How does Web3 open up new ways to enhance user loyalty?

Original Title: 《Web3 Opens New Paths to Customer Loyalty》

Authors: Haytham Yassine, Ed Crouch, Kestas Sereiva, Sesh Iyer, and Mark Abraham

Compiled by: smart token, Deep Tide TechFlow

Many businesses have overlooked the potential advantages of Web3. Coupled with the recent crash of cryptocurrencies, the plummeting prices in the entire crypto market have led to the evaporation of billions of dollars in customer wealth, which may leave many with a limited impression of Web3. The collapse of exchanges like the now-bankrupt FTX has ushered in a "crypto winter," scaring many retail companies and institutional practitioners away from the "promise" of Web3.

Web3, the third evolution of the internet, has one of the most promising applications in enhancing customer loyalty. Web3 offers a range of methods to revitalize loyalty programs. Concepts like tokenization (digital tokens representing assets or ownership) support use cases related to wholesale payments, identity management, and the crucial revenue streams of loyalty in retail. Today's consumers are quite open to loyalty relationships, and Web3 provides a rich environment that can adapt to consumer needs, further enhance user engagement, and more effectively expand the scope of partnerships.

At the same time, rapid advancements in regulatory and technological conditions are driving brands to view loyalty programs as a reliable engine for collecting customer data. Regulators are steadily reviewing consumer privacy, major tech platforms are restricting the use of third-party cookies, and stricter controls are being placed on establishing data-sharing frameworks. As more brands focus on a cookie-less future, they are eager to build their own loyalty programs to collect first-party data to better attract customers—relying on the inherent diversity of Web3 itself.

However, the answer is not as simple as launching another loyalty program in a saturated market. According to Bond's Brand Loyalty Report, American consumers held an average of over 16 loyalty program memberships in 2022. However, the process results of these memberships can be frustrating; active user engagement has stagnated at below 50% of registered programs in recent years. Businesses must understand the various solutions for enhancing engagement with Web3, as consumers will make choices, but only for the right and preferred products.

Benefits—services and features that customers can use with digital assets—are crucial for the success of Web3 loyalty programs. Businesses can tokenize customer relationships through non-fungible tokens (NFTs) to enhance customer engagement and activate their brand-specific communities. Tokenizing transactions to strengthen loyalty collaborations across partners also makes sense. Companies should avoid mimicking mainstream, short-cycle cases or, worse, completely shying away from the Web3 wave out of caution. This article will explore the challenges of existing loyalty models, examine the application scenarios of Web3 technology in loyalty, and provide a framework to help businesses reboot or enhance their loyalty program offerings to stimulate customer activity.

Getting Started with Web3

Discussions about Web3 are often clouded by misunderstandings or hype, making it necessary to clarify how this new technology differs from past versions of the internet. Web3 brings together emerging technologies, with blockchain technology at its core, providing users with greater control over their participation activities and interactions.

• The Web1.0 era lasted from around 1990 to 2005, supporting an information economy where publishers controlled content and generated revenue while users consumed that content.

• Web 2.0 (2005-2020) represents the platform economy, where networks and platforms enable users to read and create content. However, these platforms still centrally control the revenue streams for creators. (See Figure 1).

• Web3 ushers the world into a token economy driven by blockchain-based, decentralized applications. Through tokens, it enables users to directly own personal identity and monetize the content they produce. Tokens allow active participants and creators to gain economic benefits from network activities without the need for intermediary platforms. These tokens can be fungible assets, such as cryptocurrencies or stablecoins, or non-fungible tokens, known as NFTs. (For more information on Web3 technology, see "Web3 Basics").

Web3 Basics

When it comes to Web3, a plethora of buzzwords and industry terms are associated:

Blockchain: As a component of Web3, blockchain operates as a distributed database or ledger across a set of nodes to maintain secure and decentralized transaction records.

Smart Contracts: These programs execute transactions based on different conditional responses; protocols run without the need for manual input or manipulation.

Fungible Tokens: These tokens consist of data on the blockchain, representing non-unique and divisible assets (like currency).

