Senior marketers rarely worry about loyalty programme economics until margins tighten.
Then dormant balances, unredeemed points and accounting provisions suddenly become board-level concerns.
In the UK, where consumer protection scrutiny is increasing and data governance expectations are high, point breakage is no longer a passive financial artefact. It is a strategic lever — and a reputational risk.
This article examines point breakage in loyalty programs through a commercial, regulatory and behavioural lens. Rather than repeating generic “benefits of loyalty” advice, it explores governance, financial modelling, customer psychology and implementation strategy specifically relevant to UK-based CRM and loyalty leaders.
Definition
Point breakage in loyalty programs refers to the proportion of issued loyalty points that are never redeemed by customers. Breakage affects financial liability, programme economics, customer experience and regulatory risk. In the UK context, it must be managed carefully to balance profitability, fairness, transparency and consumer protection expectations.
Understanding the Economics of Point Breakage
Breakage exists because loyalty programmes create a future obligation.
Under IFRS 15, revenue linked to loyalty points is typically deferred until redemption or recognised proportionally based on expected breakage. UK-listed companies follow this framework under the oversight of the Financial Reporting Council.
This transforms breakage from a marketing metric into a financial forecasting variable.
The Commercial Tension
Breakage improves short-term profitability.
Redemption drives engagement and repeat purchase.
Excessive breakage inflates margins artificially.
Excessive redemption increases liability and cost of fulfilment.
The objective is not to maximise breakage. It is to optimise sustainable economics.
Breakage Drivers: Behavioural and Structural
Breakage rarely happens by accident.
It emerges from a combination of:
Structural Factors
- High redemption thresholds
- Short expiry windows
- Complex reward catalogues
- Limited reward desirability
- Poor UX within apps or portals
Behavioural Drivers
Behavioural economics suggests customers overestimate future usage of loyalty points. They accumulate aspirational balances but delay action.
Friction compounds inertia.
In a UK context, digital inclusion remains uneven. Ofcom data has consistently shown disparities in digital access and confidence across demographics. Where redemption requires app fluency, older segments may disproportionately contribute to breakage.
An important strategic insight: breakage is often a proxy for engagement failure.
Regulatory and Reputational Considerations in the UK
Loyalty schemes operate within:
- Consumer Rights Act 2015
- CMA guidance on unfair contract terms
- UK GDPR (where profiling and targeting are involved)
- CAP Code (promotional communications)
Expiry policies must be transparent and proportionate.
The CMA has previously scrutinised opaque pricing and promotional structures in other sectors. While loyalty schemes are legitimate commercial tools, aggressive expiry mechanics could attract scrutiny if perceived as unfair.
A contrarian but credible perspective: deliberately designing for high breakage may deliver short-term margin but undermines brand equity in a climate where consumer trust is fragile.
According to ONS data in recent years, cost-of-living pressures have materially influenced consumer spending patterns. In that context, customers may be more sensitive to perceived loss of value.
Strategically, breakage policy is part of trust architecture.
Breakage Strategy Framework for Senior Marketers
Below is a structured decision framework to evaluate your approach.
| Dimension | High Breakage Bias | Balanced Strategy | Redemption-Led Strategy |
|---|---|---|---|
| Financial Impact | Higher short-term margin | Predictable liability | Higher fulfilment cost |
| Customer Perception | Risk of unfairness | Transparent value | Strong perceived benefit |
| Regulatory Risk | Elevated | Controlled | Low |
| Engagement Levels | Lower | Moderate | High |
| Data Insight | Limited | Actionable | Rich behavioural data |
| Brand Equity | Vulnerable | Stable | Strengthened |
The optimal position for most UK enterprises sits in the “Balanced Strategy” column.
This means forecasting breakage accurately, designing reasonable expiry policies, and reducing unintentional friction — without eliminating economic discipline.
How to Calculate and Forecast Breakage
Basic Breakage Rate Formula
Breakage Rate = (Points Issued – Points Redeemed) ÷ Points Issued
However, enterprise-level forecasting requires more sophistication.
Advanced Forecasting Inputs
- Historical redemption curves
- Cohort-level behaviour
- Channel acquisition source
- Demographic segmentation
- Promotional intensity
- Seasonality patterns
Predictive modelling can estimate expected redemption probability at issuance.
Under IFRS 15, expected breakage can be recognised proportionally if it is highly probable that a significant reversal will not occur. Finance and marketing alignment is therefore critical.
