Here at Smile.io, we love successful programs and the strategies that create them. More than that, however, we love learning from rewards programs. This desire to understand what makes a program successful has led us to see if we could combine data from thousands of programs we support to answer questions that would be impossible to address with any one program.
Earlier this year, we conducted a study spanning more than 2,000 merchants and the rewards programs they run. Now, we’re using that data to provide concrete answers to some of the biggest rewards program questions. We’ve already tackled the nebulous matter of how to know your rewards program is working and today we’re going to analyze the effect a rewards program has on a store’s average order value.
Here’s our agenda:
1) Based on our study, how much does a rewards program increase average order values? What can you do to increase the impact of your program?
2) What is average order value, how do we calculate it, and what other metrics does it effect?
3) Why do rewards programs increase average order values?
1) What Impact Does A Rewards Program Actually Have on Average Order Values?
Since this is probably the reason you’re reading this, I’ll get right to it. In our study of more than 2,000 rewards programs (and the 50,000,000 plus customers they support), we found that the majority of brands see at least a 13.71% increase in order values from rewards program members over non program members. This means that for every $100 a non- member spent on an order, a program member would have spent an additional $13.71. The rewards program lift even gets as high as 25%- 50% for many brands, and even reaches over 75% in some cases!
So what do these numbers actually mean? Well for starters, they provide some very compelling evidence for the effectiveness of a rewards program. More than that however, these stats show that a rewards program doesn’t just retain customers - it can actually re-train customers into more valuable purchase behaviors! Take a look at your own store and see how your numbers compare to those in the study. You just might find some areas for improvement!
Looking to Improve Your Rewards Program?
When I said we love rewards programs I wasn’t kidding! No matter what stage your program is at, our ebook library has all the tools and tips you need to take your rewards program from good to great, including strategies for building a rewards program like the world’s best brands, a complete guide to calculating your retention metrics, and some expert tips to boosting rewards program engagement. If you'd like to learn more about the AOV metric and why rewards programs boost it, keep reading - we've got you covered!
2) What is Average Order Value (AOV)?
Average order value is a common commerce metric that analyzes how much the typical customer spends when they shop with you. When a store’s AOV is increasing, it’s a sign that customers are finding an increasing amount of value from the brand in question. If you’re not sure exactly what I’m talking about, don’t worry - we’ve got you covered with a step by step guide to calculating AOV and 5 tips to increase it.
How To Calculate AOV
The AOV calculation is fairly straightforward. First, you’ll need to know your total revenue number for the calculation period you’ve chosen (if you’re calculating AOV for the past year, you’ll need last year’s revenue total). Secondly, you’ll need the total number of orders customers made within that timeframe. When you have these numbers in front of you, you simply divide your total revenue by the number of orders and voila- you’ve got your AOV as easy as 1, 2, 3.
Once you’ve calculated your AOV, you can change the time period to assess trends and changes in your AOV over time. Tracking your AOV over time gives you the opportunity to dig deeper into your customer behavior and see how they respond to new product offerings, seasonality, or even various marketing campaigns. AOV calculations help brands figure out what works and what doesn’t in terms of getting more items into your customers’ shopping carts.
What Does AOV Measure & Indicate?
As a “leading indicator” for many other common commerce metrics, average order value can tell you a lot about both the current health of your brand and what you might be able to expect in the future.
When customers start to spend more money with a brand per transaction (aka a higher AOV), this is often a sign of their emotional commitment to the brand. I know you’re probably thinking that this sounds more like a lagging indicator than a leading one, but the truth is it’s both! When customers spend more money at a store, they actually tend to begin viewing the store as more valuable and better quality. This heuristic is known as the confirmation bias, and it helps explain why customers who spend more are actually more likely to make a stronger emotional commitment moving forward. That is, as long as you meet their expectations!
Another important metric that AOV helps predict is customer lifetime value (CLV for short). Customer Lifetime Value estimates the total financial value a customer will return to you over the entire period of time they remain a customer. CLV is the holy grail of commerce metrics because a good understanding of this number allows brands to make strategic customer decisions on both micro and macro levels. As a matter of fact, AOV is one of the pieces of the CLV formula, so it’s easy to see how the two numbers work together. As AOV increases so does your CLV, and an increasing CLV is indicative of a more valuable customer base who’s willing to spend more time (and money) with your brand.
Lastly, AOV allows brands to assess their share of wallet (SOW). While share of wallet is a less popular term, it’s still an extremely important idea. Investopedia explains that a brand’s SOW represents the amount of a customer’s total spending that happens with your brand. It differs from the more common idea of market share because while market share takes a look at what percentage of the total market your brand has captured, SOW assesses things on a per customer basis. AOV shares a linear relationship with SOW as every increased dollar a customer spends with your brand results in a greater share of wallet devoted to you.
3) How Does A Rewards Program Impact Average Order Values?
When you hear statistics about the profitability of repeat customers it kind of makes intuitive sense why a rewards program would have positive effects on AOV numbers. Giving customers incentives for purchases is a logical way to increase AOV, but the actual mechanics behind that growth are a bit more nuanced. We can split the effect of a rewards programs on average order values into two main categories: earning and redemption.
1) Rewards Programs Increase AOV as Customers Earn Rewards
The logic of a typical rewards program is pretty simple: customers earn points or status based on their ability to complete actions the brand has determined to be valuable. While different brands may place differing amounts of value on various actions, one action that is universally desirable is purchases.
By providing your customers with reward-based incentives to shop at your store, you’re actually giving them a reason to spend more with your store and increase their average order value. This exact mechanic was actually one of the biggest changes in the Starbucks rewards program in the last few years. Instead of providing customers with one star for each visit, Starbucks revamped their program to offer stars for every dollar spent, actively incentivizing larger checkouts. When brands offer reward potential that is linked to customer spending, it stands to reason that AOV will increase as a result.
2) Rewards Programs Increase Average Order Values as Customers Redeem Rewards
Rewards programs are clearly designed to increase spending by offering customers rewards for making purchases, but one thing most brands don’t consider is that the actual redemption of a reward can result in higher value orders as well.
Think about it - when a customer goes to redeem a reward, they often automatically begin to rationalize the purchase of other products that catch their eye. We’ve all experienced this at some point or another: “well, I’m already saving $X so if I throw this item into my basket I’m breaking even!” The buzz that comes from redeeming a reward can often carry customers through to immediate incremental purchases which boost your store’s AOV.
Free shipping rewards are another contributing factor. When used, these rewards allow customers to enjoy free shipping on all items in their cart. The logic then follows that a free shipping transaction would be the perfect time to place a big order without the incremental shipping costs. Therefore, customers are more likely to pile their carts high in order to make the most of free shipping rewards, creating a higher AOV in the process.
As you can see rewards programs have both direct and subtle mechanics that influence customer purchase behaviors and boost average order values. Whether it’s earning or redemption a rewards program is always working overtime to lift your AOV (by 13.71% or more)!