

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