The Future of Loyalty: How Blockchain is Transforming Customer Engagement

Introduction

In a time when much of crypto has been focused on building new infrastructure and developer tooling, Web3 loyalty programs’ promise has dominated the consumer crypto landscape over the last few years. Loyalty programs have emerged as a potential solution in a world of rising online user acquisition costs and the difficulties of most brands having the resources and storytelling to build vibrant organic communities. This article will discuss the landscape for customer acquisition and retention today, the potential benefits of onchain loyalty programs, and the mismatch between the single-player and multiplayer incentives to create an onchain loyalty program.

How do businesses currently collect customer data and target new customers?

Businesses strive to create the cheapest cost of acquisition and maximise lifetime value. The more data you have about a customer’s profile and preferences, the better you can service the right customer. Existing customer data is always more valuable than prospective customer data, as retaining existing customers is more cost-effective than acquiring new ones.

The amount of customer data a business can collect on existing users always depends on the nature of the product’s distribution and how many touchpoints exist with the end user. In an ideal world, businesses own their product distribution and rely on first-party data such as app usage, storefront data, sales performance, and direct customer feedback. Unfortunately, very few brands can rely on this exclusively, and third parties must give them access to proprietary customer information. These data providers with customer touchpoints include marketplaces, retail distributors, wholesalers, and social media platforms that invest large amounts of money to acquire customer traffic with advertising and retail presence.

On one end of the spectrum, we have brands like Peloton. They own storefronts to sell their products and an app that users use daily, which provides Peloton with data on users’ workouts and feedback to be incorporated into the product.

On the other end of the spectrum, we have Diageo, one of the largest beverage companies in the world, which distributes its products through wholesalers and supermarkets. Without a customer-facing touchpoint, it has no first-party data from its users.

Most brands know very little about end customers and who they are due to how products are distributed — most often, distribution and production are separate. The source of distribution owns user intelligence. Targeted ads are a perfect example of an effective method of targeting customers, especially new ones, but this method has become increasingly complex over the past few years.

To create more customer touchpoints and lower reliance on targeted ads, many brands have started investing in community building and expansive organic marketing campaigns to create direct touchpoints to gather user information. Community building is great, but only the fewest brands have the resources and storytelling needed. Few merchants succeed at building vibrant organic communities and can leverage them to gain valuable customer data. Brands and merchants wanting to own customer data must invest significant time and resources to create effective prog. Most small businesses lack the recurring consumer touchpoints & scale to build this effectively.

Loyalty for a given brand or company in itself can be operated over native apps built by a merchant (if resources permit), a loyalty app provider (Luca.app), a merchant PoS provider (square loyalty) or offline on a stamp card and to the naked eye there doesn’t seem much reason to publish any of these purchases + ownership and its history (from now on: commerce graph) to an open shared ledger.

Why Now

In the past 5 years, online user acquisition costs have increased by 80–200%, leaving many past marketing strategies unfeasible and ineffective in today’s environment. The significant increase in targeted ad cost stems from increased privacy regulations by major platforms, the demise of 3rd party cookies and the loss of a majority of user-level data for a post-iOS 14.5 world. This cost will likely further rise: Apple has tightened up its privacy policies in the past years and has been blocking 3rd-party cookies for years. Google has announced it will replace 3rd party cookies with a more privacy-conscious approach, allowing users to manage their interests and grouping them into cohorts based on similar browsing patterns. Digital marketing is not what it used to be as large platforms tighten their belts and increasingly enforce strict privacy to protect users.

As CAC continues to increase, businesses’ profit margins go down. In a recent report by the Information:

Bello and other upstart consumer brands — including Winc (maker of Summer Water rosé), sneaker brand Allbirds, underwear startup Parade and activewear company Outdoor Voices — had once banked on digital ads on platforms like Facebook and Instagram as a cheap, reliable way to get in front of potential shoppers. But the changes, which limited the ability of social media firms like Meta Platforms to target users, made the ads much less effective. All of a sudden, brands were struggling to grow as rapidly as they had before, despite continuing to spend heavily on ads.

Brands can no longer rely purely on 3rd party platforms as a service provider for customer intelligence (social media, delivery apps, restaurant reservation platforms) due to these increased costs and are faced with the cold reality of having very little customer information at hand without them.

Why are blockchain-based loyalty schemes a good hypothetical solution?

Public Data

Public data exists for every trade, digital item transferred, and every art piece acquired. In the same way a person’s bag and its contents tell you a lot about who they are and what they like, crypto wallets act as a transparent list of people’s transactions and owned items that are a great way to target users and track behaviours without intermediaries. In the trading vertical, companies like Nansen.ai have labelled over 300M+ blockchain addresses across 10+ chains and use this to create a curated graph of top-performing wallets across various assets, labelling and tracking a set of top tastemakers.

