The loyalty supplier business is full of contrasts. Go-to-market strategies, and business models cover the spectrum. Looking East to West across the range of choice for brands operating traditional points-based loyalty programs, the offerings can be categorized somewhere  between old-school and ground-breaking. One key area of difference boils down to a single word – breakage.

By definition, the value of unredeemed points has been the cherished prize of whatever party owns the points bank. For years, many vendors “sold” points as part of their service offering, and breakage became a hidden value from which the vendor accrued value.

Eyes are wide-open today, with everyone benefiting from the loyalty value chain attentive to breakage – both its magnitude and how it is shared. Breakage is an important assumption in projecting loyalty program ROI, and sharing in the pot is heartily negotiated between vendor and brand.

Increasingly, the conversation around breakage is changing, with more progressive brands and their vendors asking if breakage is (gasp) a good thing.

Managing breakage has been thrust into the spotlight as new regulations are in play mandating how unused value in rewards program are to be tracked and funded. The rules, referred to as IFRIC 13, have become frequent topics of interest in industry conferences and have gained attention from global accounting firms seeking to carve out a new area of core business.

Beyond accounting standards, brands are attentive to how breakage impacts the success of their rewards programs and the associated satisfaction levels of their customers.At the Airline Mega Event this past October, a “Liability Forum” was presented with panelists describing breakage as “an asset to be used for program improvement” rather than just a kitty from which to bolster profits at quarter-end.

During the Mega Event, United Airlines presented a new communications campaign that highlighted this new view on breakage, saying that United Mileage Plus is “The program that wants you to use your miles”.

At the Cards and Payments Loyalty Conference a month later, panelists were asked “what is the ideal level of breakage” in a loyalty program. Fabio Garcia, head of cards at Banco Popular, got the audience to lift their eyes from their smartphones when he asserted that “zero” was the ideal figure. His logic? More redemptions equates to higher customer engagement, lower credit risk, and is a precursor to longer term program satisfaction.

Here are a few take-aways on Breakage & Liability Management:

1. Have a clear strategy for ownership of the points bank and how ensuing financial benefits will be allocated. Craft a position on acceptable levels of breakage, with customer engagement & satisfaction guiding the process.

2. Run from vendor relationships where points are sold on issuance and the spoils of breakage are held exclusively by the vendor.

3. Be prepared to defend your business case against financially driven colleagues who contend that higher breakage will add value to the program (hint: higher program value is offset by lower customer values over time).

The loyalty supplier business is full of contrasts. Go-to-market strategies, and business models cover the spectrum. Looking East to West across the range of choice for brands operating traditional points-based loyalty programs, the offerings can be categorized somewhere  between old-school and ground-breaking. One key area of difference boils down to a single word – breakage.

By definition, the value of unredeemed points has been the cherished prize of whatever party owns the points bank. For years, many vendors “sold” points as part of their service offering, and breakage became a hidden value from which the vendor accrued value.

Eyes are wide-open today, with everyone benefiting from the loyalty value chain attentive to breakage – both its magnitude and how it is shared. Breakage is an important assumption in projecting loyalty program ROI, and sharing in the pot is heartily negotiated between vendor and brand.

Increasingly, the conversation around breakage is changing, with more progressive brands and their vendors asking if breakage is (gasp) a good thing.

Managing breakage has been thrust into the spotlight as new regulations are in play mandating how unused value in rewards program are to be tracked and funded. The rules, referred to as IFRIC 13, have become frequent topics of interest in industry conferences and have gained attention from global accounting firms seeking to carve out a new area of core business.

Beyond accounting standards, brands are attentive to how breakage impacts the success of their rewards programs and the associated satisfaction levels of their customers.At the Airline Mega Event this past October, a “Liability Forum” was presented with panelists describing breakage as “an asset to be used for program improvement” rather than just a kitty from which to bolster profits at quarter-end.

