Breakage vs Engagement: Retaining Loyal Customers

The goal of any business is to be successful and to make a profit, but it’s certainly easier said than done. One of the benchmarks of making a profit is your ability to ensure that your consumers keep coming back for more. Regardless of the service or products you offer, your business can only be successful if your consumers depend on you for their day-to-day lives.

Enter the star of the show – the customer loyalty programme. As customers continue to invest in your service or products, a loyalty programme allows them to accumulate points over time with every purchase. These points can then be redeemed for future discounts on their purchases. But when it comes to customer loyalty, the common debate is whether you should prioritise breakage or engagement. Breakage is defined as the number of points your business issues that go unredeemed at the end of a financial year.

When a business issues a loyalty point, it’s basically a liability that needs to be accounted for. But the actual cost only gets recognised when these points are redeemed to offset the purchases at the point of sales by the consumers. If consumers do not use these points, then you would reverse these liabilities and recognise it in the profit-and-loss (P&L) statement as “other income”.

From the perspective of a loyalty program operator, breakage is not necessarily good. While this may seem like easy money that your company can add to the top of the P&L statement, these loyalty points are the promise of a future discount or benefit to the consumers. Every business should be worried when consumers don’t redeem their points. It simply means that consumers don’t recognise the value of their points. Perhaps they simply forgot. But do you bother to find out why the consumers are not redeeming their points?

One of the common reasons that consumers don’t use up their points is the number of hoops that they have to jump through before they can redeem it for something even remotely meaningful. Many businesses attach a slew of terms and conditions that must be fulfilled before the consumer can redeem their points. Take air miles as an example. The airline usually requires you to have a minimum amount of air miles before you can redeem them for a reward that isn’t worth much.

Although it may seem beneficial to the company because you can simply classify and add the unredeemed points in your PNL as “other income”, this means that you’ve lost the engagement of your consumers. If the success of your business depends on how often your consumers keep coming back for more, then unredeemed points could mean that your consumer has lost interest or found another brand that better serves their needs and values their investment.

According to a famous behavioural theory, behaviour is the summation of motivation, ability, and trigger. If I want to build engagement with my consumers, I should not make them jump through so many hoops just to redeem their points. Your customers must feel motivated and empowered to do so with ease. For instance, perhaps you could allow your customer to offset their purchase with the redemption of these points at the point of sales. The ability for you to offset these points should be easy, and the business should serve as the external trigger to remind your customer to redeem their points.

When considering where to invest your time and resources, brands should prioritise engagement with consumers because every business is driven by repeat purchases by existing customers. There will never be a point where the loyalty rate of a redemption program is 100%, so we need to accept that there will always be accidental consumers who sign up for your loyalty programs without the intention of coming back. It is acceptable to have a certain level of breakage, but maximising breakage shouldn’t be the main objective of a loyalty program.

One of the primary ways to motivate your consumers to stay engaged with your brand and continually accumulate and redeem points is to make sure that they are aware of the value of their points. In business jargon, we would call this “cost per point” (CPP). The CPP is how much each point is worth to your customer. If each point can be redeemed for a SGD 1 discount, then no matter where the consumer goes to redeem their points, they know that the redemption rate remains constant.

For many loyalty programs, consumers don’t even know the value of their points because the points are often redeemed for air tickets, movie tickets, or other F&B vouchers. This can be very frustrating for consumers because the true value of their points is obscured. From a business perspective, it would also be difficult to predict the resulting liability if you don’t have a constant CPP.

In order to retain consumers, you must keep their interest at the heart of all that you do. So start by keeping the redemption rate constant so that consumers can easily calculate the amount of discount that they will get and can, therefore, know the true value of their points. A constant CPP will also allow you to multiply the CPP by the point balance at the end of the financial year to calculate the breakage.

It is inevitable for businesses to have rainy days. When this happens and you find the need to reprice or devalue your CPP, don’t be afraid to do so. The key is to keep your consumers in the loop so that they know what you are doing and the reasons for the changes. This helps you build a greater foundation of trust among your consumers which will ensure that they will stand by you in the long run.

Don’t Drive Your Business Through Breakage

While breakage can be seen as an additional profit for your business, it shouldn’t be your primary source of income. One of the first few loyalty programs came from an airline, because the breakage in the airline industry is notoriously high. Businesses decided to create an entire business out of breakage. But if you focus solely on maximising breakage, you end up losing consumers along the way, and the level of engagement from your consumers will ultimately make or break you.

Although airlines enjoy taking advantage of the breakage at the end of the financial year, the trend is changing as airlines begin to recognise the importance of consumer engagement. Singapore Airlines recently introduced KrisPay, which allows the consumers to use their KrisFlyer miles to offset their purchases at their brick-and-mortar stores. They recognised the importance for consumers to see the value of their KrisFlyer miles and provide them with the opportunity to use it beyond the redemption of air tickets.

At the end of the financial year, a breakage will always be there. But if you rely solely on breakage, your loyalty program will be wiped out in less than four years. If your main loyalty program is a coalition loyalty program, you earn a percentage of the GMV (gross merchandise volume) from your partners by driving loyalty activities to your partners. It is very much a performance-based price that you agree on with your partners based on the KPI that you are trying to help your partners achieve.

In conclusion, it’s more important than ever to keep your customers engaged and motivated to continue to support your business. Make sure your loyalty program is transparent, simple, and its value is easily understood. Put your customers first. Instead of trying to use breakage to add to your profits, use your loyalty programs to get your customers to stay delighted and come back for more.

1. Always Prioritise Engagement

After being in the business for many years, it may be easy to misalign your priorities. If you can continue to serve your customers’ needs and stand out from your competitors, then breakage will only be a minimal source of additional income because your annual profit will fuel your success to achieve your KPI.

2. For Your CPP, Transparency Is Key

Nothing is more frustrating for consumers than confusion about your loyalty program. If you choose to create a loyalty program, make sure that your consumers are well aware of the value of their points because it will ultimately drive them to redeem their points and help you gain a greater profit. Keep it simple, and don’t force your consumers to jump through too many hoops or you might just lose them in the process.

3. It’s Okay To Reprice Your CPP

If you need to reprice your CPP, that’s completely fine. Just make sure you’re keeping your customers in the loop and explaining your reasoning for doing so. This helps build trust and will encourage them to stick with you through the challenges you’re facing.