This is not simply a CRM report. It is an accounting judgement.
Step-by-Step Implementation Process
For UK senior marketers reviewing their breakage position:
Step 1: Conduct a Liability Audit
Quantify outstanding points by age band, cohort and acquisition source.
Segment by dormant vs active members.
Step 2: Assess Policy Fairness
Review expiry windows against customer journey length.
Ensure communications meet transparency expectations under consumer law.
Step 3: Model Economic Scenarios
Simulate:
- Reduced expiry window
- Extended validity
- Lower redemption threshold
- Increased promotional earn rates
Assess margin and liability impact.
Step 4: Analyse Friction Points
Audit UX across:
- Mobile
- Web
- In-store
- Contact centre
Identify structural barriers to redemption.
Step 5: Align Finance, Legal and CRM
Document assumptions behind breakage forecasts.
Ensure accounting treatment aligns with IFRS 15.
Step 6: Introduce Behavioural Nudges
Use reminder communications before expiry.
Simplify redemption journeys.
Offer micro-redemption options.
Step 7: Monitor Reputational Signals
Track complaint volumes.
Review Trustpilot and social commentary for “points expired” narratives.
Advanced Strategic Insight: Breakage as a Health Metric
Rather than treating breakage as a margin enhancer, consider it an engagement health indicator.
Very high breakage may signal:
- Weak reward relevance
- Poor segmentation
- Overly complex earning mechanics
- Inactive membership base
Very low breakage may signal:
- Over-generous economics
- Unsustainable cost structure
The strategic sweet spot aligns:
Redemption velocity with repeat purchase uplift.
In other words: breakage should reflect genuine disengagement, not engineered friction.
Practical Application for UK CRM Leaders
For retail, grocery, telecom and financial services organisations operating in the UK:
- Integrate breakage forecasting into CLV modelling.
- Present breakage assumptions explicitly at board level.
- Stress-test expiry changes against CMA risk tolerance.
- Ensure UK GDPR compliance where predictive models profile behaviour.
- Design redemption journeys inclusive of less digitally confident segments.
Breakage is not just a marketing metric.
It is a governance issue.
Quick Takeaways
- Point breakage affects financial reporting, brand equity and regulatory exposure.
- IFRS 15 requires careful estimation of expected redemption behaviour.
- Excessive breakage can undermine trust and invite scrutiny.
- Breakage should be optimised, not maximised.
- Behavioural friction is often the hidden driver of unredeemed points.
- UK consumer protection context demands transparent expiry policies.
FAQs
What is point breakage in a loyalty programme?
Point breakage refers to loyalty points issued to customers that are never redeemed. It affects financial liability, revenue recognition and programme economics. In the UK, it must also be managed transparently to avoid consumer protection concerns.
Is high breakage good for profitability?
In the short term, high breakage can improve margins by reducing redemption costs. However, excessive breakage may damage customer trust and reduce long-term engagement, offsetting any financial gain.
How is breakage treated under IFRS 15?
Under IFRS 15, companies estimate expected redemption and may recognise revenue proportionally based on anticipated breakage, provided it is highly probable that a significant reversal will not occur. This requires robust forecasting and documented assumptions.
Should loyalty points expire in the UK?
Expiry policies are legally permissible but must be transparent and fair. Businesses should ensure customers receive clear communication and reasonable timeframes to redeem points.
How can companies reduce unintended breakage?
Reduce friction in redemption journeys, simplify reward structures, introduce reminder communications and offer lower redemption thresholds. Data analysis of inactive cohorts is essential.
Conclusion: Managing Breakage as Strategic Infrastructure
Point breakage in loyalty programs sits at the intersection of finance, marketing, compliance and customer psychology.
Handled carelessly, it becomes a reputational liability.
Handled intelligently, it becomes a controllable economic variable within a transparent and trusted loyalty ecosystem.
For UK senior marketers, the objective is not to drive breakage upwards or downwards.
It is to align breakage with sustainable engagement, regulatory defensibility and long-term customer value.
As cost pressures persist and scrutiny intensifies, loyalty economics will increasingly attract board attention.
The most resilient organisations will be those that treat breakage not as accounting residue — but as strategic infrastructure.
If your organisation has not recently stress-tested its loyalty liability, expiry policies and forecasting assumptions, now is the time to initiate that conversation.
