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Breaking Good: Finding New Value in Loyalty Programs

Bob Grothe |

Can breakage in loyalty programs actually be a good thing?

Breakage has its benefits, beyond just cost savings. Issuers should look at breakage as another tool in the design of their loyalty program and use it to drive desired results.

As any financial institution executive team knows, the largest cost of operating a loyalty program are the rewards. More specifically, it is the accrual of points that customers redeem for rewards. When those points go unused, that’s “breakage”; and financial institutions (FIs) are finding innovative ways to deal with it.

More and more, issuers are moving away from traditional program elements such as point expiration and minimum thresholds that have kept accrual costs down. The absence of those features can increase program operation costs by 25 to 66 percent.

There are a number of factors driving this change:

  1. Cash-back programs are becoming richer, and issuers with points-based programs are rushing to keep pace, including removing point expiration.
  2. Issuers recognize the value of redeemers and want to reduce the barriers to redeeming. Redeemers spend three times more than non-redeemers and attrite at almost half the rate of non-redeemers.
  3. Customers are frustrated by points expiring. Points that never expire is a program benefit easy to communicate and lessens the operational requirements for tracking and calculating expiration.

As issuers race to keep their reward programs competitive, the benefits of breakage that go beyond cost savings need to be considered.

Breakage may be the best gauge of program health. Rising breakage rates can be an early indicator of earning or redemption issues that need to be addressed.

Expiration creates a sense of urgency for the infrequent customer, which may be the motivating factor in increasing their frequency of purchases. Proactively communicating to participants regarding points about to expire can be used to engage with a customers. Done right, this pending negative experience can be turned into a positive. Minimum thresholds ensure that customers provide a certain level of revenue before they are able to redeem for a rewards. The minimum thresholds are easily obtained by the better than average customer, but those customers “on-the-bubble” will need to improve their performance in order to redeem.

This is blog is an abridged version from the Compendium. Go here to read the unabridged version.

Topics: Big Data, Credit, Debit/Prepaid, Retail Trends

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