Tokenization of customer loyalty in Web3
Blockchain, NFT, Web3 and cryptocurrency are notable buzzwords today. However, marketing leaders are still working to understand the core value drivers and investment areas around customer engagement and loyalty.
NFTs in Web3 are like the “forms” in Web3 – they unlock value. In Web3, brands have migrated from monetizing collectibles to new ways to engage customers. There are a number of implementations by sector, industry and brand, e.g. community access, wider redemption, exclusive content, new experiences, monetization, etc. There are also many loyalty programs across many apps – which are difficult to track or transfer. Brands often see sub-optimization when it comes to returns from loyalty programs due to inactive customers and expired points.
A migration from closed (Web2) to open systems (Web3) is underway to cope with this loss of value. In other words, customers may be locked into one brand in Web2, but find that their loyalty can be redeemed with another brand in Web3 through tokenization. This is how Web3 can potentially help unlock value that is left behind when companies create customer-centric programs in Web2. As a co-founder of a company working to bring Web3 value to Web2 companies, I want to explore the mechanics of customer loyalty tokenization and the potential barriers to adoption.
Loyalty programs in Web3
A familiar concept in the Web2 world is loyalty programs from hotels, airlines, stores, etc. Brands use them as tools to encourage people to protect their products or services through points or miles. These points are mortgages to the consumer, but they do not own or control the terms of using them. Although these assets are linked to the consumer’s email or online identity, they cannot be liquidated for cash, transferred, exchanged or redeemed in violation of the brand’s policies, e.g. blackout dates, redemption costs, etc.
Web3 has the potential to give full control over these loyalty points or miles to the user. For example, a consumer can build loyalty points or currency from various hotels, airlines and stores into a tokenized asset. These assets can be sold, exchanged, traded or redeemed for a variety of things in a marketplace. These tokens can be fungible or even as a proprietary NFT (non-fungible token).
The tokens can also be programmed via smart contracts to deliver a certain small percentage of sales to the brand itself, creating a new revenue stream. Offers from the brands can be delivered straight into the consumer’s wallet, leading to higher stickiness and loyalty. Today, many of these loyalty programs destroy value for brands and consumers through a “use it or lose it” scheme that can monetize generating value for both parties. When Web2 and Web3 work together, there is the potential for a lot of value to be unlocked.
Many brands like Gucci, Nike, Adidas, etc., have experimented with these concepts. For example, Nike generated $185 million through NFT sales last quarter and Adidas generated $22 million in one afternoon – both signs of a potentially exponential revenue model.
The way forward
Several companies are trying a variety of approaches to integrate tokens into their existing products or services while exploring new business models and revenue streams. These companies will drive the mass adoption of Web3, embedded in Web2 value chains as an extension. Consumer adoption will happen for real value and differ from the users who trade tokens with a speculative eye today. Ownership, interoperability and portability will be at the center of Web3-powered loyalty programs. These tokens act as digital passports that unlock value through experiences inside or outside the loyalty program.
The value unlocked by these tokens can also be woven into earning structures for each loyalty program that identify milestones that unlock benefits across multiple programs using a single wallet linked to the user’s identity.
Skeptics question whether brands are simply putting a Web3 wrapper on existing paradigms and creating new walled gardens of value as opposed to embracing the ethos of Web3 – which suggests that users own their data, not companies. They also seek answers to why Web3 methods are better than Web2. Moving from closed to open ecosystems, brands like Starbucks do not yet allow their NFTs to be redeemed at Peet’s or other competing outlets. Some airlines and hotels have done a better job of working with others to redeem loyalty points, but they end up with unfair exchanges or onerous conditions for redemption.
Even previous skepticism, a wallet can help get rid of the friction between the brand and the middle platform by establishing a direct relationship between them. Brands can repurpose these costs to reward consumers for their time, attention and engagement in meaningful ways, creating a new emotional bond to increase loyalty.
We are still in the early days of asset tokenization as businesses and consumers process exchanges of value on peer-to-peer networks. A large majority of tokens do not have real value at scale yet, and many chains that strive for their product-market adoption vectors fit. I think the value will be created from Web3 features built into existing Web2 businesses that people use today, rather than trying to rip and replace Web2 with Web3 overnight. Tokenization with liquidity on the blockchain is likely to unlock more layers of innovation and creatively growing GDP. We are in version 1.0 of tokenization, and with advances in scaling technology, interoperability, regulation and security, many asset classes and forms of liquidity will be created.