Benefits of blockchain-based Customer Loyalty Programs

The potential of customer loyalty programs is often not realized

Customer loyalty and customer engagement can have a decisive impact on business success, depending on the business model. For example, according to a study, nearly 70% of respondents said they would spend more to capture desirable customer loyalty value.  As many as 80% of respondents in the same study said that customer-focused programs are critical for them to remain loyal to a brand. Accordingly, customer loyalty programs are treated as strategic investments, which is why spending on them increases every year.

Unfortunately, however, in practice the opportunities are often underutilized. For example, less than a third of respondents feel loyal to a brand, while only 21% of companies claim that their customers are loyal to them. In the U.S., each consumer participates in an average of 17 loyalty programs but is actually active in only 7.

Another statistic confirms that with such a low usage rate of active users, companies are losing about $90 billion in value. The total value of loyalty rewards in 2021 was $180 billion. So with an inactivity rate of 54%, just over half has been lost. Also alarming is that inactive rewards program customers are three times more likely to switch brands.

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The main problems why loyalty programs often fail to reach their full potential can be boiled down to three points:

Lack of Strategy
Often, customer loyalty programs are not aligned with customer needs. As a result, customers do not use them to the extent expected, customer loyalty does not increase excessively as a result, and companies incur high costs for rewards as well as for operating the program, but the desired goals are not achieved.

Lack of Innovation
The way rewards can be experienced is often no different from the competition. For this reason, many customers see no valid reason why they should choose one loyalty program over another. The resulting touchpoints with the company, often perceived negatively, are anything but good for the overall brand experience. The thrive for change is there and requires a modernization of customer loyalty programs.

Lack of Engagement
Often, both the rewards and usability of a loyalty program do not provide the necessary incentives for consumers to use it consistently. This is exacerbated by a lack of clarity and, in the worst cases, leads to a decline in customer loyalty.

How is an NFT-based solution different from traditional programs?

NFTs and blockchain technology in general offer the opportunity to significantly improve the adoption of loyalty programs. This is based on three different pillars, which are explained in more detail below.

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Reduce costs

In the first step, the technology's characteristics offer the possibility to reduce costs. Despite the fundamental changes it offers, the blockchain is not initially a replacement for an existing system in this regard, but acts much more as an intermediary. The underlying smart contracts enable automated transactions between existing legacy systems without the need to build a common infrastructure between different organizations. The sensitive, personal data of an existing reward program can continue to be stored internally, as it is not necessary for an additive blockchain application.

These fundamentals enable significant savings in three areas: IT systems, transactions, and customer engagement. In addition to the aforementioned savings for IT systems, transactions between IT systems become transparent and tamper-proof using blockchain. This leads to less effort being spent on correcting errors and misuse, but as a result, the minimum number at which customers can redeem points can also be lowered. Customers can therefore redeem points more easily and quickly, which leads to an increase in revenue transactions and thus a reduction in the cost per transaction. Rewards are thus used more wisely and the ratio of funds spent to customer loyalty achieved increases.

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Enabling an innovative and seamless experience

To give customers an experience of exclusivity and innovation when using a loyalty program, a so-called token gate is a good idea. This is an area on a website or in an app that can only be accessed by owners of a specific NFT. Behind it, for example, can be exclusive content, access to events or to exclusive products. This makes customers feel valued, the nature of the experience is new, and it can be targeted to customer preferences.

Another aspect of improving the user experience is that different rewards or points programs can cooperate with each other through the mediation function of the blockchain. In doing so, companies use smart contracts to decide how their rewards or bonus points relate to each other, and where and with whom they can be redeemed.

For example, bonus points can be deposited in a central location for the first time for the end customer. All points are stored in an application and can be exchanged for each other, combined with each other or even traded with other customers. The benefits of any customer loyalty program increase enormously as a result, and the user experience becomes seamless. A concrete application example of this is described below.

The decentralized structure of the blockchain thus makes it possible to add or remove partners in such a customer loyalty network very quickly and cost-effectively. At the same time, the underlying protocols ensure that governance and the defined rules are always adhered to when exchanging tokens.

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Creating new and unique business opportunities

A blockchain-based customer loyalty network offers many opportunities to develop new offerings or expand existing offerings.  Initially, large companies with well-developed customer loyalty programs will participate and offer their value-added offerings. However, other, smaller companies in the value chain will quickly be invited to participate as this leads to mutual benefits.

