Breakage (accounting)

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In telecommunications and accounting, breakage is any type of service which is unused by the customer. A good example would be gift cards or calling cards that have been sold but never redeemed. [1] Revenue from breakage is almost entirely profitable, since companies need not provide any goods or services for unredeemed gift cards. It is distinct from shrinkage, which refers to items which are not used by the customer because they disappeared from inventory.

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In 2006, a blog called "The Stalwart" criticized Best Buy for using estimated breakage to improve their revenue numbers. [2]

In telecommunications

In telecommunications, breakage can occur in several ways. The key elements in maximizing revenue versus 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.

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

See also

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References

  1. "When is Slippage and Breakage Good for Profits?".
  2. "The Stalwart". Archived from the original on 2006-11-20. Retrieved 2006-09-17.