How Web3 Impacts Loyalty and Rewards Programs

Introduction

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Loyalty and rewards programs are not a new phenomenon - they were first created in the 1890s as stamp collection programs. The current model was created by the airline industry through the frequent flyer programs, such as American Airlines’ AAdvantage program that was launched in 1981. 

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With the rise of web3 technologies, traditional loyalty and rewards programs are being adapted for the next generation of internet users. Read on to find out how and why web3 is impacting and changing loyalty and rewards programs.

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What are Loyalty & Rewards Programs?

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Loyalty programs are sponsored by retails and other types of businesses. These programs are designed to offer rewards, discounts and incentives to attract and retain customers for businesses. They try to encourage repeat business by offering customers a reward in exchange for their brand or store loyalty. The more a customer shops at the same merchant, and the more they spend, the more rewards they will receive through this loyalty program.

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Loyalty programs not only benefit companies by rewarding repeat customers, they also help to collect crucial pieces of information on customers and their spending habits or preferences. Loyalty programs are useful in the additional details they can provide on a company’s customers, which can help businesses determine if certain incentives are more effective than others. In general, it’s also more expensive to acquire new customers than to service returning, existing customers.

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Loyalty programs are a massive industry - it was worth $8.6 billion in 2021 and is expected to grow to over $18 billion by 2026. Loyalty programs help companies differentiate themselves from their competitors and are a vital part of a business’ competitive strategy. Major retailers such as Starbucks, Indigo and Tim Hortons all have established customer loyalty programs. 

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How do Loyalty & Rewards Programs Work?

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Loyalty program incentives generally include some or all of these components:

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• Advance notice of new products
• Early access to sales
• Free products or enhanced services
• Free or expedited shipping
• Members-only discounts

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Loyalty programs can either be free for customers, or cost a subscription fee. Customers will be asked to register their personal information with the company to receive a unique identifier (ex. Membership number), which they use in future purchases.

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How is Web3 Changing Loyalty & Rewards Programs?

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Traditional loyalty and rewards programs have many benefits, for businesses and for their customers. But these programs also suffer from a few flaws that can lead to frustrated customers, and reduce their effectiveness and value: 

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• Some programs are so numerous and complex that businesses have been created just to help consumers properly use them. 
• They are walled gardens where the benefits that customers collect often have redemption restrictions that mean the rewards offer little benefit to customers. 
• Customers are locked in and can’t transfer or sell their points to anyone else. They also can’t monetize the reward points they’ve earned because of this closed loop system. 
• Loyalty programs can be indistinguishable between companies and can be purely transactional, instead of building genuine relationships with a brand’s customers. 

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Web3 offers an alternative path forward, using blockchain technology. Blockchain-based loyalty programs can be interoperable across different companies and brands. Customers can use the open system of a blockchain-based loyalty program to monetize their reward points and better interact with other fans of that company. Companies can use blockchain technology to build meaningful connections between their brand and their customers. Customers can have pride in ownership of digital assets associated with their favourite brands. 

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Digital assets, such as non-fungible tokens (NFTs), also allow customers to publicly showcase their brand affinity and status to others. NFTs provide not only a way to deepen the customer relationship but also a platform for peer-to-peer advertising. Loyalty programs based on blockchain technology are also automatically verified, which decreases operational complexity for companies that run these programs. 

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Benefits of Incorporating Web3 into Customer Loyalty Programs:

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1. Customers become brand advocates: digital assets like NFTs allow customers to “own” or “hold” a piece of their favourite brand(s). This sense of ownership strengthens the connection between the brand and customers. Customers feel more engaged and have stronger brand awareness.
2. Loyal customers receive special access: NFTs can be used to easily provide token-gated access to reward a brand’s loyal customers. Holders of specific NFTs can be identified using public blockchain data and offered access to exclusive VIP events or products. Customers receive exclusive treatment to reward them for their connection and support of their favourite companies. 
3. Customers are brought into the co-creation process: customers’ creativity can be tapped into by brands through co-creation opportunities. NFTs can be used to gate these co-creation projects so only proven customers receive an invitation to participate. Companies benefit from having a direct connection to their best customers for product testing, and customers can help to drive product or service strategy in a way that wasn’t possible before. 
4. Customers can showcase their brand affiliations and drive referrals: NFTs can be publicly viewed and displayed to form part of a customer’s digital identity on web3. Public affiliation with a brand can help to drive interest in that brand from the customer’s social circle.

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Ways to Incorporate NFTs into Customer Loyalty Programs:

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1. NFTs are given to customers for specific item purchases to prove product authenticity.
2. NFTs can be earned by customers by completing qualifying actions or exhibiting behaviours that are rewarded (ex. Leaving a review, meeting a spending threshold, visiting a specific store or pop-up event).
3. NFTs can be used as membership passes for special product or service offers.
4. NFTs can be used as a ticket that unlocks access to special events and specific co-creation projects.
5. NFTs can be exchanged for products or services in store.

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The Next Generation of Loyalty & Rewards Programs?

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Starbucks became one of the first companies to leverage NFT technology for loyalty and rewards programs. With almost 29 million members in the US alone, Starbucks Rewards is a staple program that has been a huge success for the company. And now Starbucks is doubling down on its loyalty program by adding web3 technology.

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Starbucks announced in September 2022 that they were integrating web3 technology into their Starbucks Rewards Membership program. This new Starbucks Odyssey experience will offer their members the ability to earn and buy NFTs that will unlock access to new, immersive coffee experiences. They expect that this will enable new ways of engagement with members and employees.

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The Starbucks Odyssey program aims to create a new digital community using NFTs created on the Polygon blockchain. Since Starbucks has always served as a “third place” between customers’ homes and work offices, this new program will extend this feeling into the digital world. NFTs and web3 technology give Starbucks the opportunity to connect customers to each other, and to the Starbucks brand, in a new way. 

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Members will continue to use their Starbucks Rewards login details to access the Starbucks Odyssey program. There will be a series of activities that customers can complete, such as playing interactive games or taking on fun challenges to deepen their knowledge of coffee and Starbucks. As a reward for completing these activities, customers are given collectible NFTs. There will also be limited edition NFTs that customers can purchase through a built-in marketplace within Starbucks Odyssey. These NFTs can be used to unlock unique benefits and never-before-offered experiences (ex. Virtual espresso martini-making class). 

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Starbucks plans to continue to build on Starbucks Odyssey and to create an accessible, digital “third place” community enabled by web3 technologies. 

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Conclusion

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Loyalty customers have been used by businesses for over 40 years to drive engagement and to reward repeat customers. Web3 technology can add new functionality to a brand’s existing loyalty program and help to deepen relationships with loyal customers. There are many use cases for NFTs in loyalty programs, such as membership passes and token-gated access to exclusive events. Some of the world’s largest retailers have already launched their web3 customer loyalty programs, and we are only starting to explore all the possibilities.

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