Non-Fungible Tokens (NFTs): Data on the blockchain represents ownership of unique and non-replicable assets (like art collectibles).

Cryptocurrency: Digital currency, referred to as fungible tokens on the blockchain, protected by cryptography to prevent counterfeiting or double spending. Cryptocurrencies include highly volatile tokens like Bitcoin and Ethereum, as well as stablecoins like USDC that are pegged to fiat currencies.

Tokenization Threshold: Companies achieve tokenization of content or allow users to access their products and services through the use of digital tokens (often NFTs).

Decentralized Autonomous Organizations (DAOs): Communities composed of users, not governed by centralized management, making decisions in a bottom-up manner; DAOs are popular in some online projects.

Decentralized Finance (DeFi): Financial products managed programmatically by smart contracts, without intermediaries.

Challenges Facing Today's Loyalty Programs

Regardless of how many members a company's loyalty program may have, there are challenges in the interactions between businesses and new customers. Although the positioning of loyalty programs is to facilitate these interactions, they often fail to do so. (See Figure 2)

Fragmented "Loyalty" Relationships. While most customers are willing to join loyalty programs, they often feel overwhelmed by promotions and various messages from different projects when managing multiple loyalty accounts (See Figure 3). An increasing number of ads and offers pop up on their screens, often not appearing according to personalized settings. This relentless wave of promotions dilutes the visibility of individual programs.

To compete, brands must build an appealing loyalty product that stands out in a saturated market, offering a simple and "addictive" user experience while establishing meaningful partnerships with other projects.

Capturing the Long Tail Market: Low-Engagement Users. Many projects have a significant number of less active users, particularly in sectors like travel, hospitality, and luxury goods. Engaging with these broad swathes of less active customers can effectively convert their potential engagement rates into more potential revenue.

Brands should explore different types of incentives and rewards, with cash being the simplest option. According to Bakkt's "2022 Loyalty Program and Rewards Outlook Study," 66% of average American consumers prefer cash back over earning points. Long-term practices of rewarding points or merchandise may attract a segment of a brand's customer base, but not all customers. In contrast, converting fungible points into cash or digital assets with potential benefits or participation in other projects can effectively attract inactive long-tail users.

Closed Ecosystems. Large digital enterprises capture most of the customer attention, often leaving merchants and small brands squeezed out. For example, business giants have created self-sustaining closed ecosystems for consumers, offering a wide range of products and services.

To reach more customers, brands must enter such ecosystems and "walled gardens," which are controlled by third-party companies or platforms that manage access to customers and advertising.

One way brands can compete at scale is by collaborating with multiple partners to attract consumers. Partnerships allow brands to reach more areas, have a broader customer base, gain deeper insights, and offer more extensive reward incentives. The digital results achieved are impressive; for example, the collaboration between Starbucks and Delta Airlines allows Delta to attract over 27 million loyal customers of Starbucks who may not necessarily fly with Delta. Starbucks can also gain more touchpoints during consumers' travel experiences. (See collaboration examples in Figure 4).

Complex Partnerships in Scaling Up. While there are many partner choices, solidifying partnerships can be challenging. Brands often create "connected loyalty" partnerships to provide more comprehensive and extensive content for their different customer groups. However, these partnerships are mostly point-to-point integrations, making it difficult to scale beyond one-to-one setups into multi-partner ecosystems. Additionally, managing the details of cross-project agreements involves many extra costs, including legal and regulatory compliance, currency tracking and reconciliation, and marketing collaborations.

Web3 offers ways to expand collaborations and manage these complex details, promising more functionality as companies attempt to enhance their loyalty product offerings.

Diversity of Community Engagement in Web3 Loyalty Programs

Some brands leading the way in Web3 use cases are methodical and strategic, thoroughly exploring how Web3 can integrate into their customer engagement and loyalty strategies. Other brands have experimented with various potential Web3 routes, such as NFT airdrops, opening branches in the metaverse, or rewarding with cryptocurrencies. (See Figure 5)

Tokenization and Smart Contracts

The world of content creation in Web3 illustrates how tokenization can enhance loyalty programs. Content creators can use tokens to launch projects and build a community of loyal, active fans who can access premium content and interact with other fans and creators.

