Breakage in a loyalty program is the amount of points that are rewarded that never get spent. While your accountant might love breakage, you should be concerned about high breakage rates. High loyalty program breakage is a sign that something is wrong with your program.
What is Loyalty Program Breakage?
Loyalty program breakage is a metric that you can use to determine the outstanding financial liability of your points, but it also gives you an assessment of how effective your program is.
You can calculate your program’s breakage rate with the following equation.
This gives you the percentage of your awarded points that are going unspent. From our data the average breakage rate of a loyalty program is around 85%. If you calculate your breakage rate and it is much higher than this average it is a signal you should not ignore.
Why Breakage is Bad
You implemented a loyalty program (or are thinking about one) because it is a great way to encourage repeat purchases and create a loyal customer base. If your breakage rate is high, your customers are not returning to use the points they have. Thus, they are not repeating nor becoming loyal!
A high breakage rate is a sign that your customers are not engaged with your program. If they are not spending their points they do not see your points as valuable.
While unspent points mean more money back in your pocket, it often has a greater negative impact than the money you are getting back.
Customers see value in points when they spend them, not when they earn them. If your customers are not spending their points they are never realizing the value they hold. If customers don’t see value in your points they will not be motivated to earn them in the future.
This means they will not be motivated to purchase more often or perform the other actions you reward for. Actions such as social sharing and referring friends are a great way to leverage your program as a marketing tool. But are useless if you can’t motivate your customers with points.
So, in summary a high breakage rate is a red flag that your customers are not seeing value in your program. But there are ways to “break free” of high breakage rates.
Ways You Can Minimize Loyalty Breakage
Remember, your customers see value in your program when they “spend” their points. The solution to high breakage is to make sure that they first have points to spend, and that they are motivated to spend them.
First lets look at ways to put points in your customers’ hands, they can’t spend points if they don’t have any.
1. Give Customers Points As Soon As Possible
To reduce breakage you need to get customers spending points. To get customers spending points they need to have points to spend.
We recommend giving customers points right away, you can do this by awarding points to customers who create an account. This way your customers have points to spend. The sooner they have points to spend the sooner they can become hooked on your program.
2. Give Customers Unexpected Points
Another way to ensure customers have points to spend is to give them extra points when they might not expect it.
You can give extra points to a customer on their birthday, during the holidays, or my personal favorite… just as a surprise. When customers earn free points they are much more motivated to spend them. They also have a great view of your brand after receiving points as a gift.
Now that your customers have some extra points, we can now look at some ways to motivate them to spend those points.
3. Educate Your Customers on How to Spend Points
Make sure your customers know exactly what they will get with their points, and how to redeem them. It is difficult to get customers to spend points if they are not completely aware of the rewards they will receive.
We recommend an explainer page to tell your customers about what they can earn. This is a page on your site that explains the ways a customer can earn and spend points. You can see some examples in our list of favorite explainer pages.
Also, make it obvious how your customers will spend/redeem their points. One of the easiest ways to show this is by showing customers the amount of points they have and how to redeem them directly on the checkout page, which you can see in the example above.
4. Remind Customers That They Have Points to Spend
Sometimes customers just need a friendly reminder that they have points to spend. We all get busy and forget things every once in awhile, your customers are no different.
You can reduce your programs breakage by simply reminding customers that they have points. Send them a simple email that shows their point balance and include how much the points they have are worth. You can go one step further and include a recommendation of what they could spend those points on.
Just be sure that your recommendation makes sense for the individual customer. A blanket product recommendation won’t be useful. Members of your program want to feel like you know them personally and are treated better than a non loyal customer.
5. Run Promotions That Motivate Point Spending
The most effective way to get customers spending points is to incentivize them to do so. Run a promotion that encourages point spending, like a double points weekend or a customer appreciation day.
While there is a cost associated with making your points temporarily worth more, there are a ton of benefits as well.
When you run a promotion that encourages customers to redeem their points you can create a positive connection with spending. They will get something that is 2x the value of what they would normally get, which supercharges the positive feelings associated with your points.
These events improve your breakage rate, get customers to see points as valuable, and can also act as a marketing tool to get new customers to sign up. An event like this has a long term positive effect on your program.
How Point Expiry Impacts Breakage
One of the biggest drivers of loyalty program breakage is point expiry periods. When points expire they have become, well dead points. While there are many advantages to setting an expiry period, it is important to think of how it will impact breakage.
Basically, you want to make sure that your customers have a chance to actually spend their points before they expire. Make sure customers have enough time to earn and spend points before they are set to expire.
Instead of setting a hard date that all points expire, like at the end of the calendar year, try having an expiry period that is dependent on the last loyalty transaction.
At Smile.io we generally recommend setting a one year expiry since the last loyalty transaction. This means that every time a customer earns or spends points it will reset the countdown.
This dynamic expiration date ensures that active customers can continue to earn and spend and those that are not engaged can be encouraged to come back.
A Summary of Breakage
A loyalty program is only effective if your customers are actively engaged. A high loyalty program breakage rate is a tell tale sign that customers are not engaged with your program and are struggling to see value.
The average breakage in loyalty programs is around 85%, use this as a benchmark to see where your program stands. If your program is substantially higher you can look to implement some of the above remedies.
Most important is making sure that customers have points to spend, that they are encouraged to spend their points, and have time to spend them (expiration period).
Keeping these three basic principles in mind you can begin to reduce your loyalty programs breakage, and create happy, engaged, and loyal customers.