Web3 loyalty programs: How digital ownership will help build long-lasting customer relationships

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The battle for customer loyalty

In today’s fast-paced and highly competitive marketplace, brands are facing a constant battle to acquire and retain customers. With more choice than ever thanks to the democratization of communication channels and ease of access to sales platforms, it’s becoming easier for new brands to enter the market and for consumers to switch between them. A recent study by SimplicityDX showed that customer acquisition costs have risen by as much as 60 percent over the last five years.

These programs can take many forms, from simple rewards programs to more complex ecosystems of benefits and incentives. According to a survey by Bond Brand Loyalty, loyalty program memberships in the US alone have grown by 8 percent in the last year, and 87 percent of consumers say they belong to at least one loyalty program.

At the same time, blockchain, web3, and non-fungible tokens (NFTs) are continuing to push their way into mainstream adoption, and the metaverse, an evolved version of the internet, is starting to take shape. As these developments converge, brands are starting to explore how novel ideas involving web3 ownership could be used to enhance, extend, or replace existing loyalty programs. We’ve recently covered a high-profile example of such an initiative in our Metaverse Spotlight on Starbucks Odyssey, which extends the company’s existing Starbucks Rewards program using blockchain technology.

But what do web3 loyalty programs built on tokens and the blockchain actually have to offer compared to traditional, centralized loyalty programs? In this blog post, we’ll review different types of web3 loyalty programs, outline ways in which they can provide additional benefits to consumers and companies, and discuss the key success factors in bringing them to market.

The different archetypes of web3 loyalty programs

The foundation of any web3 loyalty program is a token. A token is the digital representation of an asset, either digital or physical, that resides on and is secured by a blockchain. Tokens can take various forms and be broken down across a variety of dimensions. Within web3 loyalty program concepts, there are mainly two streams of thought: rewarding loyalty with fungible tokens or with NFTs.

Fungible token loyalty programs:

Fungible tokens, such as Bitcoin and Ether, have no unique value. Any two bitcoins are worth the same amount, just like two dollar bills or two units of another fiat currency. In this scenario, loyalty is rewarded by depositing a number of tokens in the customer’s wallet. These tokens are transferable and potentially tradable on cryptocurrency exchanges, where exchange rates to other cryptocurrencies and fiat currencies are regularly updated. In essence, this is comparable to many contemporary loyalty schemes, such as frequent flyers programs, where customers are awarded miles for remaining loyal. These miles can be redeemed for a variety of physical goods or flight discounts. However, they are not transferable between users, even though there is a theoretical monetary value associated with them.

A fungible token loyalty program essentially brings these mechanisms to the blockchain using fungible tokens. For example, an airline may award tokens called “$MILES” for loyalty and travel behavior that customers can exchange for rewards, but at the same time, they may offer the “$MILES” on cryptocurrency exchanges and allow them to be traded for other cryptocurrencies or fiat currencies.

Non-fungible token loyalty programs:

A non-fungible token (NFT) loyalty program is a type of web3 loyalty program that uses unique tokens to reward customer loyalty. NFTs are one-of-a-kind tokens, each of which has its own unique characteristics and inherent value. In this scenario of a web3 loyalty program, customers either hold a dynamic NFT (dNFT) that “levels up” the longer they remain loyal, or they receive NFTs for specific behaviors.

In sub-scenario one, the loyalty asset itself is tradable even as it grows in value. You can imagine a frequent flyer pass that is tradable with other users but still increases in value/status as rewards and perks are collected.

In sub-scenario two, certain behaviors are rewarded with specific NFTs, with more valuable/loyal behaviors earning more valuable NFTs. An example of this model is Starbucks Odyssey. In this program, users go on so-called “journeys,” during which they can collect digital collectibles in the form of NFTs that unlock digital, physical, and experiential benefits or that can be traded on a program exchange. In both scenarios, the NFTs can still be used to reward loyalty with brand-specific benefits, or the asset itself can be sold, like in the fungible scenario.

Benefits for companies and consumers

Web3 loyalty programs offer several benefits to both consumers and companies.