For loyalty programs, brands' fungible and non-fungible tokens on the blockchain can replace or supplement traditional points with tiered loyalty management solutions. These tokens can gamify interactions, track brand engagement, and incentivize participants in loyalty programs with real-world benefits and rewards. Tokens can also open new avenues for businesses, making it easier to connect with different partners and merchants while incorporating interoperable rules. Smart contracts can automate the management of responsibilities and the substantial manual overhead of cross-partner agreements.

A case dedicated to tokenization and partnerships is Starbucks, which announced in October 2021 its goal to explore tokenizing the brand's star points on the blockchain to facilitate easier access for partners to its loyalty program. A year later, Starbucks announced a loyalty partnership with Delta Airlines.

"Benefits" NFTs

Collectible, digitally asset-oriented NFTs have created wealth effects. However, due to early speculative trading by a broad consumer base, NFT blue chips have recently faced challenges. For example, the floor price of Bored Ape Yacht Club (BAYC) peaked at around $420,000 in May 2022. By the end of 2022, the floor price of BAYC had dropped by nearly 80%.

Customers are beginning to compare NFTs with their benefits to connect the digital and physical worlds. The success of any Web3 loyalty product often hinges on pairing utility with issued tokens. Such assets can provide NFT holders with special offers, early access to products, discounts, and privileges for priority entry to stores or events. NFT metadata can be used to track the progress of loyalty programs, brands, and the achievements of their partners, such as completed tasks or earned points.

In a consumer study conducted by BCG in October 2022 regarding membership programs, most consumers expressed interest in being part of online communities or memberships, with as many as 54% stating that obtaining benefits and real-world perks was the primary reason for joining such programs. Only 21% indicated that NFTs or other digital products were their reasons for participation, suggesting that the appeal of tying purely digital NFTs to real-world benefits can create entitlements that extend beyond the digital assets themselves. (See Figure 6)

Several real-world examples currently exist. Gap launched NFTs on Tezos, allowing NFT holders to receive limited-edition collectible hoodies. Similarly, Starbucks Odyssey offers its members the right to earn and purchase NFTs, unlocking immersive coffee experiences and benefits for NFT holders. Clinique launched NFTs that holders can earn by participating in social media tasks, gaining access to an annual variety of skincare products.

Open Ecosystems and Token Entry Thresholds

As more open and multi-interface ecosystems become alternatives to "walled gardens," token entry is becoming increasingly popular, facilitating smoother collaboration between brands and loyalty programs. One brand can invite another brand's token holders to participate, granting them exclusive offers and experiences. Public or consortium-based blockchain platforms will allow for more frictionless, "plug-and-play" collaborations across brands, bypassing complex, one-time IT integrations.

The entry of tokens allows Tiffany & Co. to target affluent, NFT-savvy customers with minimal costs. In 2022, Tiffany launched the NFTiff project, where NFTiff holders would receive exclusive rights to necklaces and pendants similar to their owned CryptoPunks NFTs.

Community-Based Engagement

Around creator-led token projects, such as NFT art collectibles and emerging DeFi protocols, various passionate communities have formed. Many of these projects aim to gather community feedback and drive collective decision-making through active engagement on social media channels, special virtual and in-person member-exclusive events, and decentralized autonomous organizations (DAOs), which are user collectives without centralized management.

Brands can adopt similar online communities among their "die-hard fans" or high-net-worth customers. Leaders can use DAO-like organizational structures to easily facilitate voting on brand decisions that best reflect customer voices, such as which product to launch next or which partner to join. Governance processes can be allocated through DAOs, granting certain token holders more voting power based on loyalty, participation history, and engagement in key tasks.

