Loyalty glossary · Currency and economics
Breakage
Breakage is the share of issued points or rewards that members never redeem, and which the operator eventually releases from its liability.
Every point issued is a promise, and accounting treats it as one: unredeemed points sit on the balance sheet as a deferred liability. Breakage is what happens when that promise is never called in, and the liability is released back into revenue.
The number is larger than most operators admit publicly. Programmes model it during design, price their earn rates against it, and depend on it for the economics to work at all. What they rarely do is say so, because a programme that publicly assumes members will not redeem is a programme telling its members not to bother.
The trap is treating breakage as profit. It is not earned margin, it is a forecast that has not yet been disproved, and it inverts the incentive: an operator optimising for breakage is optimising for members who disengage quietly rather than leave loudly. Those members look identical in a liability report and completely different in a revenue one.
Two things push breakage around, and neither is under full control. Expiry policy sets a hard floor under it. Redemption friction, from thresholds set too high to a catalogue nobody wants, raises it without anyone deciding to raise it, which is the version that does real damage because it is indistinguishable from a design failure until someone measures it.
Work the arithmetic, because the argument only lands with numbers on it. A programme issues 1 billion points in a year and values them at 0.8 cents on redemption, so it books an 8 million dollar liability. Assume 20 percent breakage and 1.6 million of that is never claimed and eventually releases back to revenue. Move the assumption to 25 percent and a further 400,000 dollars appears on the P&L without a single member behaving differently.
That last sentence is the whole problem. Breakage is the one liability line an operator can shrink by changing its own forecast, and the forecast is checked by nobody outside the company.