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Delaena Kalevor – Why the “Breakage” Model is Profitable But Could Prove Unsustainable

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I would like to introduce readers to a concept called “breakage.” It’s a common business strategy in fee-based or subscription-based services, such as gym memberships, video rentals, and annual fee credit cards. It’s also common in loyalty rewards programs.

Before I discuss this concept, I want you to think of how most businesses operate. The customers want a particular product or service. They buy it. They use it and the transaction is complete.

Let’s consider a basic example:

Let’s assume that you’re hungry and you want a bacon burger.

You go to the drive-through and buy a burger. You eat the burger.

You’re happy because you’re no longer hungry.

 The drive-through franchise owner is happy because they generated a sale. This is how most businesses work.

The “breakage” model works the exact opposite way. With breakage, the company makes money when you do not use the product or service you purchased.

Let’s look at the gift card business for example: Let’s assume you buy a $25 gift card from Amazon.

You give the gift card to your friend for his birthday. How does Amazon make any money doing this?

Well, it turns out that for every $100 spent on buying a gift card, only $75 is actually ever redeemed. People who receive the gift card either lose the card, forget about the card, don’t use up the entire value of the card or the card expires.

This is breakage. Gift cards have an implied breakage of 25%. Meaning on average 25% of the value of gift cards never get redeemed. According to Delaena Kalevor, breakage can be very profitable. When someone purchases a gift card, the issuer of the gift card recognizes the gift card value as a contingent liability on their balance sheet. When the gift card value expires, the contingent liability is taken off the books and recognized as revenue. This has a direct accretive impact on net income, which can make breakage in the gift card and loyalty rewards industry extremely profitable.

The cashback and loyalty programs of credit card issuers also work in the same way and breakage is a valuable part of how these banks make money. They use tools like redemption caps (for example with American Express, you can’t redeem until you have $75 worth of points), points expiration, etc to enforce breakage. Most customers never reach that $75 redemption threshold before the points expire. This is an example of breakage. That’s why Delaena Kalevor’s favorite credit card is Discover Card. They have no breakage at all – no redemption caps and no points expiration.

Another example of breakage is health clubs or gyms. The parallel to that in the credit card industry is cards that have an annual fee.

Most fitness centers work on a monthly membership fee model.

I pay $50 a month to have access to the facility.

Whether I show up every day or never show up, I still pay the health club the same $50.

In the health club business, by far the most profitable customers in the industry are people who sign up as members but don’t actually show up to the gym.

This is also breakage. Similarly, credit card customers with an annual fee credit card, generate breakage income for the issuing bank when they do not use their card.

Breakage-based business models can be very profitable. Imagine a health club with 10,000 paying members where nobody actually shows up.

The problem with breakage business models is that you’re receiving value from customers without customers actually receiving value in return. Basically, you’re betting that customers are too lazy to recognize this.

Before Netflix and video streaming of movies became popular, a company called Blockbuster used to rent DVD movies to entertainment seekers. You would rent a movie for two nights for something like $5. If you forgot to return the movie on time, they would charge you a $3/day late fee.

Imagine renting five movies for the weekend and forgetting to return the movies for an entire week. Instead of spending $25, you end up spending $100.

This is a form of breakage too. In fact, at its peak, Blockbuster was generating 70% of its net income from late fees. Their profits came from customers who were too lazy or forgetful to return the DVD sitting in their car.

The problem with breakage though is that customers DO NOT like it.

When Netflix first started, they had a subscription-based DVD rental by mail business. For a flat fee each month, you could keep the movies you rented for as long as you wanted.

According to Delaena Kalevor, Netflix targeted Blockbuster’s most profitable customers — those that pay late fees — and ultimately put Blockbuster out of business.

Personally, I prefer a business where sales and profits come from happy customers, instead of unhappy ones that wish your way of business didn’t exist.

