Point Breakage In Loyalty Programs: Why You Should Be Concerned

By Author: LoyaltyXpert
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In today’s competitive world, loyalty programs are the proven marketing strategy for customer loyalty, customer retention, and growth of B2B businesses. It can be challenging for B2B companies to manage their loyalty programs effectively at times. 
Do you know that 55% of consumers enrolled in customer loyalty programs use them infrequently? The reasons are ineffective communication to redeem loyalty points, unrelated loyalty rewards, and not-so-engaging experience. 
This leads to point breakage and an increase in loyalty program liability. These factors can highly impact business financial health. For example, B2B brands might see average breakage rates of up to 70-85%, if it goes above this, then it’s alarming. 
Before jumping onto understanding point breakage and its impacts on your business, first, let’s ...
... have an understanding of loyalty program liability.
What is loyalty program liability?
When the customers earn points through purchase, the B2B businesses are liable to give rewards until the customer redeems their points/gift cards. Until the points are redeemed by the customers, it is said to be the company’s liability. 
Loyalty program liability calculation
For the calculation of loyalty program liability, we need to understand the variables it includes. 

Outstanding points: These are the loyalty points of the customers that are issued but not redeemed or expired
Cost per point: It is the expected cost of the points that will be redeemed
Redemption rate: It is the probability that the points will be redeemed

To calculate the loyalty program liability, we need to multiply outstanding points, cost per point, and redemption rate. Below you can see how accounting for loyalty programs can help in improving the financial health of the company. 
Accounting for loyalty programs
Financial analysis plays a crucial part in any loyalty program. Loyalty program financial risk should be evaluated in the planning stage. One of the important steps while planning a customer loyalty program is to strategize on tracking the liability, and how the accounts team will track and manage costs. Increased loyalty program liability impacts a company’s financial health. Accounts and marketing teams together can manage loyalty program liability using data-backed loyalty software.
Best Practices for Loyalty Program Liability

 
-Improve Customer engagement
One of the major reasons for high loyalty liability is bad customer engagement. Provide attractive redemption offers that can engage customers. Communicate the benefits, and expiry data, and gamify their experience to increase redemption rates. 
-Exchange Points with Products
Redeeming and managing outstanding points for customers is always difficult. So, here is the solution that can benefit customers as well as companies. 
Exchange points with products. This technique is used to exchange points for high perceived-value products which actually cost very little for the companies. It makes it easy for customers to manage loyalty program points and companies can improve their revenue. 
For example: B2B companies can allow customers to redeem 1000 points for a $500 worth of product which actually costs $50 to the company. 
Eventually, it helps in generating better revenue and decreases liability. 
-Mention Point Expiry 
Mentioning and reminding the expiry date of the earned points/gift cards can act as a catalyst for your business. It is a great incentive for customers to use points and make a purchase. Hence, customers are motivated to avail of the earned points within the deadline. 
Protip: Design the reward deadline conveniently, it should not ruin the customer experience. 
Now that we have a clear understanding of liability, you must be thinking about point breakage in the loyalty program and how it is related to loyalty liability. So, let’s dig deeper. 
What is Point Breakage?
Point breakage is the percentage of earned loyalty points that are not redeemed by the customer. For example: If your customer earned 1000 loyalty program points, and only redeemed 400 points then 600 adds to the loyalty program breakage rate. Point breakage also happens when the points expire. 
Below are some reasons for high point breakage.

Short expiry period for loyalty points
Complex process of redeeming points
Non-engaging experience for the customers
Rewards not attractive enough

Impact of High Point Breakage Rate and Loyalty Program Liability on Your Business
High point breakage and liability rate are two red flags for your business. 
The increase in point breakage means customers are not redeeming loyalty program points hence they are not seeing any value in the loyalty programs. 
Sometimes, B2B businesses like point breakage. But, they need to understand that not redeeming points can help companies with reduced loyalty program liability in the short run, but it is hazardous in the long run. 
The high point breakage impacts the loyalty program and brand image. If the customers are not interested in redeeming the points then businesses are losing customer loyalty. 
Loyalty program liability is also crucial for the performance of loyalty programs. If there is an increase in liability and point breakage then the loyalty program is not performing well. 
Tips to Minimise Loyalty Breakage

– Extend expiry for loyalty points
One of the main reasons for point breakage is the short expiry of loyalty points/gift cards. While we want our customers to come back to us quickly, customers need time to make a purchase again. So, the program design should be in such a way that it should give enough time for customers to redeem the loyalty points. 
– Offer bonus redemption points
Who doesn’t like surprises? Surprise customers with unexpected bonus points as loyalty program rewards. According to SAP, “60% of customers say unexpected rewards are the biggest reason they’ll stay loyal to a brand.” It encourages them to be loyal and redeem points fast. You can use occasions such as birthdays, anniversaries, 1-year purchase celebrations, or any other day to surprise them. 
– Communicate clearly the redemption process
An unclear and complex redemption process makes customers irritated. Easy-to-understand rules for redemption work magically. Having a how-to explainer page or video on your website can give them clear ideas about rules. You can share emails to educate them about the program and the expiry date of loyalty points. Create an urgency using analytical data and motivate them to make a purchase. 
– Use gamification to enhance customer experience
Today’s customers don’t like the vanilla experience. Add interesting elements to your redemption process. Engage customers using gamification. It helps you build a connection with your customers and gives interactive experiences that customers can remember. 
To sum up
On the surface point breakage and loyalty program liability don’t look harmless but B2B businesses should worry about the consequences in the long run. The loyalty program design should be tech-data-backed to keep customers happy, engaged, and loyal.
If you are looking for a loyalty program expert then look no further. LoyaltyXpert can help you craft loyalty programs that can convert customers into ambassadors. Their loyalty software’s cutting-edge features and branding tools help you create engaging and interactive programs. You can perform financial analysis, and design, implement, and monitor loyalty programs to unleash business growth.
Original Source: https://www.loyaltyxpert.com/blog/point-breakage-in-loyalty-programs/