Breakage: An Unusual, Yet Questionable Source Of Revenue

The norm for most businesses is to offer goods and services and charge them in a way that they make a profit to fuel the necessities of their business. This is the underlying principle of any for-profit business model. But every time out of the blue human nature often plays into business and businesses profit by making use of human nature, though it is debatable about the morality of the practice, various businesses have started framing their services in such a way that they can make a profit even if they don’t offer any goods or services.

Gift For Thee, Profit For Me

Let us see this with an example, let’s say a store has an offer where if you spend a specific amount, you’ll be given a gift card of a sizable amount which you can redeem for a discount on your next purchase, so the customer goes spendthrift mode, spends required or more than the required amount and gets a giftcard, but there is a catch, the gift card/coupon will have an expiration date and the customer being tired from shopping will be lax and will think “it still has 20 days, I’ll come by next week” and proceeds to go on with their life, and it turns out the customer will forget about it and will never redeem it. It is observed that Americans collectively have USD 21B in unredeemed gift cards annually. People who buy gift cards directly or indirectly have a high chance of not using it due to constraints in their life. This is a clever way where companies make money by not providing any service but profit off of it. In accounting the terminology where company makes revenue by unused services by the customers is called “Breakage”, this is commonly seen in telecommunications and retail fashion stores.

Health For Thee, Wealth For Me

This model is reliant on the negligence of human beings, this model is also used by gyms, the infrastructure of a gym is only capable of supporting few customers, but gyms enroll more members than mandated, because they have data that lot of members are irregular to the gym or quit the gym without undergoing the full tenure of their membership, this can be attributed to lack of motivation or the members not seeing the desired results, they do not cancel their memberships most of the times or even if they do cancel, there will be a cancellation fee, this is a win-win situation for the gym franchise.

Failures

One particular company tried to make this their primary source of revenue, the business model of this company was to offer unlimited movie access to their partner theatres for a monthly fee of USD 9.95, limiting to one movie a day, but this proved to be counterproductive as people made full use of this service, this model proved to be unsustainable. They tried to vary the business model by applying a monthly limit, but still, the losses were piling up, the company on average was losing upto USD 20M a month, and they ultimately filed for bankruptcy. The theatres too did not like this business model as it was harming their business. And it also suffered from system being overwhelmed, they did not foresee so many users signing up for their services, app outage was a common phenomenon, and the medium through which this service was carried out, a mastercard, It had too much demand, mastercard couldn’t deliver cards to all those who signed up and this created a long waiting line, which also added to its woes, this service was tantamount to a freemium model where it was overused due to its ease of use and low cost barrier.

End Notes

From the above anecdotes, it is observed that human nature is the major driving factor for the progress of this business model. In case of the gym it is a tedious task to work out and requires lot of motivation, which lot of people cannot carry on for a long time, the effort to be put in is challenging to most gym members. And in the case of gift cards it requires them to make an additional trip to a store and spend more money just to make use of the gift card, which upon closer inspection makes you realize you are spending more than needed money and possibly buying things you don’t require so you can get a miniscule discount, or you simply forget the gift card in your fast paced life. The movie subscription on the other hand, it appeals to the human nature to seek happiness and leisure and this business incentivized it. Unlike the gym or store where it involved an unpleasant experience, unlimited movie viewing is a treat and a pleasant experience which requires no efforts and this was the worst possible way to generate revenue by breakage, hence it failed. But this proved to be a valuable case study on businesses which respond to inherent human nature.