April 6, 2022
Portfolio
Unusual

Loyalty 3.0: Where consumers become owners

Lars Albright
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Loyalty 3.0:  Where consumers become ownersLoyalty 3.0:  Where consumers become owners
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Editor's note: 

In the beginning, loyalty was more about making the consumer jump through hoops than anyone displaying loyalty to anything or anyone. As soon as you’d ‘earned’ that free donut/drink etc, you likely never went back as your account was zeroed out and you were functionally a non-regular once again. Not really a solid foundation of mutual respect and trust, but effective nonetheless in certain cases. 

 

 

Loyalty 2.0 put the controls more in the hands of the consumer — or at least struck a balance of interests between company and consumer. Personalization, enabled by the digitization of everything and the rise of mobile, became a requirement and even table stakes in certain segments. Many of us can’t remember queuing in line for our coffee or anything else. Now it’s in-app, paid with a tokenized card on file, and our points are in our loyalty account before our latte goes cold. It’s a win-win and it works.

 

Done right, Loyalty 2.0 is extremely effective in driving critical business value for an enterprise — establishing customer identity, enabling permission-based data acquisition, influencing consumer behavior, and ultimately establishing deeper and more profitable customer relationships. Notably, the value exchange in the Web2 loyalty context has mostly happened in a closed ecosystem between the sponsor brand and the consumer. Yes, there are efforts to create more open systems through successful coalitions — think partner Airlines and programs like Nectar in the UK — and through points exchanges that have achieved limited traction. But, by and large, the loyalty structure has been controlled by the sponsor brand that unilaterally creates the value and sets the rules of the loyalty “economy”. The consumer gets much better experiences, but the company still holds the majority of the cards.

 

The last wave of loyalty innovation centered around the shift to digital/mobile UX, rewarding both transactions and behavior, while providing better personalization of content, incentives and experiences. Starbucks is a fascinating example of this closed ecosystem at play. They have placed loyalty at the heart of their digital experience, creating a strong community of millions of consumers who use the Starbucks Rewards app daily to make payments and earn benefits. The Starbucks system is so powerful that it is now holding more than $1.6B in stored value assets, more than most banks, across roughly ~24M active accounts (Source: Starbucks/Kevin Johnson). Perhaps most importantly, Starbucks has been able to break through and create an emotional connection with consumers through the rewards application — people want to gain status, they enjoy completing the star-dash challenges, and they get satisfaction by paying with the app and being a part of the larger community. Even with all this success, I believe that Starbucks and other brands will have to adapt and innovate to meet the rising expectations of consumers that will increasingly want more flexible and open ecosystems — enter Web3.

 

The next wave in loyalty is going to be all about the new capabilities Web3 delivers, centered around ownership, interoperability and the portability of value. While the definition of Web3 often varies depending on who you talk to, it’s clear that a digital world with crypto/blockchain functionality at its core has the potential to radically change consumer experience, loyalty program rules and community building. 

 

With the rise of crypto wallets allowing for user authentication into a decentralized peer-to-peer network on the blockchain, the ability now exists for a consumer to have undisputed ownership over a wallet's underlying tokens/NFTs.

 

I’m particularly excited by the introduction of utility-based NFT’s, where the token acts as a digital passport that can access experiences and value inside and outside of a loyalty program. A growing number of brands today are selling NFT’s that come with associated benefits — Nike, Budweiser, Disney etc. — are all taking part in this new offering. Over time, access unlocked by NFT’s will be incorporated into the earning structure of most major loyalty programs and will serve as the validation mechanism to identify when someone is eligible for a certain benefit or incentive. While the crypto wallet and purchase process absolutely needs to be streamlined to drive broader adoption the added benefit of the NFT for authentication is that you get verification and security against fraudulent actors. This is a bigger potential issue for Web2 programs than people want to admit.

 

The interoperable nature of NFT’s makes them redeemable for physical goods, traded for digital items, used to buy digital enhancements in games/metaverse, or access to real-world or digital events. What is so exciting here is that the universe for value has expanded dramatically for the consumer, enabling secure and increasingly easy experiences. Further, in cases where a limited set of NFT’s are available as the popularity of the program grows the NFT value grows as well, allowing consumers to truly have a stake in the success of the community. For brands, this is a new tool in the community-building arsenal and a way to further extend reach and presence. Think back to Starbucks, imagine if you could complete a star-dash challenge and then unlock a special Starbucks utility token that can be redeemed for access to a musical event, or used to get a discount for an online coffee purchase, or redeemable for a collectible piece of digital art, or a “barista badge/token” that gives access to a special reserved brew — the possibilities are endless.  

 

Web3 is already beginning to transform how companies are thinking about consumer loyalty and this wave of innovation will only continue to accelerate. This is great news for brands and consumers alike, as brands will have more power to influence consumer behavior and consumers will be able to capture value that they truly own and can use to enhance their lives. Like any emerging technology, there’s a learning curve and plenty of associated friction in the process. Storing your credit card in-app is now easy. Enabling seamless experiences and transactions in a truly open ecosystem is comparably difficult.

 

I am fascinated to see how companies will leverage these new capabilities, and to connect with the entrepreneurs that are building innovative businesses that will fuel the future of loyalty.

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