BrainTrust Query: Is Breakage the Next Loyalty Dinosaur?

Discussion
Mar 17, 2011
Bill Hanifin

Through a special arrangement, presented here for discussion
is a summary of a current article from the Hanifin Loyalty blog.

Breakage — the
value of unredeemed points in loyalty programs typically due to expiration
or forfeiture — is a key influencing element of loyalty marketing financial
models. But attitudes towards breakage are changing, both from perspective
of the loyalty supplier community and consumers.

Brands aren’t in the
dark on this subject. In fact recent moves by Delta Airlines and Points.com
over the past month signal additional recognition that the accrued value in
loyalty programs is not a “shiny object” to
tease consumers with, rather it is truly an alternate currency that people
expect to have liquidity and be able to convert for value.

Points.com announced
that it is teaming up with PayPal to allow its Aeroplan miles, American Airlines
AAdvantage Miles and US Airways Dividend Miles to convert into cash in member’s
PayPal accounts. It’s one thing to
flush your points for questionable value in the form of magazine subscriptions;
it’s
quite another matter to be able to convert miles into cash!

In concept, it’s
a great enhancement for Points.com and a boon for PayPal. The crucial driver
of success for the tactic will be the exchange rate set between the two currencies.
At this point, I’m not privy to the exact
exchange rate but I understand it will be distinct for each airline. Some consumers
are already crying about lack of value and we’ll have to keep a watchful
eye here. On the surface, it’s a great idea.

Delta Airlines meanwhile
announced that mileage no longer expires in its SkyMiles frequent flyer program.
Skeptics may contend that infinitely available miles will just make a seat
capacity problem that frustrates most frequent flyers even worse. Additionally,
it might seem to represent another step in making frequent flyer programs
tougher for the airlines to manage from a financial standpoint.

But optimists
will opine that eliminating mileage expiration will spark brand affinity for
Delta in the short term and, if combined with some additional redemption options
(can Delta play in the PayPal arrangement or come up with some other ideas?),
will increase customer engagement over a longer term.

I’ll weigh in as
an optimist. With our estimates of Consumer 2.0 (those digitally connected
consumers including Generation Y and portions of GenX and Boomers) at or near
150 million in the U.S., brands that shift the emphasis of their rewards programs
from breakage to engagement will come out on top. Consumer 2.0 wants attainable
rewards on a more liquid basis. Conversion to cash through Social Shopping,
redemption at point-of-sale, and Social Giving are all options that this group
finds attractive.

It’s good for the industry and for the consumer when
we witness brands encouraging engagement rather than hoping for breakage.

Discussion Questions: Do you see retailers and other brands seeking new ways to engage their customers by making loyalty points easier to redeem? Will this improve short and long-term brand loyalty? What will the rewards structure around loyalty efforts look like in the future?

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15 Comments on "BrainTrust Query: Is Breakage the Next Loyalty Dinosaur?"


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Max Goldberg
Guest
10 years 1 month ago

In most instances, loyalty needs to be more than a points program. Whether airlines allow their points to expire really doesn’t matter when the general perception among consumers is that they are difficult to redeem for free flights. Most consumers participate in grocer loyalty programs, yet it would be difficult for most consumers to name one benefit from collecting points from these programs. If consumers cannot redeem the points they’ve earned (airlines), or don’t know the benefits of collecting points (grocers), what good are the programs? How do they build loyalty? To be effective loyalty awards must be easily understood, have a perceived value that is meaningful to consumers and be attainable.

Gene Hoffman
Guest
Gene Hoffman
10 years 1 month ago

Loyalty programs seem to have a life of their own and then they become hard-to-understand gimmicks or they become obsolete. Remember trading stamps?

If you can get a seat on an airplane when you want it, and if you do, the miles required always seem to rise – it’s hard to feel any compassion for the airlines. Once a couple could fly first class from the U.S. to London for 110,000 total frequent flyer miles. Today, if you can get seats, it requires many, many more miles and loyalty to the airlines gets diminished in today’s complicated mix.

So just give me a simple program that offers cash for my existing miles or points. Then reduces prices and/or give much better service. That’s where loyal really lies.

Dan Berthiaume
Guest
Dan Berthiaume
10 years 1 month ago

Retailers definitely need to start enhancing the value of loyalty points and stop penalizing customers who accumulate points through regular patronage but do not use them in the “traditional” way. One note of caution–the article mentions some customers already complaining of their points having minimal monetary value. Offering a miserly reward is often worse than offering no reward at all, so retailers need to be sure they can afford to offer reasonable value before embarking on this kind of venture.

david scott
Guest
david scott
10 years 1 month ago

When airlines, especially, confiscate my hard earned points after I have not flown with them for a year, it murders any loyalty I feel toward them, and I vow to never fly that airline again, save for dire circumstances.

Dan Frechtling
Guest
10 years 1 month ago
Yes, loyalty programs need to evolve to continue to engage their customers. Seth Godin and Tom Rapsos (in this forum), and others have written about the devaluation of points in the minds of shoppers. Reducing breakage by extending point expiration or adding new conversion options doesn’t necessarily hurt the loyalty program P&L. Why? First, the obvious one: service usage may increase. Higher frequency, transaction size, and longevity pay off. In 2009, Tesco doubled the value of its points and reported higher profits. Second, the benefits need not be offered to all participants. These perks may simply go to top customers, where increased purchases really do offset higher point costs. Third, the exchange rate for other offers may be set to reduce costs incurred by the point provider. Fourth, providers can keep their members from going to third parties. Frustrated consumers leave limited choices by providers (e.g., magazines) and go to Points.com to trade or redeem points. Fifth, the cost may be close to zero. The rewards may be discounts rather than free goods. Retailers can… Read more »
Doug Fleener
Guest
10 years 1 month ago

Agree with Polyglot. I was even more annoyed when AirTran sent me an email saying I could pay them to not take my points away. It’s like I’m paying a ransom. Later that day I booked a flight and purposely didn’t fly them.

