The purpose of breakage modelling is to estimate the percentage of earned miles that will ultimately expire (this is referred to as the breakage assumption on earned miles), or to estimate the percentage of an outstanding miles balance that will ultimately expire (this is referred to as the breakage assumption on outstanding miles). As expected, the breakage assumptions, whether on earned or outstanding miles, are strongly correlated with the expiry rules of the loyalty programme, as well as their dynamic changes due to market trends and customer expectations. Therefore, it is crucial for a breakage model to be responsive to potential changes in programme rules, initiatives, and member transaction behaviours.
This article discusses the ‘why’, ‘how’, and ‘what’ of a simplified breakage modelling approach. It also intends to provide inspiration for the wider application of actuarial techniques.
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- Breakage – The magic of a loyalty programme .pdf • 0,11 MB