Guide 10 · Economics and liability
How to estimate breakage
Breakage is the share of issued points that will never be redeemed. Estimate it from your own history: follow groups of points issued in the same period, measure how many were redeemed or expired over time, and project the share that will never be used. Treat the result as a cautious, reviewable estimate that reduces the expected cost of rewards, not as profit, and update it whenever rules or behavior change.
Every program issues points that will never be used. Members move away, lose interest or let small balances lapse. Estimating that share, the breakage, is one of the most important numbers in a points program, because it shapes the expected cost of rewards, the liability on the balance sheet and how generous the program can afford to be. It is also one of the easiest numbers to get wrong. This guide sets out how to estimate it from your own data and how to keep the estimate honest.
Why estimate it
What is breakage, and why estimate it?
Breakage is the share of issued points that will never be redeemed. Many businesses record unredeemed points as a liability and defer part of the revenue from the purchase that earned them. Starbucks, for example, defers revenue for the Stars members earn toward free products and records a liability for them. The liability depends on how many points are expected to be redeemed, so the breakage estimate directly changes what the program appears to owe.
You need an estimate for three reasons: to measure the points liability correctly, to price rewards and earn rates, and to forecast the cash that redemptions will need. Your accountants decide how breakage is recognized under your accounting framework, such as ASC 606 in the US; this guide covers the estimate they will ask you to support.
The formula
How do you calculate a breakage rate?
The basic formula is simple: breakage rate = (points issued minus points expected to be redeemed) divided by points issued.
A hypothetical example: a program issues 800,000 points in a year. Its history shows that members eventually redeem 65% of what they earn, so it expects 520,000 points to be used. The remaining 280,000 points, 35% of those issued, are the expected breakage. If the program issues 1.5 million points the next year under the same rules, it would expect about 525,000 of them never to be redeemed.
The hard part is the word “eventually”. Points issued last month have barely had a chance to be redeemed, so a simple ratio of redemptions to issuance in the same period will make breakage look far higher than it is. That is why the estimate needs cohorts.
It also helps to estimate breakage separately for different kinds of points. Points earned on purchases, points from sign-up bonuses and points from promotions often behave differently: bonus points given to members who never buy again may almost all go unused, while points earned by regular buyers are mostly redeemed. A single blended rate can hide large shifts in the mix. Split at least by source of points and by member segment, such as active and dormant.
The data
What data do you need?
Follow groups of points issued in the same month or quarter, a method known as cohort analysis, and track for each group how many points were redeemed, expired or are still outstanding after 3, 6, 12, 24 months and beyond. Older cohorts show where redemption levels off; newer ones show whether behavior is changing.
| Input | Where it comes from | Why it matters |
|---|---|---|
| Points issued by period | Points ledger | The base of every cohort |
| Redemptions by period of issue | Points ledger, matched to earning date | Shows how redemption builds over time |
| Expired points by period of issue | Expiry runs | Shows the breakage that has already happened |
| Expiry rules over time | Program terms | Sets when points can lapse at all |
| Reward catalog and price changes | Catalog history | Explains jumps in redemption |
| Active member counts | Member data | Separates dormant balances from active ones |
Expiry rules shape the curve. Sephora Beauty Insider points expire after 12 months or more without a purchase or redemption, so a dormant balance there has a clear end point. Starbucks Green level Stars expire six months after the month they were earned unless the member stays active, while Gold and Reserve members’ Stars do not expire as long as they keep that status. Programs with no expiry have no forfeiture date at all, so their breakage depends entirely on members drifting away, and takes longer to measure.
What breaks it
What makes a breakage estimate wrong?
Change. A breakage rate describes behavior under a set of rules, and it stops being valid when the rules or the behavior shift. Common causes:
- Rule changes. Shorter or longer expiry, a new low-value reward, a lower redemption minimum or points plus cash can all raise redemption sharply.
- Engagement campaigns. Reminders, a new app or a reactivation push can bring dormant members back to redeem.
- Economic conditions. Members may redeem more when household budgets are tight.
- Borrowed figures. A rate copied from another program or an industry average says nothing about your members.
- Confusing measures. Mixing up breakage with the redemption rate, or applying breakage to rewards already paid for, double counts the cost.
How cautious
How cautious should the estimate be?
Cautious enough that being wrong does not hurt. A higher breakage assumption lowers the expected cost and makes the program look cheaper; if members then redeem more, the cost comes back, often all at once. In a hypothetical program owing $10,000 in reward value, a 25% breakage assumption reduces the expected cost by $2,500. If actual redemption runs 10 percentage points higher than assumed, $1,000 of that comes back.
Some practical rules: do not recognize breakage until several cohorts have shown a stable pattern; use the lower end of the plausible range; never use expected breakage to justify weaker rewards or to fund the program; and agree the method with finance and your auditors before you rely on it. Breakage is a forecast, not profit.
Review it
How often should you review it?
Review the estimate at least quarterly while the program is growing or changing, and straight away after any change to expiry, rewards, earn rates or redemption options. Each time:
- Compare actual redemptions for each cohort with what the estimate predicted.
- Update the rate if the gap is persistent, not just one quarter’s noise.
- Record the rate used, the data behind it and the reason for any change.
- Report the breakage release separately from normal redemptions, so the liability report shows both.
A breakage estimate that is reviewed, documented and conservative is one finance can defend. One that is set once and forgotten will eventually surprise someone.
More answers
Frequently asked questions
What is breakage in a loyalty program?
The share of points or rewards that members earn but never redeem. Because unredeemed points are usually carried as a liability, the expected breakage affects how much of that liability the program expects to pay.
How do you calculate a breakage rate?
Take the points issued in a period, subtract the points you expect to be redeemed from them, and divide by the points issued. The expected redemptions should come from your own history, followed over enough time for most redemptions to have happened.
Can you use another program's breakage rate?
No. Breakage depends on your rules, rewards, members and purchase frequency. A rate from another program, or an industry figure, is not evidence about yours. Use your own data, and be cautious until you have several periods of it.
Is breakage profit?
No. It is an estimate of a cost that will not have to be paid. If members redeem more than expected, the cost returns. How breakage appears in the accounts is set by your accounting policy and your auditors.
How often should the breakage estimate be reviewed?
At least every quarter for a growing or changing program, and immediately after any change to expiry, reward prices, earn rates or redemption options. Document each change and the reason for it.
What is the difference between breakage and redemption rate?
They are two sides of the same balance. The redemption rate is the share of points that are used; breakage is the share that never will be. Mixing them up in a model is a common error that distorts the cost of rewards.