Breakage is an accounting term that was first used to assess gift cards that had been sold, but had never been redeemed. When people bought gift cards, but those gift cards were not redeemed, it resulted in 100% profit for the company that issued them.
This is not only a definition, but an exploration of the breakage practice. These days, breakage refers not just to gift cards, but also to any kind of promotion or practice that leaves the company in profit due to a percentage of customers not redeeming their rebates, gift cards or other services.
Mail-In Rebates and Jumping Through Hoops
The mail-in rebate is the most popular, and widespread, use of breakage in marketing today. Stores and corporations will draw customers in with a price that looks phenomenal, but comes with an asterisk that says “*price after mail-in rebate.”
Of course, getting that rebate is not easy, which it could be. The manufacturer or company offering the rebate could make it very, very easy to get that money to you. For a start, they could simply deduct the rebate from the price of the product, and just not bother with the rebate.
If they did that, there would be no breakage. It would be a 100% loss for the company. What these rebates are designed to do islure customers to great deals, such as “ save 90% OFF *after mail in rebate,” or even FREE, and then make the whole rebate process as difficult as possible. This eliminates the saving for the customers, and maximizes profit for the manufacture.
What’s more, the price shown after rebate is usually so low, it attracts buyers who were not planning to spend their money on the product at all!
When customers buy the product, they are presented with a process that can range from annoying, to almost impossible. They need to cut barcodes and UPCs from the box, find multiple copies of receipts, fill out forms, make copies “just in case” the application gets lost, and get it all done by a certain date. If it’s not mailed by that date, tough luck, they get no rebate.
When all that's done, and IF they did it right, the customer will get a rebate in the form of a check or prepaid credit card, and that can take weeks, or usually months, to arrive. And then, that has an expiration date too! Sometimes as little as 90 days.
Treat The Customer With Respect, not Derision
After going through all of this to get $30 back, the customer is not left feeling valued or appreciated. They feel like a “mark,” someone who was used for their wallet and was given the money back begrudgingly after a series of tests.
That does nothing for the brand, and little for customer retention.
Cell phone companies could simply deduct phone rebates from your bill. “Hey, thanks for buying that $300 phone sir. We will be deducting that amount from you bill, you won't have to pay one for two months. Have a nice day!”
Giving out a $300 rebate card is the same financially for the phone company, but the customer feels like royalty in the first scenario, and like someone begging for change in the second.
Get this one right. Customers are your business. Period. Treat them well, they will repay you ten times over. Treat them like numbers in a bank, they’ll turn their backs on you.