The terms breakage or spoilage are business and accounting terms that refer to the expected worsening of most products during their production, inventory or sales processes. Over the next several posts we’re going to apply these concepts to marketing and sales programs meant to encourage purchases and loyalty…but actually do the opposite. And sometimes, that’s actually the intent.
To understand how these terms are usually used, think of a restaurant with a salad bar. A certain amount of losses happen every day. Some actually spoils, and has to be thrown out. Some is wasted…by dropping it, overloading plates, etc. Years ago I delivered Twinkies to grocery stores, and every week I’d have to pull some off the shelf (which were deducted from my commissions). Seinfeld did a great episode on “best by” dates on milk and other food items.
In a furniture store, a certain number of mirrors, knick-knacks and other items will be broken or damaged. In a clothing store, some stuff just won’t sell due to color or style preferences changing. Shoplifting could be included among the expected “breakage” losses as well. Automakers will take a loss to clear out inventory at the end of the year, or before the bank slams them with hefty “floorplanning” fees (lines of credit for rotating inventory).
So in almost any business, a percentage of our inventory or overhead will be lost due to breakage or spoilage. In marketing, many companies build their guarantee or their loyalty or incentive programs planning on a different kind of breakage. This breakage is intended to discourage people from taking action to redeem on their promises.
In some cases there may be some justification for this. For example, in the travel and hospitality field it can make sense to have certain blackout dates when members can’t use their points during busy seasons.
One often-used “bonus” is to offer 3 or 4 night vacation certificates for every response or purchase. Companies buy these certificates from providers by the hundreds, usually for $15 or $20 apiece. You might ask, how can that cover a paid vacation? If you’ve ever gotten one of these, they are a case study in themselves of creating a program designed to discourage response, rather than delivering the goods. First you have a handful of distant destinations (you pay your travel costs). Second, you have to pay a nonrefundable deposit, usually $200-300 or so. There are other restrictions designed to allow the provider to keep as many of the deposits as possible, while paying for as few rooms as possible.
Other examples can be found in guarantees. In my experience having a12-month unconditional guarantee will always mean fewer refunds or returns. This is a natural “breakage” effect because people feel reassured when you have reversed their risk.
Other times these same approaches can become more of a bait-and-switch. Performance guarantees are often gamed this way. On the surface, giving them a window of time to actually use your product or service makes sense. This can be based on the honor system, but I actually prefer having some clear, reasonable and measurable expectations, such as going through training modules, participating in calls, keeping a diary or log or calling or emailing any questions and problems along the way as they come up.
Sadly, many performance guarantees are not designed to honestly add value, but to make it so difficult customers do NOT take action. They build in so many obstacles or conditions that many customers give up in disgust. These programs are based on this darker kind of breakage, because the breakage they are building into the system is intentional: how difficult can they make it for you to redeem your prize (or return or refund)? While this means fewer payouts for the company, it also is a killer of long-term, mutually-beneficial relationships.
Many incentive programs are touted with hyperbole but loaded with small print so the companies can depend on a sizeable percentage of customers never redeeming their points. Two big groups that do this are travel and lodging loyalty programs (with excessive “black-out” dates or annually expiring points) and some big-box stores with conditional short-fuse coupons for their loyalty cardholders (two that come to mind are CVS drugstores and Office Max).
In my experience it is far better to keep your offers simple and straightforward, and create profitable programs so that even IF 100% redeemed (which never happens), you would still have more than enough revenues coming into the program to offset it through backend and other sales. The more happy excited people are, the more dollars they will spend now and in the future.
In my mind the purpose of any sales incentive, bonus, or loyalty-type program is to get them excited, get more to take action and improve your results. Then, when you “Wow!” them by overdelivering on their expectations, you improve your backend sales and bottom line revenues. Promising something fabulous and delivering a subpar product defeats the real purpose, right? So why do so many do the opposite?
Over the next few posts I’ll deep-dive into this concept, using detailed case history examples of company programs that approach breakage this way. We’ll also discuss how breakage can easily be offset in other areas, so you don’t have to rely on putting your customers through an obstacle course to be profitable.