For example, a bank may offer a business customer, a retailer, to join the entire network. The retailer, which previously did not have a large loyalty program, now has the opportunity to offer its customers loyalty points that can be redeemed in a larger network. The bank provides an additional service to its customer, increasing the lock-in effect, and the network gains another vendor that can interact with other loyalty programs it didn't have access to before. The whole thing can be extended to the local restaurant, which gets more customers because tourists can redeem their hotel's bonus points there.

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Areas of application

The following are three potential use cases for blockchain-based customer loyalty programs. These represent only a selection from a wide range of possibilities. For detailed insights or application to your business, feel free to contact us for a no-obligation consultation.

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How retailers engage their customers in the product development process

As described in the introduction, a customer loyalty program is fundamentally only successful if it pays attention to the goals of the company and the needs of the customers. For this reason, the rewards should be selected in an appropriately targeted manner. One way of ensuring this is illustrated by the following example.

A fictitious retail company issues an NFT to its best customers, which is linked to special added values in order to show them the appropriate appreciation.  Part of this is to give them a voice. For this reason, the company creates a survey on new products, the content of the customer loyalty program or other strategically relevant topics.  Participants are thus given the opportunity to influence the development of the brand with which they are already strongly associated, and can thus become brand ambassadors. The company obtains very important information from the immediate target group, which would otherwise have to be bought in poorer quality from a market research company at great expense. The results of these surveys can then be used to optimize the reward system, product development or general further development.

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How organizers retain visitors even after the event is over

As described in our article on "NFT tickets as a customer loyalty tool," tickets in the form of NFTs already offer advantages in principle, as they are forgery-proof, for example, and prevent black market trading. However, when combined with a customer loyalty program, blockchain technology offers additional and significant benefits to address the problem of lack of innovation, as the following example shows.

A fictional festival organizer is using NFT technology for ticketing its current festivals. This gives buyers access to the festival site, individual concerts, and all other areas to which the ticket category entitles them. After the festival, the tickets currently serve at best as souvenirs. With an NFT ticket, however, it is possible to positively influence customer loyalty even after the festival by adding value. Via a so-called token gate page, holders can access exclusive content that remains hidden from others. This can be, for example, exclusive "Behind the Scences" videos of the stars, high-quality recordings of the performances, discounts for upcoming events or exclusive merchandise that can only be purchased by this customer group. Of course, these measures can be taken not only after the festival, but also during it. For example, it is conceivable that festival visitors could receive additional NFTs at various booths on the festival grounds and thus enjoy food or drink benefits. The three application examples can therefore be excellently combined with each other and are by no means to be regarded as exclusive. In this way, a festival organizer can deliver a much more comprehensive customer experience to its customers without significantly increasing costs. Customer loyalty, on the other hand, grows strongly and the additional touchpoints lead to a significant increase in the repurchase rate.

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How airlines increase the usage rate of their bonus points

Bonus points in the form of fungible tokens offer customers decisive advantages. Not only can these points be redeemed for rewards from the company, but they can also be exchanged between consumers, donated or used in other customer loyalty networks. The following example shows how an airline can take advantage of this benefit.

The customer Niklas books a flight of a fictitious airline, receives bonus points in the form of fungible tokens in his digital wallet after payment and takes this flight a short time later. Once in the new city, Niklas uses his bonus points directly for the local premium shuttle service, as this is part of the airline's customer loyalty network.

After a few days, Niklas meets a friend from his hometown at the hotel. In conversation, it turns out that she urgently needs a flight home. The two agree on a deal. Niklas trades his airline points for his girlfriend's hotel points. She can buy a discounted flight home and Niklas can upgrade his hotel room.

This example shows how added value can be generated through the use of fungible tokens. Both the airline and the hotel have gained satisfied new customers, customer loyalty programs have been exhausted, and the accruals for the bonus points issued can be released. The probability that Niklas and his girlfriend will remain customers of these brands in the future and adjust their purchasing behavior to continue benefiting from these bonus points is 80%, according to Loyalty Report 2021.

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Jump-start with the Discovery Workshop

Before implementing such a project, however, a well thought-out concept that is optimally aligned with your company's business goals as well as its target group is essential for success. For this purpose, we recommend a Discovery Workshop, which on the one hand imparts knowledge in the field of NFT, Metaverse, Blockchain and Web3 and on the other hand outlines a first project idea in a joint session. You are welcome to use the contact form below to arrange an initial, non-binding consultation with us. We look forward to your inquiry!