Metrics that Matter is a series of posts highlighting metrics that you should consider tracking to successfully monitor and manage the health of your loyalty program.
A loyalty program’s breakage rate refers to the percentage of points issued that members are not expected to redeem due to insufficient balances, expiration, or forfeiture.
Why is it important?
The breakage rate of a program is an important indicator of member engagement. A low breakage rate indicates that members find their points valuable and are eager to spend them. A high breakage rate could mean that rewards are unachievable and/or undesirable.
Breakage rate is also used to calculate the outstanding points liability for a program. A high breakage rate means members are less likely to use their points, which will in turn result in a lower points liability.
How is it calculated?
The estimation of a program’s breakage rate, for the purposes of calculating points liability, generally requires the application of actuarial techniques. With that said, a program can get a general pulse on the metric by using the calculation below:
Breakage Rate (%) = unspent points / total points issued
This rate can be calculated over the program lifetime or for a specific time period. (Eg. breakage rate over the last 6 months)
Industry Average Metrics
Breakage rates for a loyalty program vary greatly by vertical. They can be as high as 85% within the travel vertical and as low as 5% for cash back programs. We believe 25% – 35% is a healthy benchmark for most programs to measure against.
Good, bad or ugly?
Historically, program operators encouraged breakage due to the reduction of liability and eventual financial windfall. In recent years, there has been a strong movement to curtail that type of thinking with a viewpoint that everything is secondary to engagement. If you subscribe to that school of thought, then the lower the breakage rate the better. (You can count RewardOps as squarely in that camp.)
How do I improve it?
There are two main reasons why you may have a high breakage rate: your rewards cost too much to redeem and/or your rewards are undesirable. Below are a few levers you can pull to help alleviate these issues:
- Micro-redemption rewards – Add low-cost rewards that can be offered at achievable price points. Popular examples of micro-redemption options include low denomination donations, low denomination gift cards, digital downloads, and coupons.
Chance-to-win rewards – Rewards that invoke a sense of gaming is a great way to inject excitement into your catalog and engage members at all point levels. Popular examples of chance-to-win rewards include sweepstakes, auctions, and instant win games.
Catalog curation – Maintaining a relevant catalog of rewards becomes increasingly important as your offering grows. Take care to regularly add new rewards and remove underperforming ‘clutter’.
Earn & burn promotions – Time sensitive promotions enabling members to earn points at an escalated rate or use points on discounted rewards should drive increased overall points spending. Take care not to discount the rewards cost too much or the increased engagement might be negated by the lower price per reward.
Member marketing – None of these initiatives will make much of an impact unless you are communicating them effectively to your members. Start with a monthly ‘what’s new’ email and build from there.
The above recommendations should help your program move the needle for your breakage rate. If it doesn’t, there may be a more systemic issue with the structure and design of your loyalty program.