- The breakage business model is a form of revenue generation based on a consumer not using a product or service they have purchased.
- In addition to gift cards, the breakage business model is commonly seen in hotel loyalty clubs, credit card fees, gym memberships, frequent flyer miles, and prepaid travel credits.
- Breakage itself occurs by itself and does not require business intervention. But since it is a lucrative source of revenue, many companies encourage it via various techniques. These include blocking, minimum redemption limits, expiration dates, and usage restrictions.
What is the breakage business model?
The breakage business model is a form of revenue generation based on a consumer not using a product or service they have purchased.
The breakage business model is based on the notion of breakage, an accounting term that describes revenue from products or services that are paid for but not used.
One of the oft-cited examples of the breakage business model is the sale of gift cards. Almost every retailer sells these cards because they know a certain proportion of them will never be redeemed by the customer. The reasons for this are varied. Some cards will be misplaced, while others will be thrown in the trash. In other situations, the consumer may simply neglect to spend the full balance of the card.
Whatever the reason, however, it’s important to note that an unused gift card results in a profit for the retailer. In essence, it has sold products or services to the customer without having to provide those products and services in return.
Data varies from industry to industry, but the breakage business model can be a lucrative source of revenue. In 2019, Starbucks reported breakage revenue of $140 million alone, with up to $4 billion in gift card value unused by customers each year in the United States.
Other examples of the breakage business model
In addition to gift cards, the breakage business model can be used by any company that offers various forms of stored value.
These forms include:
- Hotel loyalty points.
- Transferable and flexible points – such as those offered by credit card reward schemes.
- Frequent flyer miles and airline vouchers.
- Prepaid travel credits.
- Gym memberships – where consumers pay for monthly access to gym facilities irrespective of whether they attend.
- Credit card fees – here, the breakage occurs when a credit card customer pays an annual account fee without using the card to make purchases.
How is breakage encouraged?
While breakage occurs naturally on its own, many businesses nevertheless encourage it by utilizing a range of strategies:
- Expiration dates – even if a card is not lost or damaged, it will be void after a certain period of time.
- Minimum redemptions – where a certain number of points is required to redeem a voucher or some other reward.
- Restrictions – where usage is restricted. Some gift cards can only be used at participating retailers, while airline points are only available on certain airlines, routes, or seasons. Many customers purchase a card from a store they seldom frequent and may have difficulty finding a suitable product.
- Blocking – this is a requirement that the entire balance of the gift card is used in one purchase.
- Activity requirements – where any points or rewards accrued are void unless the customer has used their account over a set period.
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Attention Merchant Business Model
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