Sometimes it simply breaks the incoming missile or rocket into segments or destroys its ability to follow its planned ballistic path. According to Lloyd and Postol, if the warhead isn’t destroyed the interceptor failed.
You don’t need a Ph.D. to see the immense flaw in this logic: if someone fires a missile at you and you aren’t hit that is good news.
These are unguided rockets, not cruise missiles. They aren't targeted at a person or home, they are targeted at entire neighborhoods or city regions. If a rocket is heading to a neighborhood across town and iron dome disables the rocket and forces it down in your neighborhood, is that a "win"? destroying the warhead limits the damage, but even falling rocket debris can cause injury and damage.
If the 5% figure is right then it takes around $1.6M worth of $80K interceptors to stop each $800/rocket. Is that worth to price? Does a 10kg warhead routinely cause millions of dollars of damage and/or human casualties?