BrainTrust Query: Is Breakage the Next Loyalty Dinosaur?
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.