Are you one of those business owners that believes that breakage is a good business strategy? Well, think again. Breakage is simply the amount of points or credits that expire or never get redeemed. Along with gift cards and cash cards, it is widely associated with Loyalty and Rewards Programs.

Breakage is a classic example of a win-lose proposition—win for the business, lose for the consumers. Most consumers don’t even realize when they are getting the short end of the breakage stick. Here are some everyday examples:

  • The consumer receives a $50 Gift Card but only spends $47, leaving $3 of their money that they never use.
  • The consumer has a “Buy 10 Get 1 Free” stamp card in their wallet for a product (coffee, yogurt, dry cleaning, car wash, Thai food, etc.). They have seven stamps but lose their card.
  • The consumer shops on a website that offers great prizes in their Loyalty Program, but after earning 1,000 points they stop purchasing because they need 25,000 points before they can redeem them for anything.

Even though breakage is a losing proposition for consumers, many companies rely on it to help them reach their financial goals. Their programs don’t just account for breakage, they actually encourage breakage.

From the business side, the common view on breakage is that it is an excellent way to increase profits through “unredeemed assets.” It’s the equivalent of having someone pre-pay over the phone for an item at a local store and never come to pick it up. It is the ability to literally make something for nothing.

And there’s plenty of money at stake in the breakage game.

There are roughly 20 trillion frequent flier miles in circulation right now, give or take a couple billion. Let’s say just 1 percent of those expire or never get redeemed, leaving us with 200 billion. Those 200 billion have, on average, a redemption value of roughly half a cent. That might not seem like much, but multiply $.005 by 200,000,000,000 and you’ve now got yourself 10 billion dollars.

It’s easy. It’s profitable. It’s inevitable.

And it’s horrible for Loyalty Programs.

The most important thing you can remember about breakage is this: A loyalty program that encourages breakage, discourages loyalty.

E-mail it to your co-workers, write in on your walls, use it as the mantra in your daily meditations. Do whatever you need to do so that this concept becomes ingrained in your business soul.

The purpose of a Loyalty Program is clearly stated—to increase loyalty. Every expired point or unredeemed code represents a user who abandoned your program and went looking for greener pastures.

Breakage then, by nature, actually creates disloyalty from your members.

You might end up making a few bucks by getting some points off the table, but you’ve lost something much more valuable—a customer. And their value to your business may be far greater then any direct revenue, because any customer could turn out to be an incredible referral source for your program. Through the all encompassing interconnectedness of blogs, e-mails, and the almighty “share” on Facebook, the best (and cheapest) way to acquire new users that may become loyal patrons is through referrals from current customers.

Hard to imagine anyone telling their friends about your Rewards Program if they’d abandon what is essentially free stuff so that they don’t have to participate in it anymore.

The good news is there’s a fool-proof solution to keeping customers engaged with your brand, continuing to spend their time, money, and plugs with friends on you.

Reduce breakage.

Before you can reduce it, you need to rethink it. View breakage not as money earned but money found. Use the profits from breakage to increase customer retention and reduce churn. Provide greater value to your users by offering desirable rewards at attainable levels. Encourage your users to spend their points, not abandon them.

No matter how great your offer there will always be some level of breakage, so while retaining customers, driving engagement, and encouraging referrals, you’re still going to make some money.

Think of that revenue as icing on the cake, which is particularly apt because if you foster loyalty with a group of happy customers while running a profitable business, you can have your cake and eat it too.