Framework for Web3 Loyalty Products

Many organizations have begun experimenting with Web3, most taking an opportunistic and ad-hoc approach to initiate proposals. However, their commitments should be more robust, and companies must adopt a structured and strategic approach to ensure their loyalty services are Web3-based.

We have developed a six-pillar framework to help businesses think through their Web3 loyalty proposals. (See Figure 7).

Web3 Loyalty Strategy and Goals

The first step before experimenting and proposing is for businesses to understand the differences and opportunities within their current loyalty programs and explore how Web3 can assist. Leaders should define the overall strategy, the moat of the product, and the priority goals (audiences).

After that, Web3 cases must address the fundamental goals or shortcomings of existing loyalty programs. Common objectives include expanding rewards to a broader and less active customer base; broadening and simplifying partnerships; attracting new customer segments; and increasing customer engagement and stickiness with their programs or brands.

Tokenization Strategy

Next, organizations must consider how they will use tokenization strategies to deploy, supplement, or replace current products (programs) and help them achieve the right goals. These options belong to a range of prototypes that vary due to technological and regulatory complexities. Detailed financial modeling must accompany the chosen prototype to ensure it meets the desired financial objectives for the entire loyalty product. Below are four prototypes (See Figure 8)

Fungible Points.

Some projects may choose to create fungibility within their existing points-based programs. Crypto-loving customers can convert points into cryptocurrencies for liquidity or investment purposes. Financial institutions like SoFi and Venmo have launched credit cards that reward with cryptocurrencies or allow points to be converted into cryptocurrencies.

Intrusive Token Issuance.

Brands can explore alternative token products consisting of NFT collectibles, providing real-world benefits beyond the digital tokens themselves. These products can integrate with existing loyalty management solutions and gamify the program to create new ways to attract and incentivize customers, particularly younger, digitally-savvy customer segments. Starbucks Odyssey members can earn NFTs sold as digital collectible stamps, unlocking opportunities for new experiences. They chose Polygon as their issuance public chain, a Layer 2 solution built on the Ethereum blockchain.

On-Chain Loyalty Points.

Companies without loyalty programs or those looking to change their existing loyalty management solutions can issue fungible loyalty tokens or points on the blockchain. This is particularly helpful for partners with heavy projects needing to optimize cross-project token tracking, settlement, and reconciliation.

Emirates Airlines utilizes Loyyal to tokenize cross-platform transactions on the blockchain.

Most companies experimenting in this area have adopted the first two options, while a few have taken the risk of on-chain point tokenization to achieve cross-project settlement efficiency. Some Web3-native enterprises operating under more crypto-friendly regulatory regimes have launched crypto-native tokens as part of their broader ecosystem, requiring loyalty utility and incentive strategies. One example is the Basic Attention Token (BAT), funded by advertisers, requiring user and creator participation in the advertising ecosystem to earn tokens.

Partners & Ecosystems.

A third important aspect to consider is how to integrate the ecosystems that partners bring with the brand's loyalty collaboration strategy. Can the company's objectives be better achieved through a closed partnership network, whether one-to-one or one-to-many, where fungible tokens are minted and used as rewards or payment forms?

For example, a financial institution can help expand a closed loyalty network. The business can offer loyalty tokens funded by merchants at the point of sale within a predefined network of merchants and partners.

A case for a more open ecosystem strategy is when a brand issues a collectible NFT product and chooses a public chain to mint these NFTs. If the brand opts for this approach, it can allow customers to transfer or sell these NFTs in the market. Its partners can also leverage token entry to engage with certain NFT holders.

Token Benefits.

As outlined earlier, the success of any Web3 loyalty product requires aligning benefits with issued tokens. The scope of benefits can include physical, social, or purely digital perks. Physical benefits involve access to real products and services associated with digital assets, such as granting access to redeemable products via NFTs. Tokens can also offer social benefits, allowing participation in community events, VIP perks, or exclusive brand voting rights. Digital benefits can include activities in the metaverse, virtual meet-and-greets with brand ambassadors, or token privileges used in games to access opportunities in the digital world.

