I first heard the term “breakage” when learning about betting on horses. Breakage is the rounding down (never up) of payoffs to the nearest nickel, dime, quarter or dollar, ostensibly to eliminate the need for mutuel clerks to handle pennies or other small change. Breakage also helps fund “minus pools” in which the net amount bet on losers does not cover the legally mandated minimum payout of $2.10 on a winning $2.00 bet. However, breakage really is a surcharge on almost every winning bet a horse player makes, especially when the rounding down is to an amount greater than a nickel, or when it is imposed on non-cash betting accounts.
In the casino gambling industry, the term is used to describe when an establishment does not have to give something a patron has been offered or is entitled to, as explained in this post. Casinos want to appear generous in extending offers to potential patrons, but don’t necessarily want to incur the costs of fulfillment to everyone who shows up to take advantage.
Breakage also occurs in the commercial world. I have written about several varieties, such as the gas discount that may be used only once for up to 20 gallons, when most people’s cars have tanks that don’t hold that much, and coupons that, in large type, purport to apply to any item in the store; the small-type exclusions (which always seem to apply to the item you intend to purchase) are not apparent until after you’ve traveled to the store and been told the bad news at the check out counter.
I don’t understand how merchants believe that losing a customer who feels misled by an offer (even if, when carefully read, the offer fairly represents its terms) is worth the savings it can realize in terms of breakage. I prefer giving my business to businesses that are forthright in their communications with customers and don’t play “gotcha.”