Web3 is a Loyalty Program (and You Should be Excited)

Here are 3 facts most people don’t know about Starbucks:

• Starbucks generated $33B in gross revenue from 33,000 stores globally in 2023
• Starbucks sells 8 million cups of coffee every day, on average
• 20% of Starbucks customers visit a Starbucks over 16x per month

How does it make sense that Starbucks, a multinational corporation that sells a commodity (coffee) with cheaper and higher quality, readily-available substitutes, has one of the most loyal customer bases in the world? And why is Starbucks, of all companies, investing in a blockchain-enabled version of Starbucks Rewards called Starbucks Odyssey?

Starbucks recognizes its business success is rooted in customer loyalty. For Starbucks, loyalty lies less in the coffee itself and more in the customer relationships managed through Starbucks Rewards:

• 50% of Starbucks customers are members of Starbucks loyalty program, Starbucks Rewards.
• Starbucks Rewards members are 5x more likely to visit a Starbucks than non-members

Over the last few months, the consumer crypto community has taken notice of the importance of loyalty programs and onchain points as Starbucks did back in September 2022 when they announced Starbucks Odyssey. Apps like Rainbow Wallet have launched their own points programs - as app builders, onchain communities, and protocols alike all try to make sense of what the new “points meta” means for them - and what they mean for the future of ERC-20 tokens.

For my first project as a management consultant back in 2018, I was assigned to a team tasked with designing a brand new loyalty program for a major Starbucks competitor. The project required understanding the client’s current program and those of their competitors, building a financial model to project the potential incremental business impact our new recommended program could have over the current one, defining status and badge levels for different customer segments, and understanding the tech stack that makes this whole program possible. And because this all sounded far too easy, we also had to convince thousands of individual franchisee owners to adopt this new program, each of which could choose to opt out.

This experience taught me that loyalty transcends any single department or team, serving as a strategic layer across the entire organization. I also learned different stakeholders held wildly different understandings of the same program, how it worked, and what it was for. But most importantly I learned that people make decisions based on relationships, and that loyalty programs are the relationship language of businesses. To build a successful program requires thoughtful consideration to align intent and objectives.

In short:

• Loyalty programs are relationship management tools measured in points and badges
• Like relationships, loyalty programs are centralized and closed
• Onchain loyalty unlocks new multi-partner ("coalition") programs previously too technically difficult to execute in web2
• It has never been a better time to start building your own loyalty program, and you should be excited

Don’t miss the point, loyalty programs are relationship management tools

The strength of the Starbucks brand is a testament to the deep relationship Starbucks customers have with it. This relationship is intentionally cultivated, strengthened, and managed by the Starbucks Rewards program, which is simple enough to understand: Starbucks customers earn “stars” (1 star / $1 spent) when they visit and spend at Starbucks retail stores that they can redeem for rewards - such as free drinks or food items- later on. The “game” of accruing stars to earn a reward creates incentives that nudge the customer to keep visiting Starbucks and achieve that next milestone.

Personalized offers, promo codes, time of day visit star bonuses, and other features that personalize a loyalty program to a customer’s observed preferences help “lift” customer spend so they spend more per visit and “shift” customer visits away from competitors back to Starbucks. All of these bells and whistles are designed to encourage customers to remember, prioritize, and - most importantly - choose to visit Starbucks over its many alternatives.

Sounds obvious, right? Well, at the scale of 8M coffees everyday, even a small change in behavior from a subset of customers can mean tens of thousands of incremental visits from customers who might spend a little bit more than they usually do means millions for Starbucks’ bottom line. Unlike purchasing a home or deciding where to invest your money, we tend to not think long and hard about where to buy our coffee each morning. Our relationship with Starbucks is measured in Stars, and the game of accruing more of them to get the next achievement makes a big difference.

So what?

• Successful loyalty programs are designed by businesses to create and strengthen relationships with their customers by encouraging actions to evolve into habits, and sometimes rituals
• The more personalized a loyalty program is to an individual, the stronger the relationship can become and the faster habits can be built
• Effective loyalty programs must be simple, delightful experiences to the customer, even if they may be complex to execute

Like relationships, loyalty programs are centralized

Points are the inverse of traditional ERC-20 tokens. Comparing Delta SkyMiles (points) to shares of Delta stock ($DAL / token) helps paint the picture:Delta SkyMiles function as the in-game currency of Delta Airlines. SkyMiles are part of a closed system, are (chiefly) earned and redeemed for Delta’s core product - flights, are issued and managed by a central authority (Delta Airlines), cannot be cashed out or sold, have limited transferability to Delta approved partners,, and the dollar value of a Delta Skymile is abstracted/not immediately obvious - but can be calculated.

Delta shares ($DAL) represent shares of ownership in Delta Airlines, the company. These shares are bought and sold freely on the open market for a clear dollar value, and are used as a tool to speculate on Delta’s business.

Let’s compare:

Delta flyers primarily earn SkyMiles when they book flights and as a function of spend. Flyers can redeem these SkyMiles only for free Delta flights or related activities Delta approves of. SkyMiles can be transferred to other flyers, purchased with cash (at a premium), transferred from partner credit card points programs like American Express and Chase or to partner Airlines like AirFrance. This might sound like SkyMiles have deviated substantially from my definition of points, but they remain far more “point” than token”: SkyMiles cannot be cashed out, sold, or swapped for other miles on the open market or used for flights on unapproved partner airlines. Moreover, SkyMiles breaks the points framework only because Delta decides it may, because the SkyMiles program is centralized.

