Wednesday, November 4, 2009

Avoid Recognition Breakage!

Breakage is a term used to indicate gift cards that have been sold but never redeemed. Revenue from breakage is very profitable because companies do not provide any goods or services for the unredeemed gift cards. Breakage is also a factor in many point based programs where a company pays for points up front, however this post deals with gift cards.

Gift card breakage is huge…

TowerGroup, a financial-services research firm estimated that 10% or $8 billion of the $80 billion spent on gift cards in 2006 will never be redeemed! Consumer Reports estimates the amount is even higher! They say in 2005, 19% of people who received gift cards never used them.

Some gift card retailers have also imposed conditions on gift cards, such as expiration dates or monthly service fees that periodically reduce the value of the gift card. However, many States have passed (or plan to pass) legislation which outlaws expiry dates and fees or charges of any sort on gift cards.

How does this affect your recognition and reward program?

Well, if you hand out gift cards as a reward, realize that a significant portion of your recipients will never use them! I call this “reward breakage.” And while it’s not a good thing at least the recipient has the “value” of the gift card in his or her hands and it’s up to them whether to use it or not.

In my opinion, “recognition breakage” is much worse.

These are schemes whereby providers send out “recognition award certificates” that can be exchanged for a variety of gift cards. These “recognition award certificates” often have an expiry date attached to them… usually one year. While the law and legislation is much murkier when it comes to “recognition award certificates” one thing is clear… these providers are hoping recipients never, ever, exchange them for actual gift cards!

I find it ironic these “providers” call themselves “recognition experts” because the bottom line is they really do not want recipients to pick up their “rewards”!

We have come across several cases of companies who complain they don’t get reports from these providers. No wonder! Why would these providers want to reveal the fact that a significant portion of the “recognition award certificates” are not exchanged.

It’s called recognition breakage! Avoid it!