Expressed Preferences Onchain

Whilst the onchain data today might be minimal, more interesting data points emerge in various niche collections, communities, and digital goods aggregated on-chain. I can track Porsche aficionados 🏎️ via their NFT collection, high-end French wine lovers via Winechain, foodies in NYC via Blackbird, event attendees via Poap, enthusiastic tennis fans via Fantium, top subreddit members via Reddit Collectibles, and that’s only the beginning.

Each provider has reasons for having this data/collection/item onchain. Still, unbeknownst to them, they’ve created an open data set of niche aficionados without them having coordinated. The blockchain serves as a neutral layer, owned by no one, that serves as a hub for data standardisation with open data and privacy by default that now everyone can use.

As this graph of interactions keeps growing, we can start to do more exciting things with this data and create more collaboration between various customer groups without any coordination between providers. Open data like this allows brands to target ideal customers across existing communities and customers by just searching for relevant wallets.

The Incentive Mismatch in Onchain Loyalty

Data onchain is only as interesting as the user’s activity and the applications they use. Today, only 4% of applications launched onchain are consumer (source: launchcaster). To leverage the collaborative, multiplayer benefits of players putting this data onchain, a single-player incentive must exist for using public data rails.

If we take the extreme case of assuming there is no single-player benefit to building an onchain loyalty program, brands are faced with a classic Prisoner’s Dilemma:

• If both brands build their loyalty programs onchain, their loyalty programs are supercharged with the public data rails of each other’s programs. The brands don’t have to coordinate to leverage each other’s public data rails.
• If one brand builds onchain and the other offchain, the offchain brand can use the onchain data for its gain without opening up its customer data
• If both brands build offchain loyalty programs, the Web2 status quo persists. The brands must coordinate with each other if they wish to collaborate.

If the brands have to coordinate to cooperate, that negates the benefits of building onchain in the first place. The promise of an onchain loyalty program is the ability to leverage the public data rails of complementary brands in a permissionless manner.

Some potential single-player value propositions to building onchain include:

1. Companies putting data onchain to rid themselves of data liability and utilise an existing composable data standard,
2. Digital collectibles and rewards tokens become a consumer norm and have no better alternative to being secured/traded/transferred — onchain There are existing liquidity and marketplaces to plug into
3. Provable bragging rights via a collection of receipts have value for customers independent of brands (e.g. I’m the nr. one customer at my favourite local coffee shop and show this to my friends for bragging rights or my local Nespresso shop for a lovely discount)

Blackbird is an excellent example of an onchain loyalty program leveraging the single-player benefits of building onchain. Blackbird is a web3 loyalty and payments company focused on leveraging the power of direct connectivity between restaurants and their guests. Blockchain is used to abstract the complexity of customer data tracking for restaurants and release FLY loyalty points. In the future, it will be exciting to see how these points can be used and spent across restaurants and how other players can target FLY holders.

Open questions

The above reflects the state of our current thinking on commerce, loyalty and how to leverage the unique properties of blockchains. Some further questions we’re reflecting on internally and building a thesis around include:

• Re-imaging the payment flow/commerce, starting with loyalty
• What payment systems can be built on crypto rails via an initial hook of an onchain loyalty program?
• What can be achieved by adding more granular payment data to loyalty programs? Unlike web2-based payment rails, onchain payment data is widely available and can be leveraged to personalise loyalty experiences further.
• What new business models can emerge from the intersection of onchain loyalty, payments rails and community?
• What are the tradeoffs between seamless onboarding and composability across all multiple loyalty providers?
• How can applications encourage customers to add a broader array of data that is not solely point-of-sale commerce?
• How can we align the single-player incentive of using public data rails for a loyalty program with the multiplayer incentive?

Conclusion

By leveraging open, onchain data, brands can build more transparent, personalised, and interconnected loyalty systems. These programs offer the potential to reduce dependency on third-party platforms, streamline data management, and create deeper customer connections without requiring direct coordination between companies.

However, to unlock the total value of onchain loyalty, brands must navigate the challenges of aligning individual incentives with blockchain’s broader, multiplayer benefits. Companies like Blackbird are already demonstrating how blockchain can provide tangible benefits to both businesses and customers through enhanced data management and innovative loyalty models.

We’re excited for more businesses to explore the possibilities of onchain loyalty, public data and blockchain-based payment rails and the opportunities that arise for new business models and customer experiences. The potential for blockchain in loyalty programs is vast. Still, its success will depend on creating a compelling case for brands to adopt and integrate these technologies into their customer strategies.

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