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.
  • 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.

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
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