Breakage

Wikipedia:

Breakage is a term used in accounting to indicate gift cards that have been sold but never redeemed. Revenue from breakage is almost entirely profit, since companies need not provide any goods or services for unredeemed gift cards.

Breakage is a term used in sales, distribution, and multi-level marketing organizations to indicate commissions that are lost for the failure to meet certain conditions or requirements. Revenue from breakage is almost entirely profit as commissions lost for failure to meet those conditions or requirements can never be recovered.

Breakage is also used in the Telecommunications industry to refer to a scenario where the customer does not receive the full value of a service due to some specific charging mechanism or limitation. It is an important component of the profit in many Telecommunications services.

Regulations and controversy

US States have varying regulations about the accounting practices of unused gift cards. Some states consider unredeemed gift cards to be abandoned property, and as such lay claim to the value of unredeemed cards. Retailers oppose such laws, because it pays for the expense of issuing and accounting for the card, only to have the value on the card confiscated by the government.

Some retailers have also imposed conditions on gift cards, such as expiration dates or monthly service fees that periodically reduce the value of the gift card. However, some jurisdictions, such as California, Connecticut, Massachusetts, and Ontario have deemed such regulations illegal.

Some companies have been criticized for using estimated breakage to improve their revenue numbers.

Breakage in Telecommunications

In Telecommunications, breakage can occur in several ways. The key elements in maximizing revenue vs. service via breakage are:

The following examples are given in terms of voice calling, although they may also apply to data, short message or other services.

Rounding-Up: A call will often be rounded-up to a billing quanta. E.g. a call of 12 seconds may be billed as 60 seconds, and a call of 61 seconds billed as 120 seconds.

Minimum Balance Requirement: A calling service may require a minimum balance before it can be used. E.g. The billing quanta is 60 seconds, however the service will not let you begin a call unless you have sufficient funds for at least two minutes of calling.

Unusable Amounts: The unit charge values may be such that it is impossible to use all of the nominal amount purchased. A $10 calling card is charged at $1.05 per minute. After $9.45 is used, the remaining 55c is not sufficient to make any call.

Abandoned Accounts: Accounts or calling cards which are lost or abandoned while still retaining significant credit. This is the equivalent of the meaning of the term "Breakage" in the gift card context.

Expired Amounts: The subscriber is forced to pre-purchase large services amounts which expire if not used within a specified period.

Unused/Unbalanced Bundles: A bundle of services includes a mix of features. For example, a $30 per month package may include 3000 free Short Messages and 60 national calling voice minutes. Many customers may use most of the short messages, but not use the voice minutes. Other customers may use most of the voice minutes, but not the short messages.

Flat Plans, Bumpy Usage: A service plan may include a flat rate, e.g. 10Gb of data per month. However, the client's usage may be highly variable. E.g. one month they may use only 1Gb, despite having paid for 10Gb. The following month, they may use 20Gb, with the additional 10Gb being charged at a significantly higher "overflow" rate.

Careful research and planning can maximise some forms of breakage. For example, if a high percentage of mobile voice calls on the network are less than one minute in duration, then a rating plan could use an initial quanta of 60 seconds, followed by 1 second quanta. The plan appears to use a low quanta, but in fact many calls will be hit by the initial 60 second quanta.

Similarly, if many users are show to use 14Gb of data per month on a data plan, then offering data plans of 10Gb or 30Gb will force many users to pay for much more data than they need, which will expire at the end of each month.