Government by Breakage

What a failed appliance promotion shows us about our state

In the early 1990s, the British division of Hoover had a challenge. The recession had cut their sales, and new rivals like Dyson were gaining ground. Innovations like the first talking vacuum cleaner failed to make a dent in the downturn. Not only were they losing customers, but they had a mounting stack of unsold product filling their warehouses. The executives knew that they needed something eye-catching to attract shoppers and get those appliances moving. They came up with what would eventually become a notorious marketing promotion: free flights.

They partnered with another company, JSI Travel, an airline company. Similarly battered by the recession, JSI had extra flight capacity to shift, so it sold it to Hoover. The vacuum company, in turn, made an offer to customers: spend £100 and get two free flights. An initial trial limited flights to Europe, but after proving successful, Hoover extended the offer to include round-trip tickets to the United States, valued at £600. You can probably see the obvious problem here.

In fairness, so could Hoover. They relied on a marketing trick known as “breakage”. You tempt customers in with an offer that is too good to be true and then make it more complicated than you’d expect to claim. At that point, you’ve already got their money, and most will suck it up and grumble a bit. So you take everything you know about making your sales process effective and easy and turn it on its head. You could have your free flights, but you had to claim them quickly, fill out complex forms and be flexible when and where you travelled. In theory, it made sense – but they hadn’t reckoned with the determination of the British public.

When it came to getting flights worth six times your initial expenditure, the British were prepared to eat the hassle. Thousands of people bought qualifying products, usually just hitting the minimum value needed to be eligible. Some didn’t even bother to pick up their purchases and just sent off the receipt and made their claim. Eventually, 300,000 rolled in, vastly more than the 50k the company predicted. The oversubscription left them in a real predicament – not only was the promotion going to cost vastly more than they anticipated, but they didn’t have enough flights to honour the completed applications.

The disappointment led to publicity campaigns and lawsuits. The campaign cost Hoover around £50 million in costs and damage. The row it engendered tarnished the company’s reputation, including leading to it being stripped of its royal warrant. The executives who conceived and approved the scheme were ousted, and the European subsidiary was sold off. Rather than arresting the company’s decline, it doomed it. The offer lives on as a salutary case study for business schools. A glance at the government, however, reveals that not everyone has learned the lesson.

Hoover was doomed by a simple mistake. They offered something that they couldn’t afford to deliver, relying on the idea that making it hard to claim would shave off some of the costs. It is a remarkably similar set-up to many of our benefits systems, which temper generosity with the hope that attrition will cut the costs. It’s an outlook which comes with two parallel problems. On the one hand, you end up with thousands of deserving people missing out on the help they need. On the other hand, should they step up and get it, the costs quickly spiral out of control.

The row over winter fuel highlighted how this applied to pension credit. The income-based benefit should be an essential one for the elderly poor, yet only around 60% of entitled people claim it. The government has an obvious incentive to keep that take-up low. The more people who get what they are entitled to, the higher the cost goes. Furthermore, under-claimed benefits are politically far easier than over-claimed ones – so making things hard becomes the default. Pension credit itself has its own obvious form of breakage when it comes to actually applying for it. The form is 25 pages long with more than 200 questions. An effort for anyone, but especially those who have arrived at retirement with poor administrative skills or health conditions that affect them, who are already more likely to be badly off in retirement.

Pension credit isn’t an oddity. The same logic runs through vast swathes of the British state. A formal entitlement is held out but denied through underprovision or process hurdles. The BBC estimates that nearly 7 million households are missing out on a share of £24 billion of entitlements. Others miss out on services like NHS dentistry because the system discourages practices from offering them. Millions of pounds of allocated funds are not being used because of this problem. Even the much-attacked Motability scheme is taken up by only around half of those eligible.

A different problem arises when people clock on to their entitlements. When the 2014 changes to SEND provision sought to centre “parent power”. In doing so, it massively incentivised parents to jump through bureaucratic hoops to secure funding for their children, especially as other support, such as classroom assistants, was cut. Now, the number of children with a statement has roughly doubled, increasing the system’s costs well beyond what was initially intended. Changes in society, diagnostic approaches, and the hangover over COVID-related development delays partly drive this. Together, the surge is creating a system which is in demand and unaffordable.

For the state, there is a risk that more services will be like that. It only controls one side of the “promise high, provide low” model. IF something shifts in uptake, the underfunding of many of these promises could be exposed. Technology threatens to enable this. Encouraging people to claim has become a cottage industry on social media. AI chat tools are likely to promote it further, helping people to fill out forms they might otherwise struggle with – and do it in ways more geared to tick the assessor’s boxes. Greater knowledge and application could drive up the public spending bill without any changes in headline rules.

For Hoover, promising things they had neither the intention nor the capacity to deliver ended in lawsuits and a declining customer base. For the government, it is playing out in disillusionment with the system. The breakage approach could be almost designed to breed dissatisfaction. You get the negative headlines about perceived looseness and generosity. At the same time, millions still feel the government isn’t helping them, even as they see cash flowing to those they think are less deserving. Both the Tory government and the new Labour one have been repeatedly gored on these horns.

It also has practical implications. These processes are usually framed to weed out the undeserving, but often become about breakage: putting walls around the system to keep costs down. The most deserving can lose out to those who know how to navigate bureaucracy. Yet even for them, it adds considerable stress and time, dealing with a state that feels constantly miserly in practice, despite its claims to be generous.

Fixing it, however, will be politically toxic. Undo the breakage system, and claimant numbers will go up at a considerable expense. An increase would require higher taxes (or more borrowing) to keep the headline provision unchanged. Lowering entitlement levels and focusing on the neediest would create hundreds of thousands of losers from the policy change, many of whom are likely to be sympathetic and quickly mobilised to campaign. Woe betide any Chancellor who puts up taxes to deliver the same benefit system, or strips SEND children of their support.

Making generous offers you don’t intend to fulfil can only be sustained for so long. Hoover found that out with disastrous effects. Eventually, enough people cotton on, with enough determination that you are forced to disappoint them. At that point, it’s not only the hoodwinked who hate you, but everyone who watched it happen. Much of our public services have been built around the same architecture, hoping that a mix of ignorance and attrition will keep costs lower than the government intended. This is a recipe for rising costs and for disillusionment with the system.

A rapid change might be impossible, but it raises questions about how we deal with the system in future. For the left, this likely tips towards universality and higher taxes. On the right, it presents a different challenge. A system that relies on breakage is often unfair and unstable. Controlling state spending must be paired with getting money to where it is needed. Getting this right is perhaps the most significant intellectual and policy challenge for any future right-leaning government. The alternative is clinging to a structure that looks sturdy on paper but buckles the moment people use it — a model that promises the world, delivers far less, and steadily corrodes the trust on which any modern welfare state depends.