Points Breakage – The Bane of Loyalty Programmes
High levels of loyalty point breakage create a vicious circle of ever decreasing value for both the Consumer and the Brand.
New generation loyalty platforms can break this damaging cycle, says Sanjai Velayudhan, loyalty operations strategist at ITC Infotech India.
Loyalty programmes are effective marketing tools and have proven their ability to identify existing customers, understand them & their requirements, reach out to them appropriately (mainly through offers, promotions) and thereby retaining them. Organizations invest in these programmes as they can help in strengthening long-term competitive position and tangible financial impact. Considering its real and perceptional benefits, ‘total customer loyalty’ is the Holy Grail most organizations have been seeking for their growth and survival.
Loyalty programmes have convincingly demonstrated their ability to alter purchase patterns as well as in developing positive attitude. No wonder, they are deployed across industries. Studies have authoritatively concluded that loyalty programme members exhibit greater behavioral loyalty to organizations versus non participants. At any given point in time, there are innumerable loyalty transactions taking place. With millions of loyalty points being accrued or redeemed, they have become one of the largest traded currencies in the world.
Loyalty programmes are indeed expensive propositions and involve considerable set up & maintenance costs. On-going operations involving accrual and redemption of points and constant need to communicate to member segments mean constant infusion of money. This is one of the main reasons why sizeable sales gains are necessary to ensure healthy ROI.
The core value proposition and the attractiveness of a loyalty programme are primarily dictated by the accrual & redemption opportunities offered by it. Simply put how many points are accrued (accrual velocity) and how many burned (redemption velocity) can make or break it. It may appear that large loyalty programmes with millions of members have a life of their own. It loosely integrates members into an influential community. While it has been argued that true loyalty is predominantly irrational, promotions & campaigns that facilitate easier accrual and redemptions of points by its operators provide a compelling motive to participate. Member participation may be considered the primal factor that dictates the success of a loyalty programme.
Contrary to generic belief, it is not accruals but redemptions that are the most critical business process in loyalty programme administration. It is imperative that points are regularly redeemed by members for rewards of choice (RoC). Quality redemptions can leave members happy and excited about their ‘relationship’ with the brand.
In a loyalty utopia, all accrued points would be redeemed, but in the real world, it is not so. These unredeemed or expired points are called ‘breakage’. Though from a financial perspective breakage constitutes profit for the programme operator, excess of breakage often prove toxic.
On the other hand, outstanding loyalty points (unredeemed, but valid) also represent a potential liability on the balance sheet and present a dilemma as:
a. Over-provisioning leads to obstruction of large amounts of deployable funds
b. Under-provisioning can lead to deficits
The temptation and prospects of unused points are large enough for some operators to deliberately create breakage-models. They vehemently argue that breakage is critical to managing the profitability of a loyalty programme. Breakage-models are constructed by setting high redemption thresholds and other barriers to redemption like early expiry periods for points.
Every loyalty programme generates some natural breakage which is good for the bottom line as they form a part of revenue. However, in excess, it creates powerful motives that annihilate the very reason why members enroll in the programme. Thus, breakage models create a vicious circle of ever decreasing value for both the consumer and Brand. High breakage levels indicate waning member interest and are symptomatic of loyalty programme ill health. It reduces switching costs for members and enhances the attractiveness of competing brands.
Though it is not easy to identify optimal breakage rates, studies have indicated that breakage in the retail loyalty programmes hover around 25% and airlines are grappling with higher levels. With limited redemption seats, airlines depend on their coalition partners to offer wider redemption choices for its members. Today the greatest challenge thrown-up by a loyalty programme is reducing breakage as ‘redeemers churn 8-20% less than non-redeemers’. Most loyalty programmes spend substantial amounts in encouraging aggressive accrual of points but fail to create compelling reasons for redemptions. Repurchasing decisions may be inertial however opportunity to earn ‘redeemable’ points is an accelerant to it.
There are various reasons for higher breakage. Some are:
1. Communications gap: A lack of regular & meaningful two-way communication between loyalty brand and members-meaning they are unaware of balance points, rewards that can be redeemed against existing balance, expiry rules, current accrual & redemption promotions etc.
2. Flawed programme design: Some programmes are deliberately designed as or turn out to be breakage-models. Low exchange value of accrued points, uninteresting/limited rewards on catalogue, cumbersome redemption process, highly priced rewards, complicated partner rules shorter points expiry period, lack of opportunity to accrue points as a household (resulting in fragmented points balances), mid term points devaluation etc.
3. Branding ambiguity: Some programmes communicate membership benefits ambiguously. There is lack of clarity on expiry rules, no Point of Purchase (POP) material at participating outlets, no regular newsletters (soft or hard copy), untrained retail staff, no pro-active prompting for loyalty membership number at stores etc.
In the contemporary world, where speed and variety is the norm, new-gen loyalty platforms helps in solving fundamental issues including that of breakage. They have functionalities that enable:
1. Quick and easy deployment of ‘industry-specific’ loyalty programmes
2. Effective and automatic notifications regarding points balance, points expiry etc
3. Efficient rewards, promotions & member management including accelerated creation and deployment of a large variety of promotions
4. Easy on-boarding of heterogeneous partners who can be accrual specific, redemption specific or both
5. Pre-built analytics, dashboards & reports for analyzing campaigns, programmes, advanced member segmentation based on user defined attributes etc to name a few
Unlike other businesses, loyalty programmes thrive and depend on information- by extrapolating member’s transaction and personal information provides for a powerful concoction that when deployed can give spectacular results.
Increasing use of advanced technology has ensured that loyalty programmes are getting increasingly sophisticated. With business processes keeping pace, narrowcasting has replaced broadcasting, segmentation is passé, and fragmentation is in vogue. By understanding needs of fragments loyalty companies can to offer ‘relevant’, ‘timely’ & ‘interesting’ promotions and offers that will assure maximum participation as satisfaction & loyalty are asymmetrical yet, interrelated concepts.
Increased participation will mean not only increased accrual but redemption velocity too. The resultant after burn is indicative of better member satisfaction. Companies have realized that sustained profits can be earned by selling points to partners as well as by encouraging redemptions for rewards that can be priced differentially based on real and perceived attraction for members. Redemption of points is meant to recreate the desire to accrue more points and triggers the loyalty cycle all over again!