Loyalty programs only hold value if customers benefit from their participation, and too many points left on the table is both unhealthy and unsustainable for any program. So how do you build a successful loyalty program that achieves the right amount of “burn,” and the positive results that come with it?
For loyalty program members, it’s all about the burning, not the earning. That is, customers appreciate their rewards points when they spend them, not when they earn them. This poses a challenge for retailers — if customers don’t spend their points, they never understand the value they hold. If they don’t perceive the value, they may become disengaged from the program and drop out entirely.
That phenomenon is called “breakage”: when a program member earns a point and never spends it, letting it become inactive or expire. The reasons may be numerous — members may have left the program, never earned enough to redeem anything, or simply forgotten about the program because it wasn’t relevant.
Finding the right balance of breakage and redemption is key to a successful program. One that never breaks any points will underperform financially, while one that breaks too many is not providing meaningful value to members.
The Impact of Breakage
Breakage rates can vary widely by market vertical, ranging as high as 85 percent in the travel industry to as low as 5 percent for cash-back programs. In general, a 25 to 35 percent range is a sufficient benchmark for most programs.
Retailers with loyalty programs often look at breakage as a main source of profit, since not fulfilling a reward saves them money. While it is true that unused points reduce the liability on profit-and-loss (P&L) statements, the overall impact of breakage is both unhealthy and unsustainable for the program. Marketers often don’t realize that breakage creates a vicious cycle of continually decreasing value for both the consumer and the brand.
Rewards and Redemption
Redemption is a critical component of the loyalty experience because of the opportunity for positive customer interaction. Through reward redemption, loyalty programs demonstrate their value while furthering the customer relationship.
However, according to the Financial Brand and the 2015 COLLOQUY Loyalty Census, one-third of all rewards go unredeemed each year — and 20 percent of loyalty members have never made a redemption. In addition to leaving rewards on the table, non-redeemers are almost two and a half times more likely to defect to a competitor as those who redeemed in the last 12 months.
As a loyalty marketer, when you assess breakage, it’s important to remember that the reward is what makes the greatest impact on the customer. The reward will keep that customer coming back, increasing spend, and choosing you over the competition.
Monitoring and Managing
Loyalty marketers can manage a healthy breakage rate by focusing on two key areas:
1. Time to Reward: Take a close look at how fast members earn rewards. The first question from new members is almost always, “How much do I have to spend and how long will it take to get the first reward?” Typically, the first reward should be earned in the first one to two months of membership. This is the time period when they’re most amenable to promotions and brand messaging.
2. Revenue Penetration: In reviewing the transactions running through the program, what percentage of your overall revenue is via program members versus nonmembers? Ideally, 60 percent of retail revenue comes through your program. High-frequency retail, such as grocery, is closer to 80 percent revenue through the program. The larger the penetration, the more customers will be affected by positive experiences, which will lead to a greater bottom line.
These two metrics are key indicators for the overall health and direction of the loyalty program. Adjustments can be made to counter downward trends in the form of more promotional activity, introduction of new awards or increased value at reward tiers.
Monitoring the results and making strategic adjustments will ensure customers are engaged and realizing the benefits they want to achieve, resulting in an effective program that doesn’t rely solely on breakage for its bottom line.
Loyalty members who redeem for rewards are more engaged in the process: transaction, earn and burn. The more customers redeem, the bigger spenders they become, and numerous studies demonstrate that the approach directly impacts the bottom line.
According to a May 2017 report from Forrester, loyalty program members spend more with traditional retailers than other shoppers do. Their average spend in the past three months at the time of the survey was $184, compared with $141 for nonmembers. The study also showed loyalty program members tend to feel more valued: 65 percent of members feel like the brand rewards their loyalty, compared with only 28 percent of nonmembers who feel that way. Compared with the average U.S. online consumer, loyalty program members have feelings for brands that go deeper than the discounts offered.
Breakage is an important issue to address in effectively managing loyalty programs. Monitoring the key areas of attainability and penetration allows marketers to make appropriate adjustments and optimize returns — leading to the right amount of “burn,” and the positive results that come with it.