Insights

Is the End of Breakage Near?

by Josh Kelso | March 30, 2011
<p class="MsoNormal" style="margin: 0in 0in 10pt;">Let&rsquo;s face it &ndash; we&rsquo;re all participating in some sort of loyalty program in our daily lives.&nbsp; Some of us use our grocery store club card to get discounts or our Starbucks card, or our credit card for points for cash or free airline tickets.&nbsp; Either way, loyalty programs like these compete for our attention and more importantly our behavior.</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">The average US consumer is a member of eleven (11) loyalty programs and is active in about six (6).&nbsp; With all these loyalty programs competing for our attention, program &ldquo;hoops&rdquo; members must jump through like &ldquo;breakage&rdquo; become increasing important with behavior decisions.&nbsp; The following will deconstruct breakage and shed light on some loyalty programs that are siding with consumers and their choices.</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">Breakage is the classic crutch of loyalty marketing financial models.&nbsp; Attitudes towards breakage are shifting, both from perspective of the loyalty supplier community and consumers.</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">Some might argue that breakage models are critical to managing the profitability of a loyalty program however breakage models only serve to create a vicious circle of ever decreasing value for both the consumer and business because consumers will not change their behavior if the value of the reward is being undermined.</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">The most successful loyalty programs influence customer profitability by flexing the rate at which different consumers earn currency for different activities. &nbsp;Rather than creating breakage models, enlightened loyalty program operators use knowledge about their customer&rsquo;s behavior, their products and their margins in order to develop segment strategies that encourage consumers to behave more profitably using points as the incentive. &nbsp;They know that if the value of their points are in anyway devalued they are unlikely to get the positive changes in consumer behavior they desire. &nbsp;Successful loyalty program administrators create predictive customer financial models to decide which Customers, for what activities, how much and when points should be awarded. &nbsp;</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">Some brands are shifting their thoughts about breakage.&nbsp; In fact, recent moves by large airline companies &nbsp;and Points.com signal additional recognition that the accrued value in loyalty programs is not a &rsquo;shiny object&rdquo; to tease consumers with, rather it is truly an alternate currency that people expect to have liquidity and be able to convert for value almost immediately &ndash; hence, almost no breakage.</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">Points.com recently announced that it is teaming up with PayPal to allow its Aeroplan&reg; miles, American Airlines AAdvantage Miles&reg; and US Airways&reg; Dividend Miles&reg; to convert into cash in member&rsquo;s PayPal account. </p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">Cash is still king and loyalty programs that make cash more accessible and immediate will effectively influence consumer behavior and drive more brand and product loyalty.</p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">The concept of leveraging PayPal&rsquo;s technology and customer base to facilitate the fulfillment of a Cash redemption has promise and intrigue.&nbsp; Another critical driver of success for this partnership will be the exchange rate set between the two currencies and the overall consumer perceived value.&nbsp; This partnership has the potential to provide additional security and accelerate the overall process, both of which add value to the consumer and almost eliminate breakage. </p> <p class="MsoNormal" style="margin: 0in 0in 10pt;">Trellist helps clients engage their customers in loyalty programs, to increase the value of these relationships.&nbsp; We believe it&rsquo;s good for the industry and for the consumer when brands encourage engagement rather than hoping for breakage.</p>

Is the End of Breakage Near?

Mar 30, 2011, 00:00 AM by

Let’s face it – we’re all participating in some sort of loyalty program in our daily lives.  Some of us use our grocery store club card to get discounts or our Starbucks card, or our credit card for points for cash or free airline tickets.  Either way, loyalty programs like these compete for our attention and more importantly our behavior.

The average US consumer is a member of eleven (11) loyalty programs and is active in about six (6).  With all these loyalty programs competing for our attention, program “hoops” members must jump through like “breakage” become increasing important with behavior decisions.  The following will deconstruct breakage and shed light on some loyalty programs that are siding with consumers and their choices.

Breakage is the classic crutch of loyalty marketing financial models.  Attitudes towards breakage are shifting, both from perspective of the loyalty supplier community and consumers.

Some might argue that breakage models are critical to managing the profitability of a loyalty program however breakage models only serve to create a vicious circle of ever decreasing value for both the consumer and business because consumers will not change their behavior if the value of the reward is being undermined.

The most successful loyalty programs influence customer profitability by flexing the rate at which different consumers earn currency for different activities.  Rather than creating breakage models, enlightened loyalty program operators use knowledge about their customer’s behavior, their products and their margins in order to develop segment strategies that encourage consumers to behave more profitably using points as the incentive.  They know that if the value of their points are in anyway devalued they are unlikely to get the positive changes in consumer behavior they desire.  Successful loyalty program administrators create predictive customer financial models to decide which Customers, for what activities, how much and when points should be awarded.  

Some brands are shifting their thoughts about breakage.  In fact, recent moves by large airline companies  and Points.com signal additional recognition that the accrued value in loyalty programs is not a ’shiny object” to tease consumers with, rather it is truly an alternate currency that people expect to have liquidity and be able to convert for value almost immediately – hence, almost no breakage.

Points.com recently announced that it is teaming up with PayPal to allow its Aeroplan® miles, American Airlines AAdvantage Miles® and US Airways® Dividend Miles® to convert into cash in member’s PayPal account.

Cash is still king and loyalty programs that make cash more accessible and immediate will effectively influence consumer behavior and drive more brand and product loyalty.

The concept of leveraging PayPal’s technology and customer base to facilitate the fulfillment of a Cash redemption has promise and intrigue.  Another critical driver of success for this partnership will be the exchange rate set between the two currencies and the overall consumer perceived value.  This partnership has the potential to provide additional security and accelerate the overall process, both of which add value to the consumer and almost eliminate breakage.

Trellist helps clients engage their customers in loyalty programs, to increase the value of these relationships.  We believe it’s good for the industry and for the consumer when brands encourage engagement rather than hoping for breakage.