January 2023

Key Insights for this month in Digital Assets : Future of Customer Loyalty Articles | News | Market Dashboard

Last two years saw an explosion in NFTs. This phenomenon captured not only volumes but also popular imagination. While speculators saw an opportunity to monetise abstract assets, enterprises and brands saw an opportunity to better engage with their existing and new target consumer base. In this month’s newsletter, we do a deep dive into how “brand-NFT trends & road ahead”. This, as per our thesis, is Marketing 2.0.

Consumer brands are slowly realising the potential of blockchain technology and are now looking to try out new, innovative ways to incorporate it into their businesses. Most brands’ initial Web3 initiatives revolved around NFTs, and their first step was to launch their own NFT collections. These early efforts ranged from Budweiser’s Heritage Collection (featuring 1936 unique digital designs of beer cans as digital assets) to Coca-Cola’s digital apparel. Soon fashion brands like Dolce & Gabbana started to use NFTs as digital wearables and took part in the Metaverse Fashion Week in 2022. Nike began making moves in Web3 long before the NFT Summer of 2021, and in 2019, they patented CryptoKicks – their blockchain-compatible sneakers. They then accelerated their push into Web3 by announcing the acquisition of RTFKT, one of the biggest and oldest studios in the Web3 space. Most of these collections performed incredibly from a financial point of view and served as an excellent method to engage their fans and customers. 

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The success of these initial collections, especially that of Nike, has left all major brands wondering what’s next. Brands today are experimenting with the potential of blockchain technology and NFTs beyond profile pictures and digital collectibles for metaverses. One of the most promising areas for Web3 regarding integrations with existing businesses is brand loyalty programs. Ever since Starbucks announced Odyssey, the NFT-based expansion of their existing industry-leading loyalty program, more and more brands across the globe have started to look at Web3 and NFTs as a way to revitalise their existing loyalty programs. This article focuses on the challenges faced by current loyalty programs and explores the various ways in which Web3 can add value to them. 

Loyalty Programs: Current Landscape and Problems

Global marketing spending is at an all-time high and is increasing at an alarming rate for consumer brands across the globe. Consumer acquisition costs have sky-rocketed, and although brands are spending more than ever on acquiring new customers, studies have shown that 26% of marketing budgets are wasted on ineffective channels and strategies. The democratisation of e-commerce infrastructure has led to a boom in new D2C brands competing for the same customers. Moreover, stricter privacy laws have limited the brands’ access to personal customer data leading to speculative marketing campaigns with significantly worse performance. In such market scenarios, brand loyalty has never been more critical.

When brands and their competitors operate on the same e-commerce sites and social media platforms and have similar products and services, they are forced to compete on the one thing their competitors cannot copy: their loyal customers (fans). Loyalty programs help brands retain their most valuable customers, gather important marketing data, and increase referrals. These programs drive repeat purchases and recurring revenues, which builds familiarity, and buying patterns eventually become switching costs. Loyalty programs are an often overlooked area for performance improvement that has been shown to boost customer retention rates.  A study by McKinsey estimated that top-performing loyalty programs could boost revenue from customers by 15% to 25% annually by increasing their purchase frequency, basket size, or both. Brands have realised they must become experts on their most loyal customers to sustain themselves and succeed.

However, there is a clear need for improvement in most existing loyalty programs. On average, customers held over 16 loyalty memberships in 2022, and the activity across these memberships has been extremely underwhelming. Less than 50% of all members who sign up for these programs end up redeeming any of the rewards given to them. Loyalty programs have become increasingly transactional, and with most companies offering similar programs, there is a clear need to develop programs that can deepen the relationship between brands and their customers by aligning values and incentives. Current programs suffer from confusing point systems, poor app quality, and siloed rewards. Moreover, while most customers are willing to participate in loyalty programs, they often get overwhelmed by all the promotions that come their way due to managing multiple memberships, each on a different platform. Customers are becoming increasingly numb to these programs, and brands are forced to explore new ways to engage and retain loyal customers.

Customer Loyalty & Web3

Web3 provides a range of ways to revitalise existing loyalty programs. Branded fungible and Non-fungible tokens can easily replace existing loyalty concepts of points and tiered-membership statuses. NFTs can represent the membership to a brand’s loyalty program, and brands can reward holders with tradable discount coupons, special offers, and token-gated early/limited access to new products/events. Brands can also use these tokens for customer engagement and to make community-based decisions. Promotional campaigns that give customers the right to choose between upcoming product designs or collaborations can easily be carried out using tokenised memberships and can do a great job of developing deep relationships between brands and their core customers. Being programmable, these tokens can then easily be used to track engagement, gamify experiences, and award meaningful rewards and benefits to the most active users.