I don’t see the gift card, loyalty rewards, and health club businesses going out of business anytime soon. I don’t even expect their breakage business model to change. But Delaena Kalevor likes the idea of customers receiving good value for what they pay. The value should be mutually beneficial, like in the burger example. It’s a good thing to profit from really happy customers that are thrilled to do business with you. Blockbuster did not expect to go bankrupt. But they did. History has a funny way of repeating itself. The breakage based businesses out there should take lessons from Blockbuster’s experience.

The idea of Bigtime Daily landed this engineer cum journalist from a multi-national company to the digital avenue. Matthew brought life to this idea and rendered all that was necessary to create an interactive and attractive platform for the readers. Apart from managing the platform, he also contributes his expertise in business niche.

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Business

Why use custom web development? Why is it better to use ready-made CMS

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Custom web application development is not only good branding. It is also a great tool for communication between company and customer and much more enjoyable for both. Apps extend an expanse to portable and mobile gadgets’ ability to provide seamless expansion of the scope with which companies can serve to consumers online. Interface of the application should be attractive and comfortable in use. Moreover, it should have a unique identity, which reflects the company’s branding message and helps to establish emotional connection with customers. Custom-made design and development increase user engagement and distinguish a company from the competition.

But using off-the-shelf solutions might be the best choice for the companies, which are just starting their web journey due to its cost efficiency. In this article we will define pros and cons of custom web development compared to SaaS products. 

Digital innovation is a critical component of modern business development. Business leaders usually face a choice between using off-the-shelf solutions (SaaS) and designing custom ones. The former offer a high degree of reliability at a lower price tag. However, SaaS products may lack critical features that are necessary for meeting the company’s requirements.

Custom web development company services VS SaaS CMS: pros and cons

It is common for small businesses to rely on SaaS as a lower-budget alternative. But as a business grows, so do its demands for software. For example, companies might need to manage more resources, and SaaS is unable to meet the increasing needs.

Custom development allows the implementation of solutions that match the very particular company’s needs. The decision to go with it can stem from the rising number of employees, new locations, or new markets. With SaaS, companies have to deal with the one-size-fits-all approach, facing limitations in different access levels, feature customization, etc.

When choosing custom web development services, it’s important to find the right provider who will understand the company’s structure and goals.

Pros and cons of SaaS products

The nature of SaaS reveals its strengths and weaknesses. A cheaper solution also means weaker control over it. Take a look at the table below to learn about the pros and cons of SaaS products:

Pros:

  • Cost efficiency.
  • Reliability and maintenance.
  • Automated updates.
  • Data protection.

Cons:

  • Limited customization.
  • Limited control.
  • Limited scalability.
  • Security concerns.

Pros and cons of custom web development services

Having a customized app addresses specific company needs. It allows businesses to create unique features based on their requirements and add all the integrations they need. Plus, such solutions can be more secure. For instance, a company may have an offline copy of data, protected from external attacks.

Pros:

  • Customization capabilities.
  • High flexibility.
  • High security level.
  • Unique features as competitive advantages.

Cons:

  • Large investments.
  • Resource-intensive.
  • Not automated.
  • Security risks.

Who needs custom development?

When a business has specific needs, it’s best to choose custom software app development. It also makes sense in the following cases:

  • A company is planning to use this software for various projects and demands functionality variation from one project to another.
  • A business is scaling.
  • A company has its own development team with sufficient expertise to implement a required solution.
  • A business has already used a SaaS product that doesn’t match the needs.

Being a custom web development firm, TRIARE builds scalable and secure apps for businesses of different industries, be it edtech, healthcare, or ecommerce. Our mobile app development team has created dozens of native and cross-platform solutions used all over the world. In services our company offers we take aim at custom-made approach. It enables a business to build a site focused on delivering real business results via an optimal structure and user experience. 

Starting from planning, implementing, monitoring, communicating and finally delivering the completed project before the deadline, we ensure quality at each step. We take care of post-release maintenance and support, so you shouldn’t worry about security risks.

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