Written by Jonny Fry
Writers linkdin: https://www.linkedin.com/in/jonnyfry/

Loyalty programs are a big business, not only as a way to attract customers to repeat purchases but also as a source of valuable revenue. For example, in April 2020, as the COVID-19 pandemic started to impact the world, Hilton Hotels raised $1billion of cash from American Express for its honors program.

Covid also presented JP Morgan with an opportunity to buy the world’s biggest third-party credit card loyalty operator and, in doing so, gave it access to 70 million people who were members of loyalty programs globally. Indeed, loyalty programs are very valuable. Inc.com reported last year that American Airlines generated $6.5billion of “proforma cash sales” in 2019. American Airlines, with a capitalisation of $15billion, was issuing a debt instrument valued at $7billion backed by its loyalty program - AAdvantage. Loyalty programs are both a huge and global business with the market set to expand at a Compound Annual Growth Rate (CAGR) of 13.0% between 2019-2024.

Loyalty management market growth rate by region (2019-2024)

Source: ModorIntelligence.com

The loyalty industry is an ever-growing one given that, in a survey by Smallbizgenius, 75% of consumers said they preferred those companies which offer rewards. Of note, 87% of Americans don’t mind their data being tracked due to the rewards they get from loyalty programs, notably at a point in time when the public is actually wary and critical of how its data is being used. Furthermore, in a study by Bond, 95% of loyalty program members also wished to engage with their brand’s program through new and emerging technologies. This intersection is where loyalty programs can implement Blockchain technology, in the form of NFTs, to help their programs. The role of Blockchain technology and digital assets for loyalty programs is just beginning to unfold. NFTs, powered by Blockchain technology, will undoubtedly change the loyalty industry and already we have seen a number of global brands embracing NFTs as part of their loyalty programs. Three examples include Burger King, Clinique and Marriott Hotels. Unsurprisingly though, there are both merits and challenges that come with the inculcation of NFTs into loyalty programs: 

Merits

• publicity - NFTs have amassed a cult-like following from people all over the world (in part attracted

by FOMO) as prices of some NTFs have risen dramatically, also offering owners of intellectual property (IP) a new way to commercialise their IP. There is no such thing as bad press in marketing; businesses which imbibe Blockchain technology into their loyalty programs should have no time gaining a high number of loyal customers. What’s a loyalty program without loyal customers?

• easy to create - the democratisation of NFTs is one of the features that made it mainstream and this is due to the ease with which NFTs can be created. Companies can then focus time on planning for the longevity of the programs, securing maximum customer engagement whilst ensuring the loyalty programs match their brand identity.

• exclusivity - NFTs, by nature, are unique and scarce and this feature alone will make most participate in loyalty programs. These NFTs are not exclusive for the sake of rarity or merely to create urgency. In the loyalty program, the rarer the NFT, the more the benefits and rewards are attached to them.

• innovative - as stated here, customers wish to have experience with new technologies, and NFTs will make the desire of many come to life. From the monetary and social value of NFTs, they will deliver new experiences within communities of loyalists. This innovation allows brands build loyal communities, and work with other brands whilst primarily rewarding their consumers.

Challenges 

• user-friendliness - Blockchain technology remains a technology which is not fully understood. Often, there is often a lack of awareness and experience in how best to use this technology, let alone NFTs, and this can affect the rate of adoption in the loyalty industry. For this to be overcome, brands need to make their NFTs more user-friendly. This is a problem many new technologies face but, over time, the technology will gain better understanding and corporations will know how best to use it to help achieve their goals. 

• the unpredictability of the market - the average person always hears news of the volatility of NFTs and cryptocurrencies and this poses a large problem for brands hoping to use NFTs (which are, in effect, a subset of the crypto market). To overcome this problem, brands hoping to inculcate the technology should focus on the engagement and community-building side of it. A good example of this is the way in which Louis Vuitton is using NFTs to raise awareness about the technology.

• implementation - for a project to be appreciated, it must be valued by its consumers. Before brands launch their NFTs, they need to dedicate resources so as to ensure their customers see value in what the brands are doing. If not, their project could fail and thus backfire on the image, whereby having a negative impact on the brand’s value. For example, the use of blockchain and the amount of energy it requires to operate could be seen as detrimental to a firm’s Environmental Social Governance (ESG) credentials. Blockchain technology is still evolving and problems are certainly being tackled. For instance, Ethereum 2.0 promises to handle the challenges it has faced over the cost and speed of carrying out transactions on this particular blockchain. Furthermore, environmentalists have voiced concerns about this, proposing that Bitcoin gets rid of its ‘Proof of Work’ in order to handle its energy problem. 

NFTs are already being used by a number of global brands as part of their loyalty programs and the use of smart contracts enables NFTs to be programmable. This means they can operate in a similar fashion to a loyalty program, offering customers access to those exclusive events, special discounts or purchases needing to be used within a specific time limit. Income from initial or secondary NFT sales (similar to royalty revenue from music or films) can then be programmed to be paid automatically to the brand and used to fund additional rewards, thus supporting consumers and enhancing a loyalty program. This offers companies the opportunity to create loyalty programs with a new and more direct method of thanking customers for their loyalty. It also creates an opportunity to build a highly engaged community.