Discover more from Dematerialzd – Web3 for Business
Web3: The Future of Loyalty?
The state of play on Web3 loyalty, including the Web3 loyalty playbook, sector snapshot, actionable take-aways, and what's next.
Today’s deep dive is brought to you by MINTangible – an advanced rights management solution for brands and creators to encode, register and track IP rights and legal terms for NFT tokens. Learn more & grab your free NFT IP cheat sheet→
Loyalty is emerging as a promising application of Web3 technology. Leading brands such as Starbucks, Lufthansa, and Lacoste have recognized this and are beginning to experiment.
Currently, over 45 start-ups are developing loyalty solutions, with some even building entire Web3 marketing platforms. Salesforce and Shopify have launched their own Web3 offerings for brands.
What has prompted some of the biggest brands to experiment with Web3-based loyalty, where do we stand, and what is its potential?
Today we’ll explore:
Why loyalty matters
Loyalty in a nutshell
The evolution of loyalty
Web3 loyalty playbook
Sector snapshot with top brands & start-ups
Let's unravel this.
PS: A warm welcome to our new partner MINTangible. 🙏👇
Concerned or confused about NFT intellectual property?
IP in Web3 is complicated. You cannot afford to get it wrong. Get it right with MINTangible’s NFT IP Cheat Sheet. Includes 7-point IP strategy, an intro NFT IP video course, a fast track IP inventory lists & 70+ curated articles. Plus, a free 15-min consultation with an IP expert.
Why Loyalty Matters
Loyalty is nothing new. In the United States, the concept dates back to the early 1800s when merchants began handing out copper coins that could be redeemed for goods or services on future visits. In the late 19th century, S&H Green Stamps emerged as a popular loyalty points system, maintaining its popularity well into the 1980s.
Loyalty is a tool that businesses use to reward and retain loyal customers. It’s designed to enhance the customer experience and build long-term relationships, ultimately benefiting both the customer and the business.
For almost every business, having loyal customers is better than having non-loyal customers.
No business can make money on customers who are chronic switchers. Loyal customers spend more, more frequently, and for longer. Here are some stats:
Keeping an existing customer is five to 25 times less expensive than than acquiring a new one.
A 5% increase in customer loyalty correlates with a 25% increase in profit.
84% of consumers say they’re more likely to stick with a brand that offers a loyalty program. 3 out of 4 members of top-performing loyalty programs changed their behavior to generate more value for businesses. 64% of them are more likely to purchase more frequently.
86% of loyal customers will recommend a brand.
45% of loyal customers stay loyal, even after a bad experience.
Mature brands derive more than 85% of their growth from their most loyal customers.
McKinsey also estimates that 35% are more likely to prefer the brand over competitors, and 31% are more willing to pay a higher price to stay with the brand.
This is why businesses essentially reward repeated transactions (retention), brand engagement.
Common KPIs to measure the success of a loyalty program are
customer lifetime value (CLTV),
the customer retention rate,
the redemption rate,
and the churn-rate, the percentage of customers who end their relationship with a company in a particular period.1
Another popular KPI is incremental share – the combination of growth in membership and the additional amount spent by members.
In a nutshell, brands with successful loyalty programs have:
more brand equity.
Loyalty in a Nutshell
Irrespective of the type of business, customers often have three options to engage with loyalty programs:
Collect (non-fungible): Collecting unique stamps or tokens
Earn (fungible): Earning generic points, currencies or other rewards
Subscribe: Pay a subscription to be rewarded. This is more akin to “memberships” (e.g. Amazon Prime).
To unlock the following rewards:
Cashback and rebates (immediate value, simplicity)
Points or currencies (flexibility; transferability)
Tiers and status (flexibility, profit from long-term engagement)
Access to exclusive products & experiences (exclusivity, status, brand affection)
According to different studies, customers value rewards that offer instant value, have a level of exclusivity and save them money.2
The Evolution of Loyalty
In the 1990s, brands began partnering with other brands to expand loyalty networks or create entire loyalty ecosystems. This allowed them to offer customers a wider range of rewards and benefits, thus making their programs more competitive.
