Breakage

The term comes from accounting and the loyalty industry in the English-speaking world, but it is also used in German-speaking e-commerce, usually without translation.

For a company, breakage seems pleasant at first glance: the customer has paid or earned the points through a purchase, but no consideration ever falls due. In the accounts, this eventually becomes revenue without costs. This entry explains how breakage arises, how to calculate the breakage rate, how it is treated under IFRS 15 and in German commercial law, which legal limits apply in Germany and why a loyalty programme designed for breakage harms itself in the long term.

What breakage means exactly

Breakage always presupposes two things: a customer acquires a right to a future service, and this right expires or is never exercised. The international accounting standard IFRS 15 describes it soberly: customers do not always exercise all their contractual rights, and precisely these unexercised rights are "often referred to as breakage". In practice, two large groups are distinguished that differ significantly in economic and legal terms.

Breakage with loyalty points and miles

In a loyalty programme, the customer receives points, stars or miles as part of a purchase. They do not pay for them separately, but economically they are included in the purchase price. Every point issued is a promise of a later discount or reward. Breakage arises when points expire because the customer never reaches the redemption threshold, forgets the programme or finds the rewards unattractive. With airlines there is the added factor that miles are often sold to partners such as credit card providers.

Breakage with vouchers and gift cards

With vouchers and gift cards, the customer has paid the amount in advance. The company holds the money but still owes the goods or service. Breakage arises here from forgotten cards, residual amounts of a few euros that are not worth using, or vouchers that get lost. Because real money has changed hands, legislators look particularly closely at how long vouchers have to remain valid.

Calculating the breakage rate: formula and metrics

The central metric is the breakage rate. It is the counterpart to the redemption rate and can be expressed with a simple formula:

Breakage rate = 1 − redemption rate

The redemption rate is the share of points or voucher values issued that is actually redeemed. If 85,000 of 100,000 points issued are redeemed, the redemption rate is 85 per cent and the breakage rate 15 per cent. It is important to note that you only know the rate definitively once all the points of an issuing period have been redeemed or have expired. Until then, you work with expected values.

An overall rate is rarely enough for management purposes. A cohort view makes sense: you group all points by the month in which they were issued and track how much of them has been redeemed after three, six, twelve and 24 months. This lets you recognise early whether new cohorts redeem worse than older ones and look for the cause before the points expire.

How big breakage is in practice

Breakage is not a marginal phenomenon. A widely quoted projection by Colloquy and Swift Exchange estimated in 2011 that US households collect points and miles worth 48 billion US dollars every year and do not redeem around a third of them, roughly 16 billion US dollars. The figure is old and an estimate, but it shows the order of magnitude.

Starbucks provides a well-documented example from an annual report. In its annual report 10-K for fiscal year 2024 (ending 29 September 2024), the company reports breakage revenue from stored value cards of 187.6 million US dollars in its own stores and 20.0 million US dollars in licensed stores. The deferred balances from cards and the loyalty programme amounted to around 1.72 billion US dollars on the same reporting date.

Starbucks also describes the method there: in many markets, including the USA, the cards have no expiry date. On the basis of historical redemption rates, a portion is expected not to be redeemed and is recognised as breakage in proportion to actual redemptions. Starbucks reports under US GAAP (ASC 606), whose breakage rules correspond in substance to IFRS 15.

The German counter-example is Payback. The programme reports around 35 million active users in Germany for 2025 and a redemption rate of 95 per cent. Mathematically, this results in a breakage rate of around five per cent. Almost every point comes back, and that is precisely part of the success: anyone who knows that their points are really worth something keeps collecting.

Breakage in accounting under IFRS 15

The standard IFRS 15 "Revenue from Contracts with Customers" applies to financial years beginning on or after 1 January 2018 and replaced, among other things, IAS 18 and the former interpretation IFRIC 13 on customer loyalty programmes. It regulates breakage in the application guidance B44 to B47. The preceding question is whether loyalty points are a separate performance obligation at all.