Imagine you are the CEO of Delta Airlines getting pitched the regular ERC-20 $DELTA tokens to replace Delta SkyMiles points. Here’s how that pitch might go:

“Here’s the idea: $DELTA are still earned for flying with us, but anyone can just buy them at the fair market value. $DELTA can also be redeemed or swapped to any currency, so you can use them anywhere, for anything! The $DELTA holders can decide what the tokens can be redeemed for, which may or may not include Delta flights. The price of $DELTA will fluctuate based on speculation and arbitrage opportunities to get better deals on flights, and many who hold $DELTA will know nothing about our airline or have ever flown with us. Oh and our competitors can easily figure out who our biggest customers are and try to steal them!*”

The distinction between points and tokens has important implications and should be taken seriously by anyone considering launching (or holding) a point of their own. Regulatory scrutiny of tokens as securities and points “breakage” - the financial liability of points that expire and can be recognized and revenue on the P&L - are extremely important to understand and investigate, ideally before a new point system is launched.

So what?

• Points are the inverse of traditional ERC-20 tokens
• Different loyalty programs adhere to the points vs. tokens framework to varying degrees, but deviations are decided by the central authority operating the program (meaning they can change over time)
• Understanding the difference between points and tokens involves serious financial and legal considerations

The blockchain does loyalty programs better

Hosting a loyalty program onchain drastically simplifies the tech stack needed to make loyalty programs work. Most of the technical infrastructure powering modern retail experiences are built on archaic, twenty-year old systems held together by digital duct tape. Ensuring these programs remain a delightful customer experience is critical - the world’s greatest loyalty program built on unreliable tech can actually destroy the relationships it was designed to strengthen if the tech does not work when the customer needs it to.

The technical complexity required to make one traditional loyalty program work is tough, now imagine how hard collaborations across programs can be to execute. For example, Delta has a partnership with Lyft that allows Lyft riders to earn Delta miles. Makes sense right? People take Lyfts to and from the airport, it’s a no brainer! In fact, this partnership is so obvious you might expect every major airline to have a partnership with every ride share app… and yet we don’t see them. The technical complexity of a web2 loyalty program is certainly a contributing factor.

Imagine if every company shared a single database that tracked the activity and movement for anyone to read from and you start to see how onchain loyalty programs create new technical efficiencies. The blockchain helps reduce the “technical debt” created by large corporations with archaic technical infrastructures by providing a shared source of truth. This means if Starbucks Rewards are onchain, more collaborations and partnership between Starbucks and other companies where Starbucks customers also spend at - like retail stores, gas stations, movie theaters, shopping malls, ecommerce, and restaurants - could all recognize and partner with Starbucks, via the Starbucks Rewards program, far more easily. But why is this valuable for Starbucks?

The blockchain is a big deal for Starbucks and its customers because it expands the menu of rewards Starbucks Stars can be redeemed for without changing how Stars can be earned. Hypothetically, if Starbucks knows that 20% of its customers are females under age 30 who like to shop at Macy’s, Starbucks can partner with Macy’s and allow customers to redeem Stars for discounts on select items in the women’s department at Macy’s. If you are the CEO of Starbucks, you might consider:

• How many visits do we stand to lose by allowing customers to redeem Stars outside a Starbucks?
• How many visits do we stand to gain by adding utility and increasing demand for Starbucks Stars?
• How strategically valuable will a partnership with Macy’s be in helping deepen our long-term relationship with the 20% of our customer base who are females under 30?

Should you decide the Macy’s partnership, or any partnership, is strategically worthwhile, then having points onchain simplifies this partnership, technically speaking.

So what?

• The blockchain can reduce technical debt that inhibits or delays cross-program partnerships by creating an open, shared database of onchain data
• The right coalition points programs have the potential to become valuable engagement and rewards networks with a loyal user base
• Loyalty programs will play a major role in defining, measuring, and cultivating onchain relationships

Onchain loyalty season is here already

I believe onchain loyalty has the opportunity to become a first-point-of-entry for an entirely new cohort of users to onboard to web3 by providing immediate value that users care about.

Below are 3 onchain loyalty products I have really enjoyed because they "just work" and help measure and strengthen relationships I actually value - the places I eat (Blackbird), the creators I follow (P00LS), brands I love (Kalder), and people I read (T2).

Blackbird - Diner/Restaurant Relationships

A few weeks ago I tapped into Blackbird via NFT chip at Nami Nori in Williamsburg. I now have a personalized mini-loyalty program with the restaurant, tracked and displayed pleasantly in-app. Look, I earned a reward -a "surprise gift" - for my next visit to Nami Nori.

P00LS - Creator / Fan Relationships

I regularly earn points from my favorite creators thanks to P00LS for things I already do - like engaging with them on onchain social tools like Lens and friend.tech. Creators can use their own point programs to define and measure strengths of fan relationships by measuring the onchain activities that matter to creators and their fans.

Kalder - Brand / Customer Relationships

Kalder has the most productized loyalty program builder I have seen so far. The breadth of earn and redeem activities and choices is impressive and the website design is elegant and customizable so brands like Godiva can reward their members for participating in different "experiences" to earn points

T2 - Writers / Readers Relationships

As you read this piece, you are actually earning time points ("t.p.") from T2. T2 is a publishing platform that enables writers to measure and strengthen relationships with readers by proving attention and engagement with a piece - by reading, commenting, or engaging with it. Writers can only post to different "territories" or groups if they hold enough t.p themselves to quality to join. To publish this piece to the t/web3 territory, I actually had to go read and engage with more articles on T2 to earn 3 more t.p. to post to the t/web3 territory!

As a writer, I want to find out which territories host readers with the most t.p. so my work can be discovered and read by high quality readers and writers alike.

If you made it this far, you earned all the eligible t.p available for this piece and have gotten a taste of how web3 really is a loyalty program.

Cheers,

bradobradley