A prime example was the American Express Membership Miles network. Through this network, participating companies could access Amex's base of affluent members.
Similar networks exist today:
For instance, members of Starbucks Rewards can earn Stars for free drinks and food at Starbucks, and also redeem Stars for Delta Air Lines miles.
Walmart and Paramount Global teamed up so Walmart Plus members can use the Paramount Plus video streaming for free. his partnership helps Walmart Plus compete with services like Amazon Prime while drawing more people to Paramount's streaming service.
For brands, loyalty networks have the following advantages:
Customer reach: Access to a broader, more affluent customer base. Often, partner brands offer complementary products to a similar type of customers.
Targeted marketing: Partner brands can share data on customer spending habits for more precise targeting.
Increased loyalty: Offering a wider range of rewards increases customer value and leads to higher retention.
Customers profit from:
More rewards & value (obviously)
Simplified experience: One program for earning and redeeming various rewards.
For both, a loyalty network becomes a value multiplier: The larger the network of companies, the more value is created.
Loyalty and the demise of third-party cookies
The end of third-party cookies is a big deal for the nearly $1 trillion global advertising industry, as it cuts off access to much of the third-party data. Apple and Google are phasing them out, and new regulation is making them harder to collect.
This forces brands and advertisers to collect first- and zero-party data3 – and loyalty programs can help with that. This is why, in recent years, brands started to experiment with more sophisticated engagement tactics that engage with customers directly.
For example, Sephora uses its membership programs to bring top members together online and offline. They can talk about makeup trends and get early access to new products. Boston Consulting Group says:
We find a growing trend in programs that work to build deeper customer connections through partnerships and communities. These programs can create value for customers that is not tied to the cost of a company’s product offerings. More important, they allow businesses to use first-party customer data in increasingly sophisticated ways.
Often, Web3 folks argue that Web3 is the solution for everything that’s broken in Web2. That’s most often an an exaggeration and requires a more nuanced analysis. That’s the case in loyalty too. Let’s break this down.
What’s working well with Web2 loyalty
Not everyone agrees that Web2 loyalty is broken. 93.1% of companies that measure ROI (return on investment) for their loyalty program have a positive ROI. And some Web2 loyalty programs are wildly successful. Three examples:
Starbucks Rewards, quite possibly today’s most successful loyalty program, has a user-friendly app that gives points for coffee purchases. Customers can swap these points for a free drink. With nearly 31m active members, and a 15% year on year growth in the US in 2023, it's thriving. Starbucks reward members are 5.6 times more likely to visit daily. They can also use their stars at Delta Air Lines, Chase, and American Express partners.
Sephora Beauty Insider is another popular loyalty program, with over 17 million members. Members get points for purchases, which they can redeem for beauty goodies, services, and other perks. They also get the ticket to exclusive offers and events.
Amazon Prime is a subscription-based loyalty program, offers a slew of benefits like free two-day shipping, Prime Video and Music access, along with special discounts. With a massive base of over 200 million members worldwide, it’s a giant in the space.
So, what’s the issue? Why fix something that seems to be working quite well?
⚡️Hit the inbox of 7k+ Web3 & brand leaders👀
Advertise in this newsletter and get your brand in front of thousands of Web3 industry leaders every week. Get in touch today or reply to this email.
What’s not working well with Web2 loyalty
Let’s look at the data:
On average, a consumer in the US joins 18 loyalty programs but actively engages with less than half of them.
A 2021 report by Merkle Loyalty found that 45% of customers felt earning a reward took too long, while 31% thought brands made it hard to earn a reward.
A study by LendingTree shows that the number one reason for customers abandoning a loyalty program is that the rewards aren't worthwhile.
A study by Boston Consulting Group shows that customers want more than financial rewards, e.g. better personalization and community perks. The main reasons for cancelling programs include irrelevant rewards and lack of online community.