During the Mega Event, United Airlines presented a new communications campaign that highlighted this new view on breakage, saying that United Mileage Plus is “The program that wants you to use your miles”.

At the Cards and Payments Loyalty Conference a month later, panelists were asked “what is the ideal level of breakage” in a loyalty program. Fabio Garcia, head of cards at Banco Popular, got the audience to lift their eyes from their smartphones when he asserted that “zero” was the ideal figure. His logic? More redemptions equates to higher customer engagement, lower credit risk, and is a precursor to longer term program satisfaction.

Here are a few take-aways on Breakage & Liability Management:

1. Have a clear strategy for ownership of the points bank and how ensuing financial benefits will be allocated. Craft a position on acceptable levels of breakage, with customer engagement & satisfaction guiding the process.

2. Run from vendor relationships where points are sold on issuance and the spoils of breakage are held exclusively by the vendor.

3. Be prepared to defend your business case against financially driven colleagues who contend that higher breakage will add value to the program (hint: higher program value is offset by lower customer values over time).

I am often asked where to go to learn more about Loyalty Marketing. Until Mark Johnson and his crew launched Loyalty 360, it was difficult to provide a useful answer.  There are occasional tracks presented at the annual DMA event and Colloquy continues to deliver its Loyalty Marketing Workshop in conjunction with the DMA, but for up-to-date industry specific information, the choices narrowed.

One new entrant that should be worth attending is the Cards & Payments Loyalty Conference slated for 2 December in New York.

If you’re looking for airline specific information on Loyalty Marketing, I’d suggest that you become involved with Airline Information, the brainchild of Christopher Staab and Roger Williams. Both of these gentleman have deep roots in the airline business and, through their conferences, are not afraid to tackle the tougher issues of ancillary revenues, frequent flyer programs, and cobrand credit & debit card partnerships.

One of the bigger topics in discussion these days is how the need for development of ancillary revenues can conflict with cost savings. Considering that a mainstay of frequent flyer programs has been the cobranded credit card, it is controversial that the airlines eagerly accept $billions earned from co-branded credit cards while mounting protest to the amount they pay in merchant fees. Edgar Dunn & Company and ARC estimate that the airline industry faces annual cost of U$1.5 billion for the privilege of accepting credit card payments or approximately U$12 per ticket, so the magnitude of the issue is clear.

You can take part in the debate by attending one or both of AI’s conferences in the coming weeks. First up is the FFP-ARAC “Mega-Event” to be held 22-23 October in Los Angeles.  This conference has a decidedly strong marketing bias while the Airline & Travel Payments Summit, planned for 2-3 December in Miami will address payment and revenue issues as well as related marketing topics.

If you can’t wait for either conference and want to stay on top of industry issues, you can also visit Roger Williams’ Load Factor blog.

I recently attended an AI Networking Cocktail in Miami and hosted Evan Liu of Spirit Airlines as he talked about the role of Free Spirit for the carrier and future plans for development. These events are well organized and attended and I encourage you to give AI some mind share if you are interested in the airline industry.

AI has been specifically looking into the development of cobranded airline debit cards as a compromise solution between ancillary revenue and cost savings.  Delta Air Lines recently introduced a SkyMiles co-brand debit card in association with SunTrust Bank, and considering the economics of the debit card, you might ask why and how can issuers/airlines support the value proposition of giving away frequent flyer miles on debit card purchases.

AI was looking for the same answers and recently published results of 31 airlines surveyed in their latest “45 Second Survey on Cobrand Loyalty Debit Cards”. They found that only 37.9% of airlines had previously looked at the benefits of issuing a cobrand debit card while over 55% consider debit cards as a “steady or significant” source of growth for ticket purchase. Today only 5% of airlines surveyed offer a cobranded debit card, though 48% responded that they were “very interested” in pursuing co-branded debit cards.

To navigate safely through the storms of commercial aviation and take part in the rebirth of frequent flyer programs, stay in touch with AI.