Loyalty benefits can span all three realms, and companies can use NFTs as a form of engagement and benefit retention. These benefits can also be gamified. For example, if a customer collects three rare NFTs, they can burn them to mint a limited-edition NFT, granting them priority shipping for a year. Figure 9 provides examples of NFT applications within this scope.

Engagement and Rewards.

In addition to traditional rewards composed of discounts and benefits, companies can leverage other engagement tools in the Web3 world to gain traction.

One option is to use a DAO-like organizational structure, allowing a small subset of loyalty elites or customers with thresholds to participate in decisions regarding their brand. Promotions like "What color hoodie should we launch next?" or "Which band would you like to see at the virtual concert?" give customers a voice in shaping the company's products or the loyalty program itself. Companies can selectively target specific token holders or customer accounts or wallets, such as those holding exclusive NFTs or those with a certain number of tokens in their wallets or reaching a specific loyalty tier.

Another strategy brands can explore is the "x-to-earn" model, gamifying experiences and establishing different moats and milestones among one or more partners, rewarding participants who achieve accomplishments. For example, customers can earn this token on their tenth purchase. The advantage of this solution is that the gamified scope can be expanded across multiple partners to create relevant and personalized differentiation.

Technical Partners.

Navigating the Web3 technology landscape is not a simple task. Standards vary by blockchain platform, and participants in Web3 infrastructure are emerging, attempting to address the complexities of different platforms or underlying solutions through APIs and SDKs. (See Figure 10.) As a startup, four aspects must be considered:

Which Web3 businesses and solution builders will the company partner with to drive its overall Web3 market strategy, business case, product vision, customer experience development, and vendor selection? BCG, along with its technology building and design arm BCG X, is capable of supporting businesses in this area.

On which blockchain platform will the company deploy its tokens? Will it use a public chain or a private blockchain?

When selecting a platform, businesses must consider:

• Environmental factors;

• Platform reliability and uptime;

• Ticket size/quantity;

• Developer community activity;

• Institutional capabilities;

• And whether the platform is supported by Web3 infrastructure providers to accelerate its development work.

Which Web3 infrastructure provider (if any) will the company adopt?

These providers can offer Web3 tools through SDK/APIs, enabling smart contract management and connections to various blockchain platforms; KYC providers; transaction monitoring systems; and royalty management workflows.

Will collaborating with such companies help with marketing efforts? What wallet platform and custodial infrastructure will the company choose to manage its loyalty tokens?

Will it take a self-custodial approach, where users manage their own keys, or partner with a vendor to custody their digital assets? Some Web3 infrastructure participants may also offer custodial functions.

Future Outlook

With the emergence of on-chain fungible tokens, NFTs, smart contracts, and DAOs as options, Web3 can complement or completely reshape existing customer loyalty programs. Institutions and brands must not overlook this potential growth area.

Companies should take a more strategic approach to clarify how they will advance their loyalty products. Starting with small steps is acceptable, but companies must ensure they design their target Web3 strategy/vision and predefine their target market. The initial pilot that companies choose to launch must be sustainable and help them achieve their desired vision and return on investment goals. Customer engagement and loyalty must be at the core of all Web3 strategies. Otherwise, customers may feel disappointed by this "one-off" effort.

There is no "one-size-fits-all" solution. Companies can draw inspiration from practices that have already been tested but should avoid "copy and paste" products and approaches. A company's Web3 strategy will be determined by the scale, performance, customer base, and objectives of its current loyalty program.

For institutions and end-users, Web3 remains complex. Companies must ensure they avoid using Web3 jargon, replacing terms like "NFT" with "collectibles" or "badges," and focus more on incorporating potential technological complexities and workflows into a customer experience that can serve as the best option in a Web2.0 native environment.

Companies must take the time to understand the technology landscape. It makes no sense to rebuild existing infrastructure. Do not tackle this challenge alone. Invest in choosing the right technology partners, but ensure that they can build and own the core customer experience around it. Collaborate to develop a viable business framework that ensures the program delivers the desired return on investment while maintaining ongoing customer engagement and loyalty.