Breaking this down, the core challenges of Web2 loyalty solutions are:
Closed ecosystems & lack of value: Most loyalty programs operate in closed ecosystems, which limit rewards and lessen value for customers. I call this a lack of “reward-buyer fit”. Customers often feel the rewards aren’t worth it. Americans rack up about $50 billion in rewards points and miles each year, but 30% go unredeemed. Moreover, GenZ is half as likely as GenX to join a loyalty program, seeking value beyond mere transactions.
Focus on transactional relationships: Many programs reward transactions rather than fostering meaningful, long-term relationships with customers.4 This results in low emotional engagement and poor personalization, making it easy for customers to switch brands.
Scaling challenges: Web2 loyalty programs, operating on a brand's proprietary database, find it hard to establish, maintain, and grow partnership networks. This could be due to outdated infrastructure, tech incompatibility, or lack of resources, among other issues.5
What can Web3 tech bring to the table to fix this? Let’s explore.
Web3: The Future of Loyalty?
Before we jump into what Web3 can actually bring to the table, let’s debunk some common (yet flawed) arguments I’ve come across:
Branding: Argument: "Unique, valuable assets strengthen the brand image."
This holds true as long as rewards include unique, ownable NFTs. Often, however, NFTs are custodial, non-transferable, with limited rights attached to them. If not, the same can be achieved in Web2.
Gamification: Argument: Web3 encourages engagement through gamification, with phrases like “a retailer could offer a digital reward for every purchase made”.
Wait… what? 🤔 Agree, but the same can be achieved with a Web2 loyalty system.
Exclusivity: Argument: Web3 enables you to foster "a sense of exclusivity," which "drives customer loyalty."
Agreed, but why Web3? Soho House, for example, is an exclusive membership loyalty program with 168,000 members managed on a centralized Web2 database. No need for Web3.
Digital experiences: Argument: The next generation of consumers values digital experiences; that’s why with Web3, brands can “meet customers where they are.”
That’s true, but so do other successful digital loyalty activations. SEPHORA’s Beauty Insider program boosts 17m members with a digital community platform.
Nike created a virtual world "Nikeland" in Roblox that generated over 21m visitors).
Reducing costs: Argument: Instead of offering products, services, or cash, Web3 loyalty could allow you to offer experiences or collaborations, thereby reducing costs.
This is partially true, but only at scale. It allows to increase the loyalty margin (more below).
So to answer “Why Web3”, the most important question always is:
What does Web3 tech accomplish Web2 can’t do, on a centralized database, equally well?
A lot. Web3 introduces some unique killer features that could unlock billions in value.
The Web3 paradigm shift
At its core, Web3 introduces a shift towards decentralized trust. It means users no longer need to rely on centralized platforms to store and transact their digital assets; blockchain technology, which is decentralized, open, and transparent, takes care of this.
This shift underpins two fundamental mechanics that lay the groundwork for what Web3 brings to loyalty:
1. Digital ownership, scarcity, and transferability of assets:
Users can control and transact digital assets without the need to trust a third party platform. This enables genuine digital scarcity.
To “own”6 something means I possess it, and someone else doesn’t. It's scarce, exclusive and makes me stand out and unique. It also gives me more agency in the projects, communities and ecosystems I participate in.
Ownership becomes a tool of self-expression, the basis of identity.
2. Wallet centric interaction model:
In Web3, the wallet becomes the user's main point of interaction. It logs transaction records, dApp engagements, and digital assets – data that brands can use to build direct customer relationships. Some believe this could replace cookies, which are facing scrutiny from regulators and tech giants. Tomasz Tunguz, a VC at Redpoint Ventures, notes:
Better than a cookie, the wallet records purchases on-chain and makes them public. Imagine being able to segment and target based on millions of users’ purchasing history in real-time. The wallet architecture also eliminates the opaque sea of intermediaries clouding the ad marketplace. Apps could encode user metadata as an NFT governed by a smart contract that enforces royalties. Data collectors/sellers would be paid seamlessly with each use.
Marc Matthieu, co-founder of Salesforce's Web3 studio, says:
“We think the wallet is the new cookie. It’s gonna be embedded in all the brand’s websites, connecting your wallet. That’s a new data layer.”