There are three main advantages of having Web3-based loyalty programs:

  1. Composability: Consistent blockchain standards will enable brands to create joint membership programs with accretive brands. This will be especially useful for large conglomerates that own multiple brands, like the LVMH group, which can use easily interoperable/collaborative membership loyalty programs to boost customer retention and drive cross-sales between subsidiaries. Joint membership programs can also be launched by brands selling different products but targeting the same customer demographics to increase customer retention and acquisition rates. 
  2. Monetisation of Rewards: Token-based rewards will allow customers to decouple rewards from their membership status. Customers can monetise their brand loyalty and sell their rewards to others who may or may not be on different membership tiers. The ability to trade these rewards creates a new customer acquisition channel for the brand, and the ability to profit from rewards also incentivises customers to remain loyal to the brand. 
  3. Superior analytics: On-chain data will allow brands to monitor the popularity of specific rewards to inform future promotions more effectively. Furthermore, when there is more adoption of Web3 and DApps in general, brands can collect more behavioural data about their customers and use those insights to fine-tune their product and marketing strategies.

Even though Web3 can enable several features that cannot be implemented using the current Web2 stack, the success of any Web3-based loyalty program will ultimately end up depending on the brand’s ability to pair real-world utility to their issued tokens. Tokens paired with real-world utilities can bridge the digital and physical worlds. There are several examples of brands already pairing real-world utility to their NFTs that can be extended to the context of loyalty programs and tokenised rewards. Starbucks Odyssey allows members to earn NFTs that unlock access to immersive coffee experiences and benefits. Clinique’s first NFT tied to loyalty in a much more direct way. Instead of selling their NFTs, Clinique gave their existing loyalty program members a chance to receive free products for ten years along with their NFTs by sharing stories of ‘optimism’ on social media. This campaign rewarded membership to the Cliniques membership program and incentivised new customers to sign up. Brands can get creative in leveraging the capabilities enabled by these tokens and can have more flexibility to design significantly more robust programs to reward and engage their most loyal customers meaningfully. 

Conclusion

The personalised nature and community potential of such programs present a new frontier for loyalty programs. The possibilities are endless, and these Web3-enabled features can directly address existing programs’ problems and help complement or completely reshape brands’ current offerings. There are so many mutually beneficial opportunities between brands and their customers that we have no doubt that more firms will soon begin experimenting with Web3 in their loyalty programs. We at Woodstock are incredibly excited to see the creative ways in which brands and entrepreneurs will come together to create the next generation of customer loyalty and engagement programs. 

WOODSTOCK IN THE NEWS

  1. Pranav Sharma, General Partner, and Adam Mastrelli, Partner (US), were in Davos for the World Economic Forum (WEF). The event brought together some of the most influential business, political, and academic leaders to discuss Web3 opportunities for the Indian ecosystem. Read in detail about our Davos experience in the article by Adam himself.

MARKET NEWS

  • As per Electric Capital’s developer report, 2022 saw the highest number of new devs joining Web 3 (almost 3x of 2019). 72% of devs are outside #bitcoin and #ethereum – adding more impetus to our ‘multi-chain’ thesis.
  • Nomura’s digital asset company Laser Digital is still on track to launch its institutional trading platform by the first quarter, pending regulatory approvals.
  • Crypto bank Silvergate is reportedly being probed by the United States Department of Justice fraud unit over its involvement with the bankrupt FTX exchange and its affiliates.
  • The UK is finalising plans for regulating the crypto sector, moving ahead with plans to make Britain a hub for the industry as it grapples with the fallout from FTX’s collapse.
  • FTX Japan customers will be able to withdraw their funds as of mid-February, the subsidiary of FTX Trading said in a blog post, making them some of the first customers of the collapsed crypto exchange to get their money back.
  • South African grocery retailer Pick n Pay is now accepting Bitcoin in all 1,628 stores following a three-month pilot testing phase in 39 locations. 
  • Finnish company Membrane Finance has released a fully-reserved stablecoin backed by the euro. The company is licensed by the Finnish Financial Supervisory Authority (Fin-FSA) and claims that the new ”EUROe” coin is “the first and only EU-regulated crypto stablecoin.

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