Is breakage good or bad?
Breakage is a bit like pineapple on pizza, some people love it and some hate it, but nobody knows if it is actually good for you. In this article, we’ll explain what breakage is, why it matters to airlines and how to understand when it’s good for you.
Breakage is a technical term used in travel subscriptions to describe the % of trips/benefits that are never redeemed. As an example, if a subscription gives users one flight per month, but the average subscriber only uses 9 flights per year, we’ll have a breakage of 25%. The same would be true if the subscription offered 1 checked bags, fast tracks or any other benefit instead of flights.
Proponents of high breakage rates say they are good because they represent free money for the company, since the user pays for something, but never uses it. Detractors argue that if users pay for something they don’t use, they will end up leaving the program and cause it to fail.
Interestingly, both sides are right. The challenge is understanding what “high breakage” is and what level of breakage will users be happy to put up with. If done right, this will maximize customer lifetime value by ensuring users stay in the program and continue to generate recurring revenue.
The good news is that breakage can be controlled, and programs can be engineered for optimal breakage. This process requires 3 things: a rich catalog of tools to shape the program, constant monitoring, and expertise.
The first two elements are connected to the IT solution the company uses/develops. This solution should be able to control basics such as defining tiers based on origin, destinations, service classes and advance booking, localize prices, and gather detailed analytics on user behavior.
As the product is developed and evolves, having a wider catalog of business rules to pick from will give the company more options to optimize breakage, and increase the profitability of the program. However, even the richest catalog will be useless without the data, experience, and expertise needed to use it.
This is especially true in travel where the complexity of the product requires specialized solutions and where breakage, can take many forms.
Types of breakage
In traditional businesses, breakage is a fairly simple thing. Imagine, for example, a massage subscription. A person subscribes, is charged a monthly fee, and once a month they can go and get a massage. If they don’t the company still gets the money and the user does not get the massage. It’s quite simple.
In travel, as our readers know, things can get very complex, very quickly. Think for example of what happens when a user subscribes to return flights, but doesn’t always redeem round trips or if a user picks a more expensive plan to be able to book at the last minute, but only rarely uses the last minute option. The same applies to ancillaries.
In both cases, the airline will be getting “free” revenue from users that have paid for a more expensive plan, but not used all the privileges they pay for. This type of breakage is unique to the travel industry and is found in many forms, from ancillaries to booking windows, flexibility, ancillaries and more.
Another aspect to consider is that, just like pineapple on pizza, breakage can be good or bad depending on who is experiencing it. On one hand, companies have an obvious interest in getting revenue for services that they don’t need to deliver, but on the other having a user travel rather than stay home can have some profitable, side effects.
One of our clients, for example, reported that more than 50% of people who redeemed flights were doing so in unplanned trips, and were adding ancillaries every time they redeemed. The result was that the airline would always get the monthly fee, but if the user flew, they would also get revenue from ancillaries.
In a similar case, an airline reported that users who regularly redeemed their subscription were far more likely to also book with the airline when travelling outside the subscription area. As a consequence, for that airline, having low breakage meant having higher loyalty, more market share and a greater share of the user’s wallet.
Examples like these are common in the subscription world, and they are only the tip of the iceberg. Other factors like pricing or what trips/benefits can be redeemed also have a significant effect on what a “good” breakage is and whether more of it will be desirable.
What should I do?
Understanding different types of breakage is only one example of the complexity of travel subscriptions and of the many ways in which they can generate revenue. Creating a good program that is profitable and loved by users requires 3 things:
- An in depth understanding of the travel subscription landscape, and the options that are available
- A clear image of how each element of a subscription affects user behavior and profitability
- A well-built IT solution that can support the complexities of subscriptions and travel, while also being agile enough to evolve and let the program grow
Building this know-how and expertise takes time. The technical challenges of the travel industry are well known to those that work in it, and integrating them with the world of subscription is not easy, but it can be done. Luckily, travel companies that want to build a subscription today, don’t have to do things by themselves and, to save themselves a few years of development, can tap into the existing knowledge and solutions developed by companies like Caravelo. To get started, all they need to do is click here.