These two core mechanics enable new loyalty experiences for brands and consumers that are unique to Web3. Buckle up.
Web3 killer features for loyalty
1. Interoperability at scale
Web3's open, shared data layer (blockchain) paves the way for multi-company rewards, allowing open, permissionless co-branded loyalty programs or loyalty ecosystems with exponentially growing network value. Essentially, brands can accept loyalty reward status and points from other brands through token-gating7, lowering the costs of building loyalty ecosystems significantly.
Example: A luxury sunglass company can offer a 10% discount to all IWC Diamond Hands Club token holders via a token-enabled Shopify store, without needing to coordinate with the Swiss watch manufacturer. This enhances the value of both IWC's loyalty program and its membership tokens, benefiting the IWC, loyalty members, and the sunglass company. This is possible today.
Why unique to Web3: With all Web3 assets on the blockchain, brands can freely use the open, transparent, and permissionless data to token-gate specific wallets.8
Web2 limitations: Brands would need manual agreements, linking their proprietary databases through APIs, a cumbersome and less scalable process compared to the open nature of Web3. Compare this to the open Internet: a webpage can link to any other webpage, building networks of knowledge. If we had to manually ask for permission to link to another webpage, today’s Internet would be much more limited.
2. Personalization & “Loyalty Discrimination”
Both online and offline brand interactions can be tracked through a wallet and on-chain, enabling more effective customer targeting, granular tiering, and direct relationship building with first- and zero-party data.
Example: Breitling could start letting customers mint digital collectibles upon visiting a Breitling store. If a person bought second-hand Breitling watches, Breitling could identify this as a loyal collector (this requires that watches are tied to NFTs on the blockchain). This allows Breitling to track and reward brand interactions that would have otherwise gone unnoticed.
Why unique to Web3: Web3 analytics firms such as Addressable.io, absolute labs, Ethermail, Dialog, Cookie3, Raleon or Spindl connect Web2 and Web3 data, making it possible to tie wallet addresses to Web2 social profiles or email addresses or attribute across Web2/Web3 channels, allowing better targeting. Other start-ups like POAP make it easy to track physical attendance at brand touchpoints.
Web2 limitations: The depreciation of web cookies and rising costs of personalized ads compel brands to seek new customer engagement channels.
3. Transferability, Liquidity & Fraud Prevention:
Customers can trade loyalty rewards on secondary markets, retaining ownership even when switching programs, increasing the value customers could get out of a loyalty program. As customers own and control the assets, this also helps to prevent fraud.9
Example: A Taylor Swift fan who minted proof-of-attendance collectives at multiple Taylor Swift concerts is rewarded with a special meet & greet experience in form of an NFT. Unable to attend, she can sell the NFT on the open market.
Why unique to Web3: Proof-of-attendance tokens enable Taylor Swift to identify who attended multiple events. NFTs are unique and can be freely transferred by the user.
Web2 limitations: Loyalty points and rewards are usually stored in a proprietary database of the brand (in this case the ticket seller). Taylor Swift would have to connect databases from multiple ticket sellers in multiple countries. Plus, customers wouldn’t be able to sell rewards on the open market.
4. Building community & consumer collectives
Owning, collecting, and transacting digital rewards fosters a strong sense of customer connection, long-term engagement, and buy-in. It also gives customers more agency in the projects, communities and ecosystems they participate in.10
Example: Nike could launch sneaker co-creation challenges with its community. Creators own their digital creations and earn a royalty fee on sales of real sneaker replicas. In fact, Nike is already doing that with its .SWOOSH platform. Read the full case study here.
Why unique to Web3: Users have full control over assets in their wallets, allowing brands to introduce new incentivization mechanics, such as progressive, gamified experiences (cf. Starbucks Odyssey)11
Web2 limitation: While loyalty communities and gamification strategies exist in Web2, Web3 enhances these efforts by adding a layer of ownership and identity.
Sector Snapshot: Web3 Loyalty Start-ups
The customer loyalty management market is valued at over $5.5bn and is expected to surpass $24bn by the end of 2028. Currently, there are over 45+ start-ups building on Web3 enabled loyalty applications aiming to capture some of that market.
