The Loyalty Revolution

We all know loyalty and reward programs. In their simplest form, they are the punch card at your local coffee shop. Buy four and get the fifth one free. In their most complex form, they are an inscrutable and ever-changing formula for earning and redeeming rewards at some of the world’s largest brands in massive industries spanning aviation, hospitality and financial services. The complexity of these programs is so great that countless businesses have cropped up just to help consumers make sense of them.

Loyalty programs are a way for businesses to encourage customer engagement and retention. There’s a common saying that the most profitable sale is one to the customer you already have. It’s more cost-effective to extend an existing customer’s lifetime value than to go out and acquire a new one. This is increasingly true as paid acquisition channels have increased in cost and more of a business’ margin is going to large advertising intermediaries such as Google, Facebook and Instagram.

Tara Fung is the CEO and co-founder of Co:Create. This op-ed is part of CoinDesk's Crypto 2023 series.

But the versions of loyalty programs that we know and love (loathe?) are so limited. They live in walled gardens where the rewards you accrue often offer menial benefits and come with an overwhelming number of restrictions. You can only use these points on select items or at select times, the offering varies, the point-cost fluctuates, points can be devalued from one day to the next, you may be unable to transfer them to someone else (unless you pay exorbitant fees), and don’t even think about being able to monetize and sell the loyalty points you supposedly “earned.”

Because these loyalty programs operate within closed systems, many of them don’t create loyalty as much as captivity.

What is the cost to you as a consumer to “exit” a specific loyalty program and start all over? On the flip side, are you likely to even value the points you’ve earned when you don’t know if you’ll ever reach the membership tiers that unlock relevant benefits?

These switching costs and commitment barriers greatly reduce value to consumers. It begs the question whether these points are ever truly yours to begin with, and if these loyalty micro-economies are a mirage.

However, blockchains make alternative systems possible, where both brands and consumers can share bigger pieces of a larger pie. By tokenizing rewards, customers can own their loyalty, and brands can take advantage of composable technology that enables them to increase lifetime value and lower customer acquisition costs (CAC).

Read more: 2023 Will Be the Year of Dapps – Here's What to Expect | Opinion

We have an early view offered by Starbucks’s newly revamped Web3 loyalty program, Odyssey. Individuals in the beta program can now earn tokenized rewards and redeem those rewards within the Starbucks app. Starbucks has shared plans to enable customers to sell those rewards on a Starbucks marketplace. This construct allows customers to own their loyalty in a way they haven’t been able to before.

But for emergent and smaller brands – those focused on achieving growth with limited resources – it’s likely they will be more adventurous. They may be willing to band together to beat the big guys and take on potential risks for the promise of greater outcomes. This is the area that I look forward to most – both as a consumer and someone bullish on blockchain technology – to not only improve our current systems, but create new and better ones.

What if some of these brands were to launch interoperable loyalty programs that provided more value to consumers by enabling points to be utilized across several merchants? This type of system would also allow merchants to strike novel partnerships with non-competitive brands that serve similar customer segments.

In my own life, it’s easy for me to come up with examples of brands I’d love to see partner up, such as:

From these examples, you can likely guess my age, gender and demographic, but that is entirely the point. Personally, I would greatly value the ability to use Soho House credits at Lululemon, and it would undoubtedly result in me spending more across both businesses. The use of earned rewards feels markedly different than if Soho House were to email out a Lululemon discount code. Knowing I’m one of thousands being emailed the same promotion for “15% off” doesn’t hit the same way as being told that the loyalty tokens I’ve earned with one brand can be used with another to unlock rewards, discounts, store credit or limited edition drops.

From the brand’s perspective, it benefits by increasing the value of its own loyalty program. As more uses for the loyalty token are added, the perceived value of them increases, which can draw in more consumers. Additionally, by using a new and open data standard (e.g., ERC-20), brands can agree to and launch these partnerships from one day to another as opposed to spending months developing and implementing data-sharing APIs among proprietary systems.

This isn’t an entirely novel concept. We’ve seen conglomerates launch cross-brand loyalty programs to great success. What is new is the superior and more flexible technology that allows for the multi-merchant programs to be entered into and evolve rapidly, and in doing so take away many of the benefits of scale larger corporations have traditionally enjoyed.

See also: 23 Blockchain Predictions for 2023 | Opinion

Some may worry that tokenizing loyalty exposes a brand’s crown jewels to the world (and direct competitors): their customer data. Currently, the most commonly used blockchains are public blockchains that allow anyone to see transactions and account holdings. This is likely to change as the industry matures, data protection standards are developed, and zero-knowledge technology is advanced. Nonetheless, even now, in its current form, one could argue that the competitive risk presented by tokenizing loyalty is minimal for companies that serve their customers well. In the more well-known cases of vampire attacks, we see that these competitive strategies were often shortlived and minimally successful, with the majority of customers reverting back to the original platform.

Without a doubt, there are many aspects of open loyalty programs that will need solutions, such as mechanisms to regulate healthy supply and demand dynamics so that individuals are not able to disproportionately earn from one merchant and redeem at another. Furthermore, this brave new world is likely to happen incrementally and iteratively versus all at once, beginning with brands using transfer restrictions to address some of these unanswered questions from return on investment (ROI) to regulatory uncertainty.

Nonetheless, this change is coming. Blockchain technology will unlock new opportunities for smaller brands and consumers to share more value among each other rather than allowing that value to be captured by large advertising intermediaries. Progress is relentless, and this is one of the areas we will see it take hold.

CORRECTION (DEC. 28 15:00 UTC): Due to a copy edit error, an earlier version of this story referred to lifetime value as a ratio.