Loyalty Breakage Definition
Loyalty breakage is the difference between the loyalty points earned by customers and the points redeemed for rewards or benefits. This loyalty metric is primarily used to assess financial liability related to the value of unredeemed points, but it can also be used to estimate the performance of the loyalty program.
How to calculate loyalty breakage rates?
To calculate your loyalty program's breakage rate, follow these 3 simple steps:
- Identify the total number of unused points (this includes all unredeemed points in your program).
- Determine the total number of points issued, including those that have expired.
- Divide the number of unused points by the total number of points issued.
What is the average loyalty breakage rate?
The average loyalty breakage rate varies depending on the type of loyalty program and the industry. Some studies have reported average breakage rates ranging from 5-30%, while others have reported higher or lower rates. For instance, retail loyalty breakage is around 25%, while airlines deal with much higher rates. It's important to note that the breakage rate can be influenced by many factors, including the structure of the loyalty program, the frequency of redemptions, and the incentives offered.
Is high loyalty breakage bad?
A high level of loyalty breakage indicates a low level of engagement by customers with the program or a mismatch between the rewards offered and customers' preferences. CFOs may encourage higher breakage rates as they are correlated with higher program revenue and lower overall program cost – some financial teams may even encourage high breakage rates on purpose by adding high redemption thresholds or short expiration periods to the loyalty program. But is that the best approach?
Excessive breakage can undermine the program's purpose and negatively affect its value for both consumers and the brand. High breakage rates signal declining member engagement and signify the program's decreased effectiveness. It also reduces the obstacles for members to switch to competing brands, making them more appealing as point redeemers churn 8-20% less than non-redeemers.
What are the leading causes of high loyalty breakage?
There can be several factors that contribute to high loyalty breakage rates:
- Complex redemption process – if the process of redeeming rewards is overly complicated, members may be discouraged from using their points or miles altogether.
- Lack of compelling rewards – programs that offer unsatisfying rewards are likely to see higher breakage rates as members are less motivated to redeem their points to claim them.
- Lack of communication – reward programs that do not adequately communicate rewards and the value of program membership may see lower redemption rates and higher breakage.
- Rigid expiration policies – programs with short periods for points may see higher breakage rates as members may forget to redeem their points in time.
- Infrequent purchases – industries with infrequent customers may see higher breakage rates as customers are less likely to accumulate enough points to redeem rewards.
- Lack of integration with other programs – programs that do not integrate with other loyalty programs or payment methods may face difficulties in attracting and retaining members.
- New consumer preferences – as consumer preferences evolve, loyalty programs that do not adapt may see higher breakage rates.
How to minimize loyalty breakage?
- Reward loyalty instantly – it's crucial to encourage customers to spend their points as quickly as possible. The easiest way to achieve this is to offer points to customers when they sign up, providing them with the necessary points to start spending. This quick initiation will help customers get hooked.
- Educate program members – it’s essential to clearly communicate the rewards associated with points and how they can be redeemed. Consider creating an explainer page on your website that outlines the earning and redemption process. Additionally, make the redemption process easily accessible by displaying the customer's point balance and redemption options directly on the checkout page.
- Offer bonus points – another effective method to encourage customers to use their points is to provide them with unexpected bonuses. This can include additional points for special occasions such as their birthday or holidays or simply as a surprise gesture.
- Extend expiration periods – points expiration is a major factor in the decline in loyalty program participation. To prevent this, ensure that your customers have enough time to earn and redeem points before they expire. This can be achieved by making the expiry period dependent on the last loyalty transaction instead of a fixed date, such as the end of the year.