Reward Points Calculation Dilemma

I run a new small e-commerce business and I'm considering to reward my customers with reward points for every dollar spent in our store.

I was thinking along the lines of 10 reward points for every dollar spent.
To redeem a product it would costs 5 times the retail price.

For example :

When a customer purchases a $10 item a total of 100 reward points would be credited to their account.
And For a customer to redeem a $10 item, it would costs 500 reward points

I'm somewhat uncertain about the above calculation. On average, my products are only retailing at $10-$15. I'm hoping to strategically reward my customers while ensuring it would not dig too deep into my costs. And of course the point redemption needs to be realistic and achievable.

What are your thoughts? Do you have any advice for this newbie? Thanks in advance.

If you haven't already find a copy of "Scoring Points : How Tesco Continues to Win Customer Loyalty" it's available on Amazon both in paper and on the Kindle. For those that don't know Tesco is one of the leading supermarket brands in the UK who are famous/infamous about their reward scheme.

The book goes into a fair amount of depth on several subjects but highlights some areas that might directly help you.

One of the big things it covers is why setup a points scheme? If its to reward customer loyalty just give them period discount codes, its a lot cheaper and has a similar effectiveness. Points schemes really only provide a good return if they are being used with data mining to open new opportunities.

Now as Tesco was a bricks and mortar store they didn't have the advantage of a nicely available transaction log with user_id to track users. So they relied on people use ClubCards and tracking users purchases through the ClubCard scheme. Every few months Tesco would send out ClubCard rewards a mixture of ways to get more points or get discounts, more often then not these were not on products you bought but products that were similar with a slightly higher price bracket. In effect they used the data and promotions to change their users behaviour.

So what is your goal with your points scheme?
Is the goal to change user behaviour or simply to reward users?
Building a point scheme is quite complicated vs a simple reward scheme where you dish out discount vouchers is it worth the extra development time and support?

Sort of linked the book I mentioned is a fair few years old, and covers Tesco first online foray given that point schemes were first introduced to track users purchases rather then reward customer loyalty is there a need for such a system, when you already have its biggest business advantage the data. Could you simply use your existing data to reward and change user behaviour?

A common practice as I know, is to avoid relating reward points to actual products you are selling, or fixed amount of money.

If you make them directly related, you'll have the problems:

1. As you mentioned, it's hard to redeem. How to you decide rate? Why 5 times? Sounds groundless and not fair enough.
2. In this case customers will relate your points to money directly. A discount will be more effective than your points.

A better choice is to redeem points by unusual gifts, or other products which are appealing to your customers but not available in your store, say an iPad(it may be expensive in your case, just an example).