Proportional recognition instead of instant profit

The core message of B46 is important for anyone who sees breakage as quick income: expected breakage is not booked as revenue at the time of sale, nor as a lump sum at the end of the year. It is released in step with actual redemptions. Whether a company may expect breakage at all is checked according to the rules on constraining variable consideration. It therefore needs reliable empirical values; mere hope is not enough.

Deloitte illustrates the principle in its guide to breakage under ASC 606 with a voucher example: a retailer sells vouchers worth 1,000 US dollars and expects 20 per cent breakage. When a voucher worth 40 US dollars is redeemed, it recognises 40 US dollars of revenue plus 10 US dollars of breakage, because 40 of the expected 800 US dollars of redemptions is one twentieth, and one twentieth of 200 US dollars of expected breakage is 10 US dollars.

Commercial law and tax balance sheet in Germany

There is no specific breakage rule in the German Commercial Code (HGB). Vouchers sold are an obligation for the retailer that only becomes revenue on redemption. For bonus points, the Federal Fiscal Court (BFH) ruled in its judgment of 29.09.2022 (IV R 20/19) that a retail company must recognise a provision for uncertain liabilities for points and vouchers from its customer card programme if a claim is probable.

According to the BFH, the obligation is already economically caused by the first purchase of goods in which the points arose. Provisions are recognised under § 253 HGB in the amount of the settlement amount required according to prudent business judgement.

Then there is VAT: whether a voucher is a single-purpose or multi-purpose voucher within the meaning of § 3(13) to (15) of the German VAT Act (UStG) decides when the tax is due. This entry does not replace tax or legal advice. How exactly you account for points and vouchers is something you should clarify with your tax adviser.

Legal framework: limitation periods and expiry clauses

In Germany, a company cannot bring about breakage at will. For monetary vouchers without an expiry date, the regular limitation period of three years under § 195 of the German Civil Code (BGB) applies. According to § 199 BGB, it begins at the end of the year in which the voucher was issued. A voucher bought in March 2026 can therefore be redeemed until the end of 2029.

Shorter periods in general terms and conditions are subject to review under § 307 BGB. In its information sheet on vouchers, the Cologne Chamber of Industry and Commerce refers to the Higher Regional Court of Munich (judgment of 17.01.2008, ref. 29 U 3193/07): a redemption period for gift vouchers in online mail order limited to one year is unreasonably short. According to the information sheet, however, the customer has no right to have a residual amount paid out.

For loyalty points, the judgment of the Federal Court of Justice of 28.01.2010 (ref. Xa ZR 37/09) is decisive. An airline was not allowed to shorten the validity of bonus points already collected from five years to six months via its terms and conditions when participation was terminated. The points were a discount promised at the time of purchase; the clause unreasonably disadvantaged the participants and was invalid.

Expiry periods as such are therefore not prohibited. Payback, for example, states in its FAQs a validity of 36 months, after which points expire collectively on 30 September. What is decisive is that such a rule is clearly stated in the terms of participation from the outset and is not tightened afterwards to the detriment of points already collected.

Why a programme that relies on breakage harms itself

The temptation is easy to explain: the fewer points are redeemed, the cheaper the programme becomes. High redemption thresholds, short expiry periods and unattractive rewards push the breakage rate up. On paper, costs fall. In practice, this strategy destroys exactly the mechanism that makes a loyalty programme valuable.

• No retention effect: a point that nobody redeems brings nobody back to the shop. The repurchase rate does not rise, and neither does the customer lifetime value.
• Negative experiences: the only reminder of the programme is often the email "Your points are expiring". That creates frustration instead of loyalty.
• Legal risk: anyone who sets deadlines and thresholds too tightly or tightens them afterwards risks invalid clauses in their terms and conditions, as the Federal Court of Justice ruling shows.
• Distorted calculation: anyone who plans breakage as income underestimates the costs as soon as the programme does catch on and the redemption rate rises.

A high breakage rate is therefore more of a warning signal than a success. It shows that the programme is not understood, not valued or simply forgotten. The more sensible attitude: plan a loyalty programme for redemptions and calculate with a high redemption rate. Breakage is then a side effect, not a business model.

