Breakage is Bad

Points-based reward programs are still seen by many as the paradigm for a loyalty "program". However, with more and more points-based loyalty programs in the marketplace, it's clear that many are not profitable and few are entirely effective. 

While well designed and well executed points-based programs exist, many are built to be "successful" if the program can get a lot of participants who are earning points but not redeeming many rewards.  This is called breakage

Where breakage has been a conscious part of the design, companies, and their loyalty providers believe that they are "saving" expense and increasing the profitability of their program by issuing a lot of points (or miles) that do not get redeemed,

Traditionally, loyalty and incentive providers literally sold points to clients for use in their programs.  The clients pay when points are issued, and then the issuing company holds the liability for all redemption that occurs using those points.

Breakage creates a false economy.  If a program provider sells points on an issuance basis, they make less money when those points are redeemed. The result is that they are less likely to promote the program and increase its success, because it increases the program provider's promotional budget and reduces their profit on the program. (There are instances in the incentive industry where companies have even been known to not answer their phones in order to avoid redemption activity).

More importantly, if program participants (aka customers) are not redeeming their earned points, they are clearly not seeing or benefiting from the value in the program proposition.  Thus, there is no reward for their "loyalty" and even worse, these customers may feel disenfranchised by the program sponsor because of that lack of value.

Instead of a breakage model, it is smarter to design a program that uses a currency, like points or miles, to drive new behavior from customers (assuming a currency/rewards-based program is the right strategy).  Increasing revenue from those customers grows the business organically.  It increases their perceived value from the brand when they redeem rewards.  When this happens everybody wins - the customer, the company, and its stakeholders.

As more and more companies develop and implement programs, let's hope they increasingly recognize the true and proper balance where both the customer and the company win.