Loyalty Revolution: How Brands Use Tokens to Improve Loyalty Programs?

Author: Tara Fung

Compiled by: Web3 Market Research Institute

We all know about loyalty and rewards programs. In their simplest form, they are the punch cards at your local coffee shop, buy four and get the fifth one free. In their most complex form, they are an obscure and ever-changing formula for earning and redeeming rewards from some of the world's largest brands in major industries like airlines, hotels, and financial services. The complexity of these programs is so great that countless businesses have emerged just to help consumers understand them.

Loyalty programs are a way for businesses to encourage customer engagement and retention. There is a common saying that the most profitable sales are those made to existing customers. Extending the lifetime value of existing customers is more cost-effective than acquiring new ones. As the cost of paid acquisition channels increases, more and more business profits flow to large advertising intermediaries like Google, Facebook, and Instagram.

However, the versions of loyalty programs that we know and love (or hate?) are so limited. They exist in closed gardens, and the rewards you earn often provide negligible benefits, accompanied by overwhelming restrictions. You can only use these points on specific items or at specific times, the variety of goods offered varies, the cost of points fluctuates, points may devalue from one day to the next, and you may not be able to transfer them to others (unless you pay a high fee), let alone think about being able to monetize and sell the loyalty points you supposedly "earned."

So what would this look like?

We can get an early preview from Starbucks' newly improved Web3 loyalty program, Odyssey. In the beta program, individuals can now earn tokenized rewards and redeem them within the Starbucks app. Starbucks has shared the program, allowing customers to sell these rewards on the Starbucks marketplace. This construction allows customers to own their loyalty in unprecedented ways.

But for emerging and smaller brands, which are committed to growth with limited resources, they may be more willing to take risks. They might be willing to band together to take down big companies and take on potential risks for greater rewards. This is an area I look forward to the most, both as a consumer and as someone who is confident in blockchain technology, not only to improve our current systems but also to create new and better systems.

What if some of these brands launched interoperable loyalty programs that allowed consumers to use points across multiple merchants? Such a system would also allow merchants to form novel partnerships with non-competing brands that serve similar customer bases.

In my life, I can easily think of brands I would like to see collaborate, such as:

• Allbirds x Cometeer
• Soho House x Lululemon
• Athletic Greens x Glossier

From these examples, you might guess my age, gender, and demographics, but that’s precisely the point. Personally, I would love to be able to use Soho House points at Lululemon, which would undoubtedly lead me to spend more at both companies. Using earned rewards feels entirely different from receiving a "15% discount" email as one of thousands of people getting the same promotion. Being told that the loyalty tokens I earned with one brand can unlock rewards, discounts, store points, or limited-edition products with another brand feels different.

From a brand's perspective, it can benefit by increasing the value of its own loyalty program. As the use cases for loyalty tokens increase, their perceived value will also rise, potentially attracting more consumers. Furthermore, by using new and open data standards (like ERC-20), brands can agree to and initiate these partnerships without spending months developing and implementing data-sharing APIs between proprietary systems.

This is not a completely novel concept. We have already seen the successful launch of cross-brand loyalty programs. Newer and more flexible technologies allow programs from multiple merchants to enter and evolve rapidly, taking away many of the economies of scale traditionally enjoyed by large companies.

Some may worry that tokenizing loyalty will expose a brand's core competitive advantage—customer data—to the world (and direct competitors). Currently, the most commonly used blockchains are public, where anyone can see transactions and account holdings. As the industry matures, data protection standards evolve, and zero-knowledge technology improves, this situation may change. Nevertheless, even in its current form, one could argue that the competitive risks of tokenizing loyalty are minimal for companies serving their customers. In more famous cases of vampire attacks, we see that these competitive strategies are often fleeting, with a low chance of success, as most customers return to the original platform.

There are undoubtedly many aspects of open loyalty programs that need to be addressed, such as the need to regulate healthy supply-demand dynamics to prevent individuals from excessively earning rewards from one merchant and redeeming them at another. Additionally, this entirely new world may unfold gradually and iteratively, rather than all at once, starting with addressing some unresolved issues from investment returns (ROI) to regulatory uncertainties.

Nonetheless, this transformation is happening. Blockchain technology will unlock new opportunities for small brands and consumers, allowing them to share more value between them rather than letting that value be captured by large advertising intermediaries. Progress is relentless, and this is one of the areas we will see it mastering.

A Word from the Author

Tokenizing loyalty points requires consideration of several points:

• First, how to tokenize? Choose Token or NFT?
• Second, how to use tokenization to strengthen the relationship between customers and brands?
• Third, how to drive customers to continue consuming to earn points?

Here are some distinctions regarding loyalty tokenization that I have compiled for appropriate reference.

Currently, more and more loyalty programs are gradually using NFTs to replace traditional contribution points. For example, Open Loyalty, 3mint, and Loyalty3, mentioned in the previous article, all build their loyalty systems around NFTs. Web3 projects can create special NFT collectibles and set corresponding minting (loyalty) thresholds for users to collect; users can earn NFTs by meeting loyalty thresholds and then gain more benefits through trading or redeeming additional prizes.

However, building a loyalty program centered around NFTs has even deeper significance. Do you know what it is? We will decode it in the next article.