Measuring breakage: how to proceed

You can only measure breakage if every movement of points is stored individually. A customer account that only knows a current balance is not enough. A clean points ledger records every credit, redemption, cancellation and expiry as a separate booking. If shop, app and till are attached to a shared ledger, an ERP integration also supplies the accounting department with the figures.

1. Store bookings instead of a balance: every movement with date, reason and reference to the order.
2. Form cohorts: group points by month of issue and track their redemption curve.
3. Estimate the expected rate: derive a redemption rate from completed cohorts that serves as a forecast for new cohorts.
4. Segment: evaluate redemption rates separately by channel, customer group and promotion. Special promotions with multiple points often behave differently from the basic programme.
5. Watch for deviations: if a new cohort is significantly below the expected redemption curve, that is a signal to review rewards, thresholds or communication.

The measured rate has two consumers. Marketing reads from it whether the programme is working. The finance department needs it to estimate the outstanding liability and, under IFRS 15, the expected breakage. Both should work with the same data basis.

Breakage, point value and devaluation

Breakage is closely linked to the point value. The point value determines what a point brings when redeemed and thus the amount of the outstanding liability. If a programme becomes too generous, the obvious idea is to make rewards more expensive. Such a devaluation lowers the value of every open point and usually increases breakage, because more customers no longer reach their threshold.

A well-known example is Starbucks Rewards in the USA. According to Axios, several reward tiers rose there on 13 February 2023, for example from 50 to 100, from 150 to 200 and from 200 to 300 stars. For other rewards the thresholds fell. All in all, some members received less than before for the same stars.

In Germany, the 2010 Federal Court of Justice ruling sets tight limits on retrospective deterioration to the detriment of points already collected. Anyone who has to devalue announces it early, protects existing points with a generous redemption window and offers something in return. It is better to calculate the earn rate and point value from the outset so that a high redemption rate remains affordable, without losing sight of the average order value.

A practical example

An online shop issues loyalty points with a nominal value of 50,000 euros in the first quarter. From completed cohorts it knows that 90 per cent of the points are redeemed. The expected breakage is therefore 5,000 euros and the expected redemptions 45,000 euros. For simplicity, we assume that the contract liability corresponds to the nominal value. Under IFRS 15, for loyalty points it is actually an allocated portion of the transaction price. All values are a model calculation.

The breakage is therefore not booked as profit in the first quarter but grows with the redemptions. If after twelve months it turns out that only 18,000 euros instead of 27,000 euros have been redeemed, the shop adjusts its expectation. At the same time, the weak cohort is a hint for marketing: perhaps the first reward is too far away, or customers do not even know that they have points.

Breakage therefore belongs in the same consideration as other levers for existing customers that work without additional visitors. How these levers interact is shown in the article higher turnover without more traffic. Anyone who wants to integrate a loyalty programme into an existing shop will find the technical framework under e-commerce development.

Frequently asked questions

Is breakage pure profit for the company?

Economically, breakage is revenue with no service on the other side. Under IFRS 15, however, expected breakage may only be recognised in proportion to redemptions and only on the basis of reliable empirical values. If the money has to be remitted to third parties, no revenue arises. In the long term, a high breakage rate also costs customer loyalty.

What is a normal breakage rate?

There is no universally valid figure. It depends on programme design, industry, redemption thresholds and expiry periods. Payback reports a redemption rate of 95 per cent, i.e. mathematically around five per cent breakage. The US estimate by Colloquy from 2011 put it at about a third for points and miles.

May vouchers in Germany expire after one year?

For monetary vouchers in online mail order, the Higher Regional Court of Munich considered a redemption period of one year to be unreasonably short. Without a time limit, the three-year limitation period from the end of the year of issue applies. Shorter periods need an objective justification. If in doubt, have your voucher terms checked by a lawyer.

What is the difference between breakage and expiry?

Expiry is the lapse of a right when a deadline passes. Breakage is the umbrella term for all unexercised rights, including balances without an expiry date that are never redeemed. Expired points are therefore part of breakage, but not the whole of it.