Understanding Loyalty Program Breakage and How to Prevent It

Loyalty programs have become essential for enhancing customer satisfaction and driving repeat business. These programs allow customers to earn points, which they can redeem for rewards, goods, or services. However, not all points are redeemed, leading to what is known as loyalty program breakage. Breakage refers to the percentage of loyalty points that customers earn but never use. While breakage can provide financial benefits to businesses, high breakage rates can harm customer loyalty and reduce the effectiveness of loyalty programs.

According to a report by Bond Brand Loyalty, nearly 30% of loyalty points go unredeemed each year, highlighting the significance of breakage in the loyalty industry. Understanding why breakage happens and how to manage it is crucial for businesses aiming to balance financial gains with enhancing customer experiences.

What is Breakage?

Breakage refers to the percentage of loyalty points in a loyalty program that customers earn but never redeem. This occurs when points expire, are forgotten, or remain unused due to a complex redemption process. Breakage allows companies to recognize revenue from unused points, improving short-term financials. However, high breakage rates can undermine customer loyalty, as customers may feel frustrated when they cannot redeem their rewards.

According to Capgemini Research, successful loyalty programs strike a balance by minimizing breakage while ensuring customers redeem their points, thereby enhancing customer satisfaction and fostering long-term relationships.

Why Does Breakage Happen?

Forgetfulness and Loss

Many customers forget about their loyalty points or lose track of them. With busy lives, people often overlook the points they have earned, especially if reminders are not sent regularly. Points may also expire before customers realize they have them. According to Forrester Research, loyalty program members often forget to redeem their points due to a lack of communication from companies. This forgetfulness leads to higher breakage rates and missed opportunities for businesses to build customer loyalty.

Complexity and Low Perceived Value

A complex redemption process can discourage customers from using their points. If the process is time-consuming or confusing, customers may give up before completing a redemption. Additionally, when the rewards offered seem too small or not valuable enough, customers may feel it is not worth the effort to redeem their points. As Harvard Business Review highlights, loyalty programs with unclear rules or limited rewards often see higher breakage rates due to low customer engagement and satisfaction.

Why Does It Matter?

Breakage Revenue and Revenue Recognition

Breakage plays an important role in a company’s financial management. When loyalty points go unredeemed, businesses can recognize the value of those points as revenue. This boosts short-term profits and improves cash flow.

According to Deloitte, companies often rely on breakage revenue to offset the costs of running loyalty programs. However, relying too heavily on breakage can be risky, especially if customer behavior changes and redemption rates increase unexpectedly. Properly calculating and predicting breakage is essential for accurate financial reporting and long-term planning.

Customer Loyalty

While breakage can benefit a company’s finances, high breakage rates can harm customer loyalty. Customers may feel frustrated or cheated if they cannot easily redeem their points or if their points expire too quickly. This dissatisfaction can lead to lower engagement with the brand and even customer churn.

As Forbes highlights, successful loyalty programs are those that encourage customers to redeem their points, thereby enhancing customer satisfaction and fostering long-term loyalty. Reducing breakage through better communication, simpler redemption processes, and valuable rewards ensures that customers feel appreciated and stay loyal to the brand. Balancing breakage revenue with customer satisfaction is key to a sustainable and successful loyalty program.

How to Calculate Breakage

Historical Data

One of the most common ways to calculate loyalty program breakage is by analyzing historical data. Companies review past loyalty program trends to see how many points were issued and how many were redeemed over time. This helps in estimating the percentage of points that typically go unredeemed.

According to PwC, analyzing historical redemption patterns allows businesses to create more accurate breakage estimates, helping with financial planning and revenue recognition. Historical data provides a clear picture of customer behavior, including average breakage rates, seasonal redemption trends, and factors that impact point usage.

Expected Breakage

Expected breakage is calculated by predicting how many points will go unused in the future based on current data and trends. Companies often use statistical models to forecast breakage rates by considering factors such as customer activity, program rules, and redemption deadlines.

As noted by KPMG, understanding expected breakage helps businesses allocate resources effectively and set aside liabilities for potential point redemptions. Accurate calculations ensure that loyalty programs remain financially sustainable while still offering meaningful rewards to customers who actively redeem their points.

Cases in Which Breakage Occurs

Long-Term Loyalty Programs

Breakage is more common in long-term loyalty programs where customers earn points over extended periods. As time passes, customers may forget about their points, lose interest, or fail to meet the redemption requirements. According to McKinsey & Company, long-term programs often face higher breakage rates because the longer the duration, the more likely customers are to lose track of their points or let them expire.

High-Value Gift Cards

Breakage also occurs frequently with high-value gift cards. Customers may hold onto these cards for special purchases but forget to use them before they expire. Additionally, some customers find it difficult to use high-value cards all at once, leading to unused balances. As highlighted by CNBC, billions of dollars in gift cards go unused each year, contributing significantly to breakage and unclaimed revenue for businesses.

How to Prevent Breakage

Simplify Redemption Process

A complex redemption process is one of the main reasons for high breakage rates. Simplifying how customers redeem their points can significantly reduce breakage. According to Gartner, businesses that streamline redemption through easy-to-use platforms, such as mobile apps or one-click websites, see higher redemption rates and improved customer satisfaction. Clear instructions and user-friendly designs make it easier for customers to redeem their points without frustration.

Offering Value-Added Goods and Services

Customers are more likely to redeem points when they see value in the rewards offered. Providing valuable goods and services encourages participation in loyalty programs. As HubSpot notes, offering a mix of high-demand products, exclusive services, and personalized rewards increases customer engagement and reduces breakage.

Regular Reminders and Updates

Many customers forget about their loyalty points. Regular communication through emails, SMS, or app notifications can keep customers informed about their point balances and upcoming expirations. According to Salesforce, personalized reminders and timely updates can boost redemption rates by up to 30%, ensuring that fewer points go unused.

Flexible Expiry Dates

Rigid expiration dates often lead to unused points. Offering flexible expiry dates gives customers more time to redeem their points, reducing breakage. As highlighted by The Loyalty Report, loyalty programs with extended or rolling expiration policies experience lower breakage rates and higher customer retention. Flexibility ensures that customers feel valued and have ample time to benefit from their earned rewards.

Conclusion

Loyalty program breakage is a critical factor that affects both business revenue and customer loyalty. While unredeemed points provide financial benefits through breakage revenue, excessively high breakage rates can harm customer satisfaction. Businesses must strike a balance by encouraging point redemption through simplified processes, valuable rewards, regular reminders, and flexible expiry policies.

Accurate breakage calculation using historical data and expected trends is essential for financial planning. As highlighted by BCG, well-managed loyalty programs not only reduce breakage but also foster long-term customer relationships, ensuring sustained growth and a loyal customer base for businesses.