Loyalty Truth

The loyalty supplier business is full of contrasts. Go-to-market strategies, and business models cover the spectrum. Looking East to West across the range of choice for brands operating traditional points-based loyalty programs, the offerings can be categorized somewhere  between old-school and ground-breaking. One key area of difference boils down to a single word – breakage.

By definition, the value of unredeemed points has been the cherished prize of whatever party owns the points bank. For years, many vendors “sold” points as part of their service offering, and breakage became a hidden value from which the vendor accrued value.

Eyes are wide-open today, with everyone benefiting from the loyalty value chain attentive to breakage – both its magnitude and how it is shared. Breakage is an important assumption in projecting loyalty program ROI, and sharing in the pot is heartily negotiated between vendor and brand.

Increasingly, the conversation around breakage is changing, with more progressive brands and their vendors asking if breakage is (gasp) a good thing.

Managing breakage has been thrust into the spotlight as new regulations are in play mandating how unused value in rewards program are to be tracked and funded. The rules, referred to as IFRIC 13, have become frequent topics of interest in industry conferences and have gained attention from global accounting firms seeking to carve out a new area of core business.

Beyond accounting standards, brands are attentive to how breakage impacts the success of their rewards programs and the associated satisfaction levels of their customers.At the Airline Mega Event this past October, a “Liability Forum” was presented with panelists describing breakage as “an asset to be used for program improvement” rather than just a kitty from which to bolster profits at quarter-end.

During the Mega Event, United Airlines presented a new communications campaign that highlighted this new view on breakage, saying that United Mileage Plus is “The program that wants you to use your miles”.

At the Cards and Payments Loyalty Conference a month later, panelists were asked “what is the ideal level of breakage” in a loyalty program. Fabio Garcia, head of cards at Banco Popular, got the audience to lift their eyes from their smartphones when he asserted that “zero” was the ideal figure. His logic? More redemptions equates to higher customer engagement, lower credit risk, and is a precursor to longer term program satisfaction.

Here are a few take-aways on Breakage & Liability Management:

1. Have a clear strategy for ownership of the points bank and how ensuing financial benefits will be allocated. Craft a position on acceptable levels of breakage, with customer engagement & satisfaction guiding the process.

2. Run from vendor relationships where points are sold on issuance and the spoils of breakage are held exclusively by the vendor.

3. Be prepared to defend your business case against financially driven colleagues who contend that higher breakage will add value to the program (hint: higher program value is offset by lower customer values over time).