How Breakage Works
Breakage Calculation
Breakage Rate = (Points Earned - Points Redeemed) ÷ Points Earned × 100
Example: 100M points earned - 72M redeemed = 28M unredeemed → 28% breakage
Types of Breakage
Expiration Breakage
Points that expire before redemption. Members with small balances or those unaware of expiration policies lose points to time limits.
Churn Breakage
Members who leave (churn) without redeeming accumulated points. They may defect to competitors or simply stop shopping before reaching redemption thresholds.
Dormancy Breakage
Points in accounts that become inactive. Members may forget about the program, move away, or disengage without formally leaving.
Threshold Breakage
Small balances below minimum redemption thresholds. If redemption requires 500 points and a member has 450, those points may never be used.
The Breakage Paradox
Breakage is "free money" in one sense—unredeemed points cost nothing. But high breakage often signals that members don't find enough value to redeem, which means they're probably not engaged or loyal either. The goal isn't maximizing breakage; it's optimizing the engagement-cost balance.
Managing Breakage
Healthy Breakage Range
Most programs target 20-35% breakage—enough to manage costs, low enough to indicate value:
- Below 15%: Expensive but highly engaged members
- 20-30%: Typical healthy range
- 30-40%: Watch for engagement issues
- Above 40%: Likely indicates poor program value
Reducing Excessive Breakage
If breakage is too high (members aren't finding value):
- Lower redemption thresholds
- Improve expiration communication
- Add low-point redemption options
- Simplify redemption process
- Re-engage dormant members
Managing Low Breakage
If breakage is too low (program is expensive):
- Review earn rates (may be too generous)
- Examine redemption options (may be too attractive)
- Consider if heavy redeemers are profitable
- Analyze whether engaged members deliver enough value
Accounting Implications
Under ASC 606/IFRS 15, breakage affects points liability and revenue recognition:
- Liability reduction: Higher estimated breakage = lower liability (fewer points expected to be redeemed)
- Proportional recognition: If breakage can be reasonably estimated, revenue is recognized proportionally as redemptions occur
- Breakage reserve: Some programs maintain reserves for breakage uncertainty
- Audit scrutiny: Breakage estimates require defensible methodology and historical support
Breakage Analysis
- 1. Segment breakage by cohort. New members vs. tenured, high-value vs. occasional. Different segments have different breakage patterns—don't assume one rate applies to all.
- 2. Track breakage trends. Is breakage increasing (engagement declining?) or decreasing (redemption improving?)? Trends matter as much as absolute levels.
- 3. Analyze breakage by balance tier. Most breakage comes from small-balance accounts. Large-balance accounts rarely break—they've demonstrated commitment.
- 4. Model breakage over account lifecycle. New members have high breakage risk (many churn early). Long-tenured members have low breakage. Model accordingly.
- 5. Connect breakage to engagement metrics. Engagement scores predict breakage. Disengaged members are breakage candidates—intervene before they break.
- 6. Review after program changes. New earn rates, expiration policies, or redemption options change breakage. Re-estimate after significant program modifications.
| Segment | Typical Breakage | Primary Cause |
|---|---|---|
| New members (0-6 mo) | 40-60% | Early churn, didn't reach threshold |
| Active members (1-3 yr) | 15-25% | Small residual balances |
| Long-tenured (3+ yr) | 5-15% | Minimal—committed redeemers |
| Dormant accounts | 80-95% | Abandoned, likely to expire |
Exchange Solutions Breakage Analytics
Exchange Solutions' platform provides comprehensive breakage analysis—segmented breakage rates, trend monitoring, predictive breakage modeling, and liability reporting that supports accurate accounting. Understand your breakage drivers and optimize the balance between engagement and cost.
