How blockchain can benefit loyalty programs
Loyalty schemes in every sector are an effective means of building a relationship with existing customers whilst attracting new ones to boost to bottom line. Blockchain could take these consumer programs to the next level.
Customer retention strategies have been in use since the late 18th century when US retailers began to give customers copper tokens with purchases. This paved the way for some of the most well-known schemes, such as Green Shield stamps that could be later redeemed for catalogue products.
An average American household is a member of 29 loyalty programs and a recent research study by the Deloitte Center for Financial Services found that 80% of respondents were much more likely to choose a bank that offered rewards for being a good customer.
With the rise of ecommerce and digital payment infrastructure, smaller players have launched plans to compete with the bigger retailers. But as the number of reward cards in our wallets swell and points are spread across different loyalty programs, an average-spending consumer might not earn enough reward points to be eligible for redemption.
So how do companies get right the balance between encouraging happy customers to stick with them and over-rewarding those who would have purchased anyway?
Current inefficiencies in loyalty schemes
The 2015 Colloquy loyalty census in Canada found that even though loyalty programs grew by 25.5% to 3.3 billion from 2012 to 2014, more than half of the members did not participate in them. It suggested that these schemes were not realizing full potential because of low redemption rates, time delays and high transaction, system management and customer acquisition costs.
In recent years the market for loyalty programs has been changing with a stronger focus on multi-vendor loyalty plans and a redesign towards digital loyalty programs.
According to Ketharaman Swaminathan, founder and CEO of GTM360 Marketing Solutions, the mixed performance of loyalty programs should be attributed to the notorious “too many loyalty programs, too few reward points to redeem” problem caused by the very nature of the programs.
“Over time, this problem dampens consumer enthusiasm and makes them decide future purchases based on price, discounts and other factors – exactly the kind of behaviour supposed to be curbed by loyalty programs.”
He added that blockchain has the potential to help improve adoption of loyalty programs and drive repeat purchase, which is the primary goal of a loyalty program.
Key benefits for loyalty rewards programs
According to a report by Deloitte Center for Financial Services, blockchain technology can help companies realize the full value of customer loyalty programs in five ways:
- Reducing costs: A blockchain-based loyalty rewards program should reduce system management costs with smart contracts that report secure, tracked, transparent transactions to legacy systems, reducing costs associated with errors and fraud.
- Enabling a frictionless system: Through a trustless, decentralized technology solution, blockchain can centralize a customer’s loyalty programs.
- Making the process near real-time: Blockchain can enable a transaction to be recorded and accessed by multiple involved parties in near real time.
- Providing a secure environment: The technology creates an immutable and time-stamped distributed database entry of every single transaction ever made, making each transaction and its record easily traceable, but also rendering them irreversible, preventing double spending, fraud, abuse, and any other type of manipulation of the transactions.
- Creating unique business opportunities: At the onset of building an interlinked loyalty network, large loyalty rewards program providers with well-developed programs will have unique opportunities to offer value-added services to other businesses.
Jeremiah Owyang and Jessica Groopman, industry analysts and founding partners at Kaleido Insights came to similar conclusions in a recent report. They said that companies should consider deploying blockchain for their loyalty program if current partnerships aren’t delivering meaningful business return on investment, are too cumbersome or costly to scale, or if customer loyalty is not growing.
They said blockchain would suit holding companies with multiple disparate brands, products, locations, and systems. It should also appeal to those that are part of a partnership with multiple companies that all share a common loyalty program, but the systems are not well interconnected.
Owyang added: “While private blockchains and branded cryptos are nascent, bleeding edge technologies with limitations, we have to ask: Why is this a budding trend? We see many potential business opportunities.”
He said this includes fraud reduction, loyalty exchange, transferability, more flexibility and lower risk.
Retailer crypto schemes
In February, Japan’s largest retailer announced a blockchain-based loyalty program on which reward points will be issued in the form of an alt-coin called Rakuten Coin. By placing all rewards in single branded token, this solves the problem of fragmentation of reward points across different loyalty programs.
Restaurant group Chanticleer Holdings saw its stock soar by 50% after the company announced that it would be moving its reward programs to the blockchain. The company owns several burger brands and operates a number of Hooters restaurants. It also holds a minority stake in the parent company Hooters of America.
Michael Pruitt, chairman, president and CEO of Chanticleer Holdings, said: “We wanted to expand our existing loyalty program with something that really changes the way our customers can leverage their rewards; Mobivity Merit is real cryptocurrency, leveraging the same infrastructure and principles of Bitcoin, Ethereum, Ripple, Litecoin, and more, and will enable our customers to make use of their rewards in entirely new ways.”
Beverage brand Lattesso also recently formed a partnership with qiibee to help transform its customer loyalty program. According to qiibee, Lattesso will use blockchain technology and cryptocurrencies to power its loyalty program throughout Switzerland, Germany, Austria, the Benelux, and Russia.
Beauty and the blockchain
The beauty sector has also woken up to the benefits of using blockchain and cryptocurrencies for a new type of rewards program. Opu Labs was launched in April and describes itself as “a mobile application that bridges skin care, artificial intelligence and blockchain technology into one ecosystem.”
The platform asks users to submit photos of their faces on the blockchain, which are then analyzed using artificial intelligence so that dermatologists and brands can use them for research. The facial recognition technology start-up has launched its own coin OpuCoin to pay users for submitting photos. The coin can then be used to pay for goods and services on the platform.
Richard Reed, COO of Opu Labs, said: “I think in a not-too-distant future everyone will have the equivalent of a PayPal account with different cryptocurrencies — you will have all these different loyalty programs and points and the crypto incentive is a way to decide if you want to participate and get discounts and services.”
Another platform is Perfect365 that wants to increase its user retention and engagement by using the cryptocurrency Kin – a coin developed by a messaging app firm called Kik last year – to entice its users to take specific actions such as uploading their photos on social media.
Perfect365 hopes to monetize this spending activity with in-app purchases and by taking the engagement numbers to brand partners such as Ipsy, Nudestix and Hot Tools which will then want to advertise or sponsor the platform.
A customer loyalty solution
The Deloitte report concluded that the design of blockchain means it can streamline execution and administration of loyalty rewards programs, giving all participants near-real-time transparency, within the permissioned constraints of the program provider, which taken altogether should result in significant future cost savings.
Other experts have since said that it is only a matter of time before we see blockchain technology applications deliver value to both businesses and customers in the loyalty program space.
According to Swaminathan by harnessing the full capabilities of the blockchain, loyalty programs can delight consumers and that alone “should be benefit enough for brands to embrace the blockchain for their loyalty programs.”