There are many moving parts and terms of a loyalty or incentive program that contribute to its success. One aspect that some people aren’t familiar with is point breakage (or incentive breakage as it’s referred to among B2B channel incentive programs). Point breakage itself is relatively easy to comprehend but what some brands struggle to understand is how it can impact a loyalty program.
Point breakage (not to be confused with 1991 film Point Break) is the percentage of issued loyalty program points that go unredeemed by members. If John Doe earns 1000 points in his loyalty program, but leaves 500 points unredeemed in his account for an ongoing amount of time, the 500 points contribute to the program’s breakage rate. This can also happen if rewards points expire.
Some point breakage is normal and the averages can vary by industry: for example, for CPG retailers 20%-30% is considered an average breakage rate, while B2B brands and the travel industry can see average breakage rates of up to 70-85%. Because of industry differences it's difficult to determine an exact percentage to work as the universal standard of a bad breakage rate for every loyalty program, but it's typically safe to say that if your breakage rate is trending towards the higher percentages, you've got a problem.
Why Do Loyalty Programs Have High Point Breakage Rate?
On the surface point breakage might appear to be a good thing for the brand: less points being used or redeemed for rewards means there’s fewer items or prizes for the brand to fulfill, thus lowering program costs. For B2B channel incentive programs that issue rebates, the less rebates that get paid out means the brand benefits from the sale without having to incur the cost of the incentive.
However the negative impact of a high point breakage rate far outweighs any small benefit of reduced fulfillment costs.
Let’s consider the common reasons a loyalty program might have a high point breakage rate:
- Points are expiring too fast
- Members can’t earn enough points to redeem for prizes
- Earning or redeeming points is too complicated or requires too much work on the customer’s part
- The available rewards are irrelevant or not valuable enough
Each one of these reasons not only cause a high breakage rate, but they also reveal some major issues or problems with the loyalty program itself.
Points Expire Too Fast - members lose any value they’ve rightfully earned too quickly and before they can receive any benefit from doing so.
Members Can’t Earn Enough Points To Redeem For Rewards - This tends to happen when the point cost for available rewards is too high, or if there aren’t any low- or mid-tier value rewards in the catalog: only high-value rewards with high price tags. Think about it: if the low-tier rewards in your catalog start at 1000 points but customers can only earn 1 point per dollar spent, they will quickly become overwhelmed and discouraged at the amount of time and money they need to spend to even get the low-tier rewards -- nevermind the top-tier rewards.
Earning & Redeeming Points Is Too Complicated or Requires Too Much Work - Member participation rates tank when a program makes it too difficult to earn points, requires too much effort on the member’s part, or has strict restrictions on how members can use and redeem their points. Even if a program has good enrollment rates initially, there’s a high possibility members will abandon the program soon after enrollment rather than continuing to struggle to use it.
The Rewards Are Irrelevant Or Not Valuable Enough - Customers won’t redeem their hard-earned points when they’re not interested in any of the rewards. There are times when lackluster reward options can cause members to hoard their points in hopes that something better and more valuable will become available in the future. But this risks losing members who no longer have the drive or motivation to continue playing the waiting game.
How Point Breakage Negatively Impacts Loyalty Programs
Point breakage itself is an issue because it shows that a key element of the loyalty program isn't working - customers are earning points but not doing anything with them when points are meant to be used. There are other negative impacts that come with point breakage:
It Creates A Cycle Of Unfairness
The human brain is wired to react to pain. Psychology research shows that the same area of the brain that registers pain also reacts to feelings of unfairness. This means when an individual believes they are being treated unfairly, they react in a similar way as if they were experiencing pain. Point breakage can create a cycle of unfairness that’s difficult for customers to overlook. When customers repeatedly find they can’t redeem their hard-earned points because of issues like a difficult redemption process or their points expiring too quickly, they’ll eventually develop feelings of frustration, anger, and the belief that they are being treated unfairly and were misled by deceptive processes.
No company should want their customers to associate these types of negative emotions towards their brand. They don’t portray the image of a brand who inspires affinity and loyalty in its customers. High point breakage might seem like a good thing for the brand but it’s bad for the customer and that is what brands should be working against.
