Using econometric modeling (non-linear regression methodology) FAS Solutions can help our clients estimate breakage:
Loyalty reward programs vary across many different industries. Since the 1980’s airlines have offered frequent flyer miles. Today the concept has broadened immensely to retailers offering gift cards, hotels offering points and many other entities offering loyalty rewards. Frequently programs are offered through credit cards. “Breakage” refers to the percentage of points issued or outstanding that will never be redeemed. I.e., broken points either expire or sit in an unredeemed state for the life of the program. The breakage rate is, by definition, the complement of the redemption rate. I.e. breakage = 1 – redemption.
Broken or unredeemed miles or points represent an indefinite obligation, or liability, to the offering company. For this reason offering companies need to estimate breakage. I.e., trends in the redemption patterns of previous collections allow a company to create an estimate of future breakage. Once we determine rigorous estimates of breakage, our clients can confidently claim to have a basis for removing the liability from the books. FAS Solutions can help any loyalty reward offering company estimate auditable breakage rates with increased confidence.