Breakage can refer to the profit a company takes in for services paid for but never received. A significant number of companies have breakage integrated into their business models to some degree; some companies rely on breakage as their entire basis of profit.

The most obvious form of breakage is from gift certificates or gift cards. In states where this has not been outlawed, most modern gift cards start charging an inactivity fee after a period of time vaguely disclosed in very fine print on the bottom of the back of the card. This inactivity fee is extremely silly. Your gift card exists as one row of a database. Neither the card nor the card number is going to be recycled. That oustanding gift card is costing the company nothing other than a trivial liability on their books. As well it should, for they owe you a debt: their service has been paid for, but until you use the card, it has not been received. It is a debt they owe no interest on and will never repay in cash. There is a helpful psychology of the gift card, however, and it is that you have received it as a gift. The person who bought you the card almost certainly paid for it in full, but it feels like the gift is partially from the store, and they can pretend they have the right not to fill their end of the bargain. These gift-card writeoffs are pure profit for the store, minus the $0.04 the card cost to produce.

Many states have laws against profiting from gift-card breakage. In true governmental cash grab style, several of these laws permit (or occasionally require!) these inactivity fees, but instead mandate that the squandered cash be remitted to the local or state government.

A close relative of gift-card breakage is subscription breakage. Most services that offer both subscription and pay-as-you-go models are designed to profit from subscription breakage. Subscription breakage is caused by non-utilization or underutilization of a service for which an unlimited, or even a limited, subscription has been provided. Everybody with a cellular phone contract is going to be familiar with this one; most people have significantly more minutes available than they use, and so-called free in-network or off-peak calling rarely accounts for more usage than could otherwise be paid for with the money spent to receive these "free" minutes. Cellular phone companies rely on breakage to be profitable. They are not alone in this; eMusic does exactly the same thing, but at least they're more above-board about it. Health clubs are notorious for this, locking guilt-riddled holiday revelers into year-long plans, and doing nothing in particular to encourage them to continue using the facilities. Some have been accused of going so far as to deliberately have interesting classes only in the first four months of the year.

Rebate processing companies have a business model built entirely on breakage. Corporations that outsource rebates pay the rebate processor to handle the rebates, paying one flat fee that covers both administration and the value of the rebates themselves. This flat fee is generally significantly less than the combined value of all the rebates they are putting on offer; the processor simply gambles that a significant percentage of customers will not submit the rebate, will fail to submit the rebate correctly, or will not follow up when the promised refund simply never appears. Rebates are becoming more expensive for companies to offer during the current economic slowdown, as cash-strapped consumers are becoming significantly more diligent about rebates and their follow-up.

Breakage provides some modicum of opportunity for alert consumers. Breakage allows a company to offer a deal that would be detrimental to them were people to actually take advantage of it. Deals based on breakage can be excellent discounts, but always follow through; profit from the laziness of your less-diligent bretheren, lest you become among them!

Break"age (?), n.

1.

The act of breaking; a break; a breaking; also, articles broken.

2.

An allowance or compensation for things broken accidentally, as in transportation or use.

 

© Webster 1913.

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