Understanding Breakage: From Gift Cards to Loyalty Breakage

What is Breakage?

Breakage is a term that, in the context of gift cards and loyalty programs, refers to the unclaimed balance that customers never redeem. With around 3 billion gift cards sold annually in the U.S alone, a significant portion of these remain unused, translating to 'gift card breakage.' Simultaneously, 'loyalty breakage' refers to the unclaimed points or benefits within a loyalty program. This concept might seem simple, but it carries immense weight in the finance and marketing realms.

Why does Breakage Happen?

Breakage can occur for many reasons. Primarily, it's due to customer forgetfulness or loss of the gift card. Sometimes, customers can't find something they want to purchase, leading to high breakage rates. On the loyalty program front, the complex redemption process or the perceived low value of rewards can lead to loyalty breakage.

Forgetfulness and Loss

The sheer volume of gift card sales annually means there's a high probability of forgetfulness or loss. This is especially the case with physical gift cards, which can be easily misplaced or forgotten about in a drawer. Even with eGift cards, the digital equivalent, emails can be lost in an overloaded inbox, leading to high gift card breakage.

Complexity and Low Perceived Value

When it comes to loyalty breakage, complex redemption processes can deter customers. A study showed that 57% of loyalty program members abandon their points if it's too complicated to redeem their points. Moreover, if customers feel the rewards don't offer substantial value, they may not bother to claim them.

Why does Breakage Matter?

So, why does breakage matter? Simply put, it significantly impacts a company's bottom line. Breakage can be recognized as revenue, contributing to a company's financial health. However, breakage can also affect a brand's reputation and its ability to drive customer loyalty.

Breakage Revenue and Revenue Recognition

From a financial perspective, companies can recognize breakage as revenue, which can give a considerable boost to profits. As per most financial regulation standards, companies can estimate the gift card breakage and recognize it over the time the cards are expected to be redeemed. This concept also applies to loyalty breakage under the same standard.

However, the flip side of recognizing breakage as revenue is unclaimed property liabilities. In the U.S, unused gift cards may fall under escheat laws, leading to the value of these cards becoming state property.

Customer Loyalty

On the customer loyalty front, high breakage rates can discourage consumers from participating in loyalty programs or purchasing gift cards. Hence, it's a delicate balance that businesses need to maintain to ensure customer satisfaction while recognizing breakage as revenue.

How to Calculate Breakage

In terms of calculation, breakage rate is typically determined by using historical data and expected breakage rates. It involves predicting the percentage of gift cards or loyalty points that will remain unused. These calculations can help businesses make informed financial decisions, especially concerning revenue recognition and risk management.

Historical Data

Historical data plays a crucial role in calculating breakage. It involves analyzing past trends of redemption and non-redemption over a specific period. By examining this data, businesses can establish patterns and predict future breakage rates. For example, if a company finds that on average, 10% of gift cards sold remain unused, this figure can be used to estimate future gift card breakage.

Expected Breakage

Expected breakage uses statistical modeling to predict the percentage of loyalty points or gift cards that will go unredeemed. Companies often use algorithms that consider factors such as the card's value, the time since the last redemption, and the total number of cards or points issued.

It's important to note that businesses should continuously update these models and calculations as new data becomes available to ensure they reflect the most accurate and up-to-date information.

Cases in Which Breakage Occurs

While breakage is common in all sectors, certain situations tend to have higher breakage rates. These typically involve long-term loyalty programs and high-value gift cards.

Long-Term Loyalty Programs

Breakage often occurs in long-term loyalty programs where customers earn points over an extended period. The longer the timeframe, the more likely it is that customers will forget to redeem their points or even lose interest in the program.

High-Value Gift Cards

Interestingly, gift cards with higher values often have higher breakage rates. One might think that a high-value card would be quickly spent, but studies show the contrary. 65% of consumers spend an extra 38% beyond the value of their gift cards, indicating that smaller gift cards might actually incentivize spending more than the card's value, reducing breakage rates.

How to Prevent Breakage

Preventing breakage isn't just about avoiding unclaimed property liabilities or reducing breakage revenue. It's about maintaining customer satisfaction and loyalty. There are several strategies that businesses can adopt to minimize breakage.

Simplifying Redemption Processes

One of the most effective ways to reduce loyalty breakage is by simplifying redemption processes. Making it easy for customers to redeem their points can encourage more active participation and less breakage.

Offering Value-added Goods or Services

Providing value-added goods or services as part of the redemption process can also help reduce breakage. For instance, companies can offer unique experiences or premium products as rewards. These are not just incentives for customers to redeem their points or gift cards, but they also reinforce the value of the loyalty program or gift card.

Regular Reminders and Updates

Regular reminders and updates can also be useful in reducing breakage. Informing customers about their points or gift card balance and potential rewards can spur them to action and redeem.

Flexible Expiry Dates

Offering flexible expiry dates or, even better, no expiry date can significantly impact breakage rates. The more time customers have to redeem their points or use their gift cards, the lower the chances of breakage.

Breakage, whether in the context of gift cards or loyalty programs, is a critical factor for businesses to consider. It affects financial results, customer satisfaction, and overall business reputation. By understanding and managing breakage, companies can strike a balance between achieving profitable revenue recognition and maintaining a loyal customer base.

Conclusion

Breakage, encompassing both gift card breakage and loyalty breakage, is a significant aspect of the finance and marketing landscape. It refers to the unclaimed balances, points, or benefits that customers never redeem. Understanding breakage is crucial for businesses as it directly impacts their revenue recognition, profitability, and customer loyalty.

Overall, managing breakage is a delicate balance between maximizing revenue and maintaining strong customer relationships. By implementing effective strategies to minimize breakage rates, businesses can enhance their financial performance, customer satisfaction, and loyalty.

Remember, recognizing breakage and its impact is vital, but equally important is the ethical responsibility of ensuring customers have a seamless experience and receive the full value of their gift cards or loyalty program benefits. Striking the right balance will not only benefit businesses but also build trust and long-term relationships with customers.