What are loyalty rewards programs?

A loyalty program is a marketing tool used to encourage customers to increase consumption of a service or product while building brand loyalty. This strategy is used in multiple industries including banking, entertainment, hospitality, retail, and travel. An operator of a loyalty program allows a customer to set up an account where the customer can earn points and status.

It’s also not a new thing: Betty Crocker's loyalty points program was introduced as early as 1929.

It was calculated that the global loyalty management market will be worth $5.57 billion U.S. dollars in 2022. Market evaluations predict that the size of loyalty management ecosystem will surpass $24 billion U.S. dollars by the end of 2029, growing at CAGR of 23.5 percent in this period.

-Statistica.com Loyalty management market size worldwide from 2020 to 2029

Loyalty programs work well when the incremental cost of giving away value to the customer doesn’t eat into the company’s margins. For example, the marginal cost of giving away an empty first-class seat or providing an upgrade to an empty hotel room is low for the company, whereas the perceived value for the consumer is high. 

There is some overlap between membership programs, like Costco where customers pay $120 a year, and loyalty programs. However, a membership program typically generates revenue in exchange for a product or service, whereas a loyalty program is free. 

Why loyalty?

According to Nielsen’s research, 84% of customers are more willing to choose a retailer that runs a loyalty program. According to Comarch/Forrester research, running a loyalty program can result in 3.5x times more transactions per member. 

4 Big Challenges for Loyalty Programs

1. People Don’t Redeem Their Rewards

People don’t redeem their rewards: redemption rates for rewards are below 20%. In addition to the fact that 80%+ of rewards go unredeemed, US consumers belong to upwards of 16 loyalty memberships on average in 2022, according to Bond’s Brand Loyalty Report.

2. Advertising Is Getting More Expensive

It’s harder to personalize ads at scale to prospect customers into a loyalty program. With the deprecation of web cookies and changing iOS policies, advertising is more expensive and difficult. Customer acquisition costs (CAC) are rising and return on ad spend (ROAS) is increasing for many advertisers.

3. Giving Away Free Stuff Eats Into Margins

Giving away free rewards creates more perceived value for customers but it also eats into margins. Brands need to find ways to deliver customer value without losing money on the loyalty program. Margins matter!

The value of a loyalty program can be determined by a formula developed by BCG called the loyalty margin. Any program value is a function of the benefits that the program offers to customers relative to the cost of those benefits to the company, as well as the incremental share the program generates. 

For a loyalty program to be profitable, customers must contribute more in incremental-margin dollars than the company invests in funding the program. The most profitable programs invest more in their customers who spend more. 

-BCG: Leveraging the Loyalty Margin: Rewards Programs That Work

4. Personalization Across Channels Is Tough

It’s really hard to deliver a personalized experience to a customer who engages with your brand across multiple online and offline channels.

Consider this example: you’re trying to buy a fancy pair of prescription sunglasses.

• You see an advertisement on a social media site and click the ad which directs you to an e-commerce website with lots of sunglasses to choose.

• You pick your favorite color and upload your prescription details before adding the sunglasses to your virtual shopping cart, including your FSA card before checkout.

• However, decide you want to try on the sunglasses before making the purchase so you head to the physical store.

• Will the sales clerk at the physical store have information about your shopping cart, your prescription, FSA card to help you complete the purchase?

Probably not.

Personalization helps sell more products and improves the customer experience. This is hard to do when data is siloed.

Loyalty Solutions Enabled by Blockchain

1. Multi-Company Rewards That Don’t Eat Into Margins

The first solution enabled by blockchain is a shared data layer for multi-company rewards. With the Ethereum/Polygon API standards, other brands can easily accept your loyalty reward status and points via token-gated or token-enabled commerce. This unlocks the ability for other brands to stack value on your rewards program without needing to manually create a partnership or invest engineering resources to build data pipes to connect customer systems together.

Consider this example: An airline launches a Diamond Status as an NFT on Blockchain.

A new luxury luggage company can open TODAY and provide all Diamond Status token holders a 20% discount through a token-gated (token-enabled) Shopify store, without manually having to speak with the airline.

The airline loyalty program was able to accrue value through this new 20% discount on luggage, delighting the customer, without eating into the airline’s budget. The airline did not have to invest in building a custom data pipe to attest to the credential of various customers who want to redeem this reward at the luggage company.

This is a permissionless partnership. 

2. Secondary Market for Rewards, Status, and Points

With blockchain, you can buy, sell and rent out your loyalty rewards and status in a secondary market.

Consider this example: You just purchased a new mattress.

After purchasing a fancy, new $1500 mattress you receive a special reward from the mattress company: $250 off of your next mattress!

Except you don’t plan to purchase another mattress for at least 5 years, making this reward totally useless.