Four focus areas: 70% pure loyalty (collect, reward, incentivise), 20% community building and 5% infrastructure (providing tools), 5% CRMs (managing relationships).
All of them cover different stages of the conversion funnel.
Sector Snapshot: Brands Building in Web3 Loyalty
Below just a few snapshot of brands that are experimenting with Web3 loyalty.
KIKI World, a direct-to-consumer beauty brand, gives power to its community by allowing members to vote on products for production. They've added NFC chips to their pen caps, which, when paired with a smartphone app, give points to members each time used. With over 5,000 members, points are also earned through voting on upcoming products and engaging with email marketing. KIKI has plans for on-chain revenue sharing for creators down the line.
The Singapore-based KaiKai app by Cosmose, introduced a crypto-based cash-back and rewards feature this summer, blending shopping with entertainment and rewards. Users earn cryptocurrency rewards, dubbed “Kai-Chings,” through purchases and app interactions. Serving as currency within KaiKai’s loyalty brand ecosystem, it has grown to be the second most popular Web3 dApp with over 1.6m unique active wallets. There are plans to allow users to transfer Kai-Chings out of the app in the future.
With each purchase from the Alo Yoga Aspen Collection, buyers receive an ownership certificate in the form of NFTs, verifying rarity, authenticity, and ownership. NFT holders gain access to special VIP experiences, a personal trainer at an Alo Wellness Club, entry to an Alo House, and a private client manager for shopping needs.
Starbucks Odyssey is a digital loyalty program, powered by Web3, that rewards members with collectable digital Stamps (NFTs) they can own. These Stamps unlock exclusive experiences, benefits, and merchandise, including virtual espresso martini-making classes, exclusive events and trips to Starbucks roasteries and coffee farms. Additionally, members can buy and sell limited-edition Stamps in the Starbucks Odyssey marketplace. More here.
Earlier this year, German air carrier Lufthansa launched its NFT loyalty program with partner app Uptrip. Passengers scanning their boarding pass in the Uptrip app receive a Polygon-based NFT, which can be stored in a chosen crypto wallet and traded on an integrated marketplace. Collecting rewards unlocks benefits like free on-plane WiFi, lounge access, miles tiers, or partner offerings.
Lacoste rewards Undw3 (Underwater) NFT holders with access to a dedicated web platform hosting creative sessions, contests, video games, and interactive conversations, integrating Web3 technology into its loyalty strategy. The program is intricate, encompassing community rewards, co-creation, and a vision to involve customers in the "creative process."
⚡️Hit the inbox of 7k+ Web3 & brand leaders👀
Advertise in this newsletter and get your brand in front of thousands of Web3 industry leaders every week. Get in touch today or reply to this email.
Takeways For Brand Leaders
Here are my top recommendations for brand leader building in Web3 loyalty:
Play the long game: Use ownership mechanics to add additional real-life utility, gamification, and community elements. This enables customers to engage and progress within your Web3 loyalty journey, creating even more loyalty.
Remove complexity: Aim for mobile-first, seamless cross-channel experiences where membership is synchronized across devices, in-store, and online. Tools like Magic or Web3Auth can simplify the wallet onboarding process.
Partner up: Look for the right technology providers that help you with infrastructure, data management and analytics. This helps you build more personal relationships with your customers and reward them for previously unrewarded actions. I've mentioned most of the leading startups above.
Grow the pie: Actively develop loyalty ecosystems within your brand and through partnerships with complementary brands and communities. Utilize blockchain's open-data layer to your advantage. The value you can unlock with minimal marginal cost per partner is substantial, also reducing the likelihood of consumers switching to other brands.
What’s next: Building for the long-term
Loyalty is set to be supercharged with Web3, allowing brands to shift from transactional to more direct, reciprocal relationships with their customers, moving beyond the diminishing utility of cookies. Ana Andjelic says:
There are no shortcuts when building a brand relationship with customers. […] Brands realized that it is much more valuable and cost-effective to add value to existing customers, rather than to compete for the low-quality new ones through price and discounts.
