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.
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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
Actionable take-aways
What’s next
Let's unravel this.
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 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 engagement
more revenue
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?
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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.
In fact, 61% of consumers switched some or all of their business from one brand or provider to another in the last year.
Plus, just giving a way free stuff eats into the margins of loyalty programs.
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
With Web3, loyalty can become transparent, participative, and owned by the community. I wrote about this here and here.
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.
Some observations:
A handful of them have a very broad toolset (e.g. SmartMedia Technologies12, Mojito, Co:Create); a handful very basic; most are in-between.
Two approaches: loyalty first, Web3 ready (e.g. Flaunt) vs Web3 native loyalty (e.g. Authic Labs, POAP Studio, Kazm, etc.)
Two categories: Loyalty, which also includes infrastructure providers (e.g. Crossmint) or CRMs (e.g. absolute labs) and community.
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.