However, if the $250 discount was an NFT, you could sell it for $100 on a secondary market. Another person in the market for a mattress would have a discount they could use in a token-gated Shopify store.

The mattress company could even program royalties into the smart contract of the NFT, earning 5% royalties on every sale on the secondary market. This would create a new revenue stream for the brand, offsetting the cost of the reward.

Here’s an example of a bunch of offers my AMEX card issues in the app. I don’t plan to use any of them but wish I could sell them on a secondary market.

Alas…

3. Acquire Customers By Stacking Utility on NFTs

Ok, this one is going to require some context before we jump in: but it’s worth it.

The Crypto Wallet is evolving into a hub of commerce. The wallet is important software that allows people to sell, transfer or confirm ownership of a digital asset. While digital assets, like a digital pass to a golf club or a tokenized digital currency, “live” on the Blockchain, the crypto wallet is where people will sign transactions to use the assets in applications.

From a marketer’s perspective, the Crypto Wallet is a new surface, similar to social media or email, where brands can engage consumers. Consumers are using these wallets to purchase new media products, represented by tokens on a blockchain, in video games and loyalty programs.

What if marketers invested advertising budgets in media products owned BY THEIR CUSTOMERS

Marketers typically don’t invest their marketing budgets on media products owned by their customers. Media products are owned by big companies that can reach customers. But the customer doesn’t get a cut of the ad budget. With the deprecation of web cookies and changing iOS policies, personalized advertising is becoming more expensive. This opens up an opportunity to experiment with new channels.

Consider this example: A restaurant offers a free burger to Reddit Snoo Collectors

7 million people have minted or purchased Reddit’s Snoos. These avatars are media products owned by prospective customers.

A restaurant chain could offer a free burger to consumers who own a Snoo avatar and sign up for the restaurant’s loyalty program. Customers who own the Snoo would enter the restaurant’s token-enabled experience using their crypto wallet, to verify their ownership of the media on the Blockchain, enabling them to redeem the discount for a free burger. People who get this reward would be delighted because, in addition to a free burger, their Snoo avatar is now more valuable because the brand stacked a reward on it. The media product they own is also an advertising surface. The free burger is also a promise that other brands may add additional rewards. The Snoo may now be worth more in secondary markets for digital media products. The advertising literally accrues value to the customer.

Customers would be more loyal and share their experience enjoying the free burger on social media, generating earned media for the restaurant.

For the cost of a burger, a restaurant can create a new user in their loyalty program and free earned media: that’s performance advertising powered by web3.

Advertising to customers by investing IN customers can be a powerful performance marketing strategy enabled by web3.

4. Have a 360 View of Your Customer Through Token Gating

There’s a complex web of customer interactions that happen daily across a brand’s channels. From emails, social media ads, e-commerce sites to physical store, it’s difficult to have a 360 view of the customer at each touch point. It’s even more difficult to personlize the experience at each touchpoint to help accelerate customers through the buyer’s journey and build loyalty. Let’s return to the example of when you try to buy sunglasses.

Consider this example: you’re trying to buy a fancy pair of prescription sunglasses.

• You see an advertisement on a social media site and click the ad which directs you to an e-commerce website with lots of sunglasses to choose.

• You pick your favorite color and upload your prescription details before adding the sunglasses to your virtual shopping cart, including your FSA card before checkout.

• However, decide you want to try on the sunglasses before making the purchase so you head to the physical store.

• Will the sales clerk at the physical store have information about your shopping cart, your prescription, FSA card to help you complete the purchase?

Probably not.

However, consider an alternative where the customer was granted a NFT status.

The customer’s status could be used to token gate a discount at the physcial store or earn points at checkout.

But, you might be asking, having a customer show a QR code can be down with a centralized database, right? So no need for blockchain here…

Why complicate things with Blockchain?

Because the brand will be able to capture valueable onchain (as in on the Blockchain) data that is privacy enhanced through zero knowledge proofs.

A zero-knowledge proof is a way of proving the validity of a statement without revealing the statement itself. The ‘prover’ is the party trying to prove a claim, while the ‘verifier’ is responsible for validating the claim.

As loyalty programs, games and other blockchain based web services proliferate, onchain data will become more valuable for brands. At the same time, consumers will have more control because they can leverage attestation from zero knowledge proofs, validating something is true to get a reward without revealing the data itself.

Brands can offer customers rewards in exchange for data to power personalization, without losing control of privacy.

Three Future predictions 

1. Your phone will be your crypto wallet abstracting away private key management

2. Blockchain Digital identity will be how people around the world access government services and commerce

3. Companies will allow their most loyal customers to govern DAOs for corporate social responsibility and fun projects like owning a sports team. Customers will literally become owners of the brands they love.