The Loyalty Program Isn't Delivering Value
Some brands fall into the trap of viewing their loyalty programs as a tool that should only benefit the brand itself - which is just untrue. The core purpose of a loyalty program is to build a relationship between the brand and customer based on recognition, appreciation, and mutual reciprocation of value. Rewarding early and often helps inspire and encourage customers to continue making those repeat purchases that lead to brand loyalty. When rewards aren’t being delivered or redeemed, a core piece of the loyalty-building process is removed and without it the whole strategy falls apart. The program and its rewards automatically become less important, less valuable in the customer’s mind. The diminishing value makes it easy for customers not to care deeply about a brand or maintaining an existing relationship.
How To Fix Point Breakage
To fix point breakage, it helps to start with determining why your program is experiencing issues in the first place. Take a look at your program metrics and member data, and look for trends that reflect the issues outlined above. Then consider some of the ways you can modify your program to address and solves these issues. Here are some tips to fix high point breakage rates.
Ensure Members Know How The Program Works
Point breakage solutions aren’t always complicated or dramatic like complete program overalls or process changes. In fact the first and easiest solution is ensuring your members know how, when, and the ways they can earn and redeem program points. Your program might seem straightforward to you, but customer confusion over how a program works and not fully understanding rules are one of the top causes of inactive memberships.
Here are some action items to ensure new and existing members are well-informed:
- Make sure your program earning rules are clear, easy to understand, and easily available for members to access across any digital channel. Include a ‘How-To’ or explainer page on your brand website that can detail out how your program works for any interested viewers.
- Create onboarding emails for new members that explain program structure, earning rules, and how to redeem points. You can also create emails that encourage customer actions like redeeming for their first reward or reaching a point milestone.
- Set up automated emails that remind customers of their available points and different ways to spend them like recommended rewards or new catalog items.
Make It Easier To Earn Points
If your program only allows members to earn points when they buy something then it’s less likely member participation will stay consistent or frequent - when they're not making a purchase they have no reason to engage with the program. Both your members and your program will benefit from increasing the opportunities for users to earn points. Members will have a reason to use your program and engage with your brand more frequently. Being rewarded for more active engagement will also help build the connection between the customer and your brand, which helps create more customer loyalty. Consider letting members earn points for:
- Completing their member profiles
- Social media activity - you can reward members who tie their social media accounts to their profiles with points and award points to members for posting content to dedicated hashtags, interacting with brand social accounts, etc.
- Engaging with content such as watching videos, reading articles, or participating in brand events
- Submitting product reviews or referring friends & family
- Completing user quizzes or surveys
Provide More Reward Options
Lackluster rewards can make it difficult to feel motivated about participating in a loyalty program. After all, what’s the point of earning points if there’s no reward that makes you want to redeem your points? There’s also the fact that customer shopping trends and preferences have been shown to consistently change over time. If you stick to the same prizes or rewards you offered 5 years ago, there’s a higher likelihood customers will begin to feel your program no longer delivers the same high value or desirable incentives it once did.
Regularly refreshing your rewards catalog with new items or expanding it to include other types of rewards has a number of pros: it shows the brand is invested in keeping the program fresh and exciting; it gives customers a reason to regularly check-in to see what new rewards they can access; and it also makes your program more appealing to new non-member customers and motivate them to enroll. Be sure to do some customer research and collect feedback to stay on top of what your customers want to see in their reward options.
On the surface point breakage may not seem like a major concern for brands running a loyalty program but it's biggest threat is to the long-term health and growth of the program. A loyalty program's ability to serve its purpose and deliver on ROI depends on all parts of the process working smoothly and together. When members aren't redeeming their points, the causes can create negative impacts that over time will hinder the program's progress towards meeting program goals. To avoid these issues, be sure to monitor program breakage rates along with other loyalty metrics to stay on top of any changes in program health.
If your program is experiencing problems like high breakage rates or similar issues, consider reaching out to us to learn how we help our partners identify, diagnose, and fix problem spots in existing loyalty programs.