Loyalty in the Age of Blockchain: Benefits and the Way Forward

In an age where organizations are struggling to maintain a competitive edge, customer loyalty programs could be a key differentiator. Loyalty programs have existed as a marketing/ promotional strategy for many years, and whether we like it or not, most of us are enrolled in some loyalty program or the other. From an organization’s perspective, loyalty programs are one of those key factors, which if implemented correctly, can boost customer retention and acquisition.

The first recorded loyalty scheme was introduced in ancient Egypt, known as the Beer and Bread Tokens, according to Professor Barry Kemp, in Ancient Egypt: Anatomy of a Civilization. These were tokens made of wood and plaster in shapes of beer jugs or breads and awarded to workers for their work and temple time, which could be redeemed at the market for beer, bread, or any other commodity. Some might argue this was a societal exchange system developed due to a lack of fiat currency, but others would contend that is exactly what a loyalty system is - a non-fiat exchange system based on a tokenized currency.

Over the years, many such loyalty systems have taken shape and advanced this concept further. Today, we have several organizations offering their own loyalty programs and platforms, which seek to deliver added value to customers. However, there is a reason why loyalty reward programs across industries are not able to realize their full potential, despite growing so rapidly over the last 20 years or so.

With the proliferation of social media, consumers today want everything instantly. Right from getting their food delivered, to booking an airline ticket, consumers expect all transactions to be instantaneous, and hassle free. According to the 2016 Bond Loyalty Report, out of a randomly selected 280 loyalty programs across industries, the percentage who were active members was higher but still only stuck at 50%; and of those 50%, a full 1/5th had never redeemed their loyalty rewards. Factors like account inactivity, lower redemption rates, time delays, higher maintenance, transaction, and customer acquisition costs also impact customer retention. Customer inactivity on loyalty platforms can prove to be counterproductive since unclaimed rewards are accounted for as liabilities on the company balance sheets. The Loyalty Report further says that loyalty rewards program members who do not make redemptions are 2.7 times more likely to defect from a program and join another.

One solution for this problem is to integrate disparate loyalty programs onto a single platform network. This will minimize the member defection problem, keep maintenance costs low, and will ensure maximum redemption benefits for its members. However, the problem with this solution is having a standard digital infrastructure and consistent obligations to protect competitive proprietary information to each of its partnering organizations.

This is where blockchain comes into play and becomes an ideal remedy for the GenZ loyalty programs.

Benefits of Blockchain within the Loyalty Ecosystem Space

Trustless Distributed Ledger – In order to connect disparate programs within a single platform, there needs to be a standardized network bringing all players to a level playing field. Needless to say, each program will have its own concerns on how this is being achieved, and in ensuring no single program gets the benefit of someone else’s labor. Blockchain’s ability to remain a distributed ledger with smart contracts to ensure the digital facilitation, verification, and enforcement of specific program parameters, ensures that all the partners can carve out their own unique niche within the ecosystem. At the same time, such a network would also allow smaller players to take advantage of economies of scale with minimal investment, by integrating with the network in a modular pattern.

Token Integration – With different loyalty programs come different tokens which have their own respective values within their programs. However, when we connect these programs, the tokens need to interact with each other, determining their value outside of their respective systems. This also means each program would have the ability to control the value of their token in comparison to others, for their own customers on the network. All these opportunities give rise to a new digital token economy which can be well supported by a layered blockchain which not just maintains a healthy balance of transactions, but also supports cryptocurrency integration, thus giving real-world monetary value to the token economy.

Cost Optimization – There is no doubt that maintaining a scaled or scalable loyalty program requires continuous improvements and a steady flow of investment. With a common blockchain network, the cost of maintaining such a solution is distributed and the ROI for the solution remains high compared to having a program in-house. That being said, there’s a high initial set-up cost, assuming that the legacy program might need a big overhaul in order to integrate with such a network. However, the returns can be bundled into 3 main categories – System Management, Transactions and Customer Acquisition. And because blockchain networks are traditionally modular, participants always have the option of maintaining sensitive components of the program in-house, while integrating with the network for others, based on their respective strategic objectives.

Higher Redemption Rates – Organizations with large loyalty programs have millions of dollars stuck in liabilities against unclaimed loyalty points. While such organizations don’t strive for 100% redemption rates, they also do not want unclaimed points to be written-off. Maintaining a well-connected loyalty program within a blockchain loyalty eco-system, organizations can have better redemption rates, thanks to the higher number of partners & vendors their customers would have, to redeem their points against. Such a system would also help organizations minimize on the revenue leakage which happens every year through awards/points expiration.

The Way Forward

Loyalty as a business function is a low-risk endeavor for any organization to experiment with, on an enterprise blockchain network. This is mainly because loyalty is not considered as a core business for large organizations, but rather a strategic value-add to their existing products and services or a marketing objective.

To move towards an enterprise blockchain network, the organization would still need to make some strategic calls in terms of the direction and investment for such a platform -

Build versus Buy - The first major decision that is faced by the organization is to leverage existing infrastructure versus creating their own. Considering the modern competitive age, organizations are getting more and more fragmented and moving towards focused areas of operation. An optimal scenario for organizations would be to partner with technology players who specialize in the blockchain space, to have a plug-n-play solution rather than build the infrastructure from scratch. Large organizations have experimented with building such solutions from scratch in-house, however the return on investment remains low. The exception in this case would be large conglomerates, connecting its multiple businesses under a single umbrella program.

Permissioned versus Permissionless - We have seen many blockchain networks rise in the permissionless space. Networks such as Ethereum are public networks and need to be permissionless, in order to be a decentralized cryptocurrency. However, for multiple loyalty programs to be on a centralized platform, they would need to be in a permissioned network such that the organizations and their customers are able to access the platform while also maintaining the exclusivity which comes with joining a loyalty program. Unlike a permissionless network, users on this platform wouldn't need to mine cryptocurrencies but rather abide by the smart contracts established by their respective organizations, to earn the loyalty rewards. Users would be able to achieve varied degrees of access and controls depending on how those loyalty program tiers have been designed to function within the network.

Multi-Channel Strategy – For an Ecosystem Blockchain network to flourish, organizations will have to rethink their sales and marketing strategies w.r.t loyalty programs, to move away from traditional channels like email and contact centers, towards the ever-evolving sphere of social media. This way, the organizations would be as close to their customers as possible, to help them decide at the right time and with the right offers to redeem their loyalty rewards, thus becoming a truly omni-channel loyalty solution.

To conclude, we know all roads lead to an ecosystem offering in terms of a centralized loyalty platform made possible by a decentralized architecture. Blockchain takes the intermediaries out of systems and distributes trust across the decentralized network to streamline administration and execution of large-scale loyalty solutions. The network can be transparent, near real-time, and would result in considerable cost savings for the parent organization, while maintaining scale. The one thing that can expedite this transformation, is for a critical mass to take the plunge. Even a handful of success stories along with accepted protocols and standards will provide more confidence to larger players to turn their programs around, by greater adoption of blockchain within the loyalty space.

Author: Hardik Roy - Principal Product Manager in the Data & Analytics team, Sabre India