Ben Ball
Guest
10 years 1 month ago
Unredeemed points = undeveloped loyalty. Smart businesses–and card issuers–are moving to make points more liquid and meaningful. Bill has a point in that some of the airline and credit card “exchange rates” would make the airport currency exchanges jealous. But others are going a very different direction. As a personal example, I recently made two decisions on exactly that basis. I traded in the “membership rewards points” I earned on an Amex Gold card that carries a $150 annual fee for a free Amex card from Costco that gives an additional 1% cash back in addition to my Executive Membership cash back. That Gold card was also my primary business travel card, but a Marriott Visa costs only $65 a year, gives me Marriott points and doubles every dollar I spend at Marriott. Marriott points are worth a lot more to me than Membership Reward points–especially since I always found the “exchange rate” for those points to be quite low when perusing the glossy catalog of high–end electronics and Waterford crystal trying to redeem them.… Read more »
Jonathan Marek
Guest
10 years 1 month ago

The question is: do you want a loyalty program or a fancy promotion? If it’s a loyalty program, there has to be a real commitment required by the customer–a strong enough incentive that the customer will regularly and significantly change his or her behavior. The example I think of is the person who will connect on United rather than fly nonstop on another airline for the same price.

More and more, loyalty programs are becoming near-term promotion vehicles that don’t build any loyalty at all. Think about the supermarket programs where shoppers cherry-pick deals by retailer by week.

Economically, I do think breakage is and will continue to be a critical part of the economics of the first type of program.

Al McClain
Guest
Al McClain
10 years 1 month ago

When retailers and brands make loyalty points hard to redeem, they are just shooting themselves in the foot. A lousy program, or lousy program terms, is worse than no program at all. With everybody on some form of social media, consumers who feel mistreated by terms and conditions of these programs will yell loudly, to all of their ‘friends’.

Craig Sundstrom
Guest
10 years 1 month ago

Let’s be realistic here–actually let’s be a little cynical too–the point of “rewards” programs is to increase revenues, not expenses: what I suspect is that companies don’t really want premiums redeemed, but they want them to SEEM easily redeemable…expect ever more elaborate schemes to make sure people keep their accounts full without realizing it.

Bernice Hurst
Guest
10 years 1 month ago
Ah yes, airmiles…if only they could be converted into cash or even discounts… I recently managed to use most of mine (Yes I did!!!) with two airlines but the third, remaining, batch is proving difficult as the airline has doubled the amount I would need for the flights I want and won’t let me use them for a one way ticket. Grrrr. If I could also convert the few I have leftover from one of the others, I would be very happy and much more inclined to give them my loyalty. Obviously having points on three different airlines (or four in my case) indicates that I am not the least bit loyal but they may or may not know that. As for supermarkets, yesterday I emailed a complaint to a store in which I rarely shop. Today I had a lovely apology and an offer of points on my loyalty card. As I do not have such a card, I have requested a voucher to use in-store and await, with interest and baited breath, the… Read more »
Bill Hanifin
Guest
10 years 1 month ago

I do wonder if the debate about interchange legislation will wither if all the facts come to light.

If significant money is drained from the transaction processing chain, funding for loyalty points will have to come from another place or they will have to go away.

Using an extreme example, the net result would be the retailers becoming responsible for all of their marketing as co-brand cards with rewards won’t be financially viable. This might be fine with retailers, but caution is urged before reverting solely to a traditional discount and sale approach or, in lingua franca, a “Groupon mentality.”

This approach trains customers to have zero loyalty but to behave like shopping mercenaries. Is that good for retailers over the long haul?

Steve Montgomery
Guest
10 years 1 month ago
We all know loyalty is something more than a point system. It is earned by retailer and other service providers because they uniquely meet our needs regardless of how that is defined. I primarily flew one airline for a variety of reasons–wanted to get to permanent life long status so I could always board earlier and have more legroom. Yeah, I got miles but those were something extra and not the basis for selecting the airline. Now I do admit when another airline contacted me and told me my miles were going to expire and for a fee I could “rescue” them, I elect to do so. Not because I was particularly loyal to that airline but I had enough for a round trip ticket and saw the fee as cheaper than buying it. In the prepaid calling card business, breakage was how everyone made their money and eventually the rules changed and no breakage is a minor issue. Today, keeping a customer loyal and reducing the breakage is probably a very inexpensive way to… Read more »
Sam Angeli
Guest
Sam Angeli
10 years 1 month ago
Bill, you are “spot on”! I’ve been involved in retail all of my adult life, some 35 years plus, and a consumer along with it. It’s always baffled me when any business feels there is a benefit to the dollars saved by breakage, in any way achieved. It’s all very simple: If you truly want to lead a “Great Company” which I think means “Great Customer Service,” don’t try to “stick it to them” with this approach. People dislike being led on … false promises … bait & switch. My recent attempt to use my Continental Mileage Award Account was incredibly disappointing. To upgrade my coach seat they wanted 30,000 miles + a “Mileage Award Fee” of another $300 plus, which was almost the price of the ticket! They have no idea the damage they just did! I’m through with Continental, and I’m a good customer and hold their “Presidential Plus” Mastercard which I pay plenty for!!! By “screwing me” out of my earned mileage, they lost a good customer. I’m going back to American… Read more »
Christopher P. Ramey
Guest
10 years 1 month ago

Consumers desire simplicity. Airlines, if it is an incentive program, should create systems that incent rather than incite their customers. Anything less is a larger liability than what is already reflected on the financial statement.

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