Benefits for customers:

  • Ownership and engagement: Traditional loyalty programs often rely on centralized systems to track and manage customer points and rewards. This means that customers don’t truly own or control these assets. In contrast, web3 loyalty programs utilize blockchain technology to create unique NFTs or loyalty tokens that are owned and controlled by the customer. This increased sense of ownership can lead to greater engagement and loyalty from customers. Web3 loyalty programs offer customers the ability to track and manage their tokens in a decentralized manner, giving them more control over their rewards and incentives. In addition, the value of these tokens is often tied to the success of the brand, providing customers with the opportunity to share in the financial value that they create through their loyalty to and promotion of the brand. This added incentive can further increase customer loyalty and engagement.
  • Flexibility and choice: In our report Unlocking the metaverse, we paint a picture of the metaverse. One of the defining features of the metaverse we envision is interoperability – the ability for assets to be recognized and used across a variety of services and platforms with the help of blockchain technology. This interoperability extends across the digital and physical worlds, allowing for greater connectivity and flexibility. As access points to the metaverse proliferate, membership and loyalty NFTs can be verified and recognized in more and more locations, both online and offline. This means that companies don’t have to worry about creating complex integrations with third-party websites or physical partner locations. Instead, they can offer rewards and perks across partnerships in the digital and physical worlds, and access to these can be easily verified through the interoperability of the blockchain. This opens up entirely new possibilities for loyalty rewards and experiences and allows brands to extend engagement beyond their traditional touchpoints.

Benefits for companies:

  • Cost-effective and efficient: Loyalty programs built on blockchain technology have the potential to be significantly more cost-effective and efficient than traditional loyalty programs. For one thing, the use of blockchain technology can greatly reduce the need for intermediaries, which can save companies money on transaction fees. Additionally, the decentralized nature of blockchain means that data can be stored and shared securely, reducing the need for expensive data storage solutions. The automation of smart contracts on blockchain can also streamline processes and reduce the need for manual labor, further decreasing costs. Finally, the interoperability of blockchain-based loyalty programs allows for greater flexibility and scalability, as they can be easily integrated with a variety of services and platforms. All these factors contribute to the cost-effectiveness and efficiency of loyalty programs built on blockchain technology.
  • Futureproof: Our physical and digital lives are set to become ever-more connected and integrated. This also means that the way we engage with consumers, build communities, and drive loyalty to our brands will likely evolve to combine digital and physical experiences. Web3 loyalty programs enable us to replicate many (if not all) of the features of current loyalty programs with the added benefits of being able to expand features and benefits as the metaverse matures.

Five success factors for a futureproof web3 loyalty program

Web3 loyalty programs offer the potential to revolutionize the way we think about loyalty, but it’s important to approach them with the right mindset. Here are the top five success factors for web3 loyalty programs:

  1. Web3 technology should be seen as a value enabler, not just a marketing stunt: Simply using web3 or NFTs as a buzzword is not enough to convince consumers to get on board. Instead, it’s important to focus on the clear benefits that web3 loyalty programs can offer to customers. For example, if a loyalty program uses blockchain technology to enable partnership experiences or to trade stamps on exchanges, it’s much more likely to be successful than a program that simply uses web3 as a marketing gimmick.
  2. Loyalty programs should incentivize wanted behaviors across the entire customer journey and beyond: In the past, loyalty programs have typically focused on incentivizing certain behaviors, such as making purchases or referring friends. With web3 technology, it’s possible to take this a step further and reward novel mechanisms of brand interaction enabled by web3 ownership structures. For example, a brand could incentivize customers to participate in online communities and events or create and share content about the brand.
  3. Brands should create partnerships across the digital and physical spaces to take full advantage of the interoperability benefits offered by web3 technology: One of the unique advantages of web3 loyalty programs is their ability to offer a network of interoperable benefits, but this requires brands to build meaningful partnerships with other companies and organizations. For example, a fashion brand could partner with a travel company to offer customers rewards for both fashion purchases and travel bookings.
  4. The process of onboarding customers should be as frictionless as possible while still preserving the benefits of web3 technology, such as decentralized wallet ownership: Setting up a wallet and purchasing native cryptocurrencies can be a daunting process for many people, so it’s important for web3 loyalty programs to make it as easy as possible for customers to get started. At the same time, it’s important to maintain the benefits of web3 technology, such as the ability for customers to own and manage their own digital assets.
  5. It’s important to start exploring options for web3 loyalty programs early and approach the subject with a “build-and-grow” mindset instead of a “wait-and-see” attitude: The metaverse is still developing, and it’s likely that new and innovative ways to use web3 technology in loyalty programs will emerge over time. By approaching web3 loyalty programs with a “build-and-grow” mindset, brands can take advantage of these opportunities as they arise and continuously develop their loyalty programs to meet the changing needs of their customers.

In summary, web3 loyalty programs have the potential to revolutionize the way brands engage with their customers, but it’s important to approach them with a clear focus on value, an eye on the entire customer journey, and a willingness to build partnerships and continuously evolve. By acting on these success factors, brands can create web3 loyalty programs that truly stand out in a crowded market.

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