I foresee that the most successful loyalty programs in the future will offer more than just immediate, transactional value to consumers.
They will be entrenched in an open, competitive loyalty rewards ecosystem, amplifying the value for both brands and consumers. Thanks to digital ownership, rewards will also act as conduits of culture and identity.
They will turn consumers into active participants, cultivating a sense of belonging and agency, and ultimately making them owners of the value they generate.
The best brands will link loyalty to the cultivation of brand culture, with co-creation and ownership built in.
PS: If this was helpful, please share it with your community or consider pledging a future subscription! 🙏 This helps in growing dematerialzd.xyz further.
Thanks for reading Dematerialzd – Web3 for Brands! Subscribe for free to receive new posts and support my work.
The Future of Web3 Loyalty, Reddit for Business, Salesforce, Media.Monks, Polygon Link
Loyalty Guide, Co:Create Link
Web3 Opens New Paths to Customer Loyalty, Boston Consulting Group Link
Web3 for Memberships & Loyalty rewards, Polygon Link
The ROI on Web3 Loyalty, Flaunt Link
Winning in Loyalty, McKinsey & Company Link
Transforming Customer Loyalty with Joe O'Rourke, Forum3 Link
Web3 Loyalty Programs, Radeon Link
The Future of Loyalty with Web3, Dehidden Link
Web3 Loyalty Rewards, Superteam Link
Leveraging the Loyalty Margin, Boston Consulting Group Link
Global Customer Loyalty Report, 2022, Antavo Link
NFTs as Cookie Alternatives, Block.co Link
What's Better than a Cookie? A Wallet - How Crypto Will Revolutionize Marketing, Tomasz Tunguz Link
Loyalty Programs Need Next-Generation Design, Boston Consulting Group Link
The Wallet-Centric Customer Experience Stack, Ben Basche Link
Do Rewards Really Create Loyalty? Harvard Business Review Link
The demise of third-party cookies and identifiers, McKinsey & Company Link
Web3 Research Report: A New Paradigm for Brand Engagement, Permission Link
Web3 Attribution: How to Use It to Market Your Web3 Product, Nathan Snell Link
Additionally, a Capgemini study reveals that 63% of consumers like loyalty programmes that get them first access to goods and services.
Lastly, a study by Merkle indicates that 65% of customers desire free goods, while 79% of respondents prefer straightforward discounts.
First- and zero-party data are types of data collected from users, which are critical in online advertising for understanding and engaging audiences. Here’s a brief explanation:
First-Party Data: This is data collected directly from your audience or customers with their knowledge and consent. It includes data from behaviors, actions, or interests demonstrated across your website or app. Examples include data from purchase histories, site usage analytics, and email subscriptions. It's reliable and accurate because it comes directly from the source.
Zero-Party Data: Zero-party data is information that users willingly share with brands. It could be survey responses, preference center data, or social media profile information. Unlike first-party data, zero-party data is explicitly provided by users, often in exchange for better personalization or other incentives.
Tareq Nazlawy, from Science Magic Studio, explained this as “connecting to a group of people I wanna spend time with, versus something which is convenient to me not to switch from”.
“Owning” is not used in the legal sense. What Web3 natives mean with “owning” an NFT is: You hold the private key of the wallet in which the NFT is stored.
What lawyers mean with “owning” an NFT: It depends. In most cases, you don’t actually own anything. And if you do, it’s complicated. ,
“Token-gating” means restricting access to certain experiences, products or services to users based on NFTs / tokens they hold in their wallets.
In the Web3 loyalty space it’s usually either Ethereum or Polygon.
According to a study by BCG, the majority of consumers showed interest in being part of an online community or membership, with up to 54% indicating access to utility and real-world benefits as a primary reason to join. 87% of US Gen Zers plan to join a premium loyalty program, more than every other generation.
With Starbucks Odyssey members can participate in "journeys," which involve interactive games and fun challenges designed to deepen their knowledge of coffee and Starbucks.