Tokenized Loyalty Programs

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Loyalty programs have long been a popular way for businesses to reward their most loyal customers and encourage repeat business. Many of these programs involve earning points or rewards for making purchases, which can then be redeemed for discounts, free products, or other perks. In recent years, however, some companies have started to explore the use of tokenized loyalty programs (hereout labeled TLPs), which use digital tokens and collectibles instead of traditional points to represent rewards. These tokens are blockchain validated assets, allowing for a new realm of innovation for marketers to experiment with. In this article, we'll take a closer look at the benefits of TLPs for both businesses and customers, and explore the potential future of this innovative approach to customer loyalty.

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TLP Overview

The concepts used in TLPs should be quite familiar to both brands and consumers, as loyalty and rewards programs have been around for decades. There are, however, a few key differences.The tokens used in TLPs can be stored in a digital wallet, either a branded custodial wallet or a non-branded non-custodial wallet, and easily transferred or traded in both closed and open marketplaces, much like cryptocurrencies. This can give customers greater flexibility and control over their rewards, as they can choose if, when and how to redeem them. TLPs also have the potential to offer increased security, as the use of blockchain technology can make it more difficult for rewards to be fraudulently earned or redeemed.

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In addition, TLPs can allow customers to use their rewards in a branded marketplace or open marketplace, potentially gaining additional benefits through the resale of their tokens. This can act as a driver for customer reengagement, as customers may be more likely to continue participating in a loyalty program if they see the value of their rewards increasing through resale. This can also enable affiliate or partner brands to more easily integrate their own tokenized rewards programs into a brand's TLP. Traditional loyalty programs have also experimented with resale, such as airline loyalty programs that allow customers to redeem miles for flights with partner airlines. However, the use of tokens in a digital marketplace offers a more seamless and secure way to facilitate resale. TLPs offer a more flexible and secure alternative that can benefit both businesses and customers.

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Benefits for businesses

TLPs can offer a number of benefits for businesses over traditional loyalty programs.

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Analytics and personalization

TLPs can also enable businesses to more easily track and analyze customer data, as the use of digital tokens can facilitate the collection of real-time data on customer behavior and preferences. With non-custodial wallets, businesses can even access on-chain data to gain insights into other purchases made from a customer's wallet or other loyalty programs in which a customer is participating. This can help businesses tailor their loyalty programs and marketing efforts to better meet the needs and interests of their customers.

Partnerships and affiliates

Through the use of TLPs, brands businesses can collaborate with other companies, organizations and communities to create joint rewards initiatives or cross-promotional opportunities. For example, a loyalty program could offer customers the opportunity to earn tokens that can be redeemed for rewards from multiple brands or partners. The major advantage of partnerships in comparison to how they’ve traditionally been run in loyalty programs is not just that you can collaborate with other entities, but that you can build these partnerships without any integrations, something that is typically cumbersome and costly. There is also no need to share any customer data between the two partners given the decentralized nature of non-custodial wallets.

Earned awareness

TLPs can enable businesses to create rewards that are tied to social media or other online communities. For example, a loyalty program could offer customers tokens that are earned or redeemed based on their social media activity or influence. This could create a more social and engaging loyalty program and give a business a way to collect additional consumer data for accounts tied to wallets.
Fraud and security improvement

Another advantage is the ability to reduce fraud, as the use of blockchain technology can make it more difficult for rewards to be fraudulently earned or redeemed. For businesses, the use of blockchain technology can help protect against data breaches and unauthorized access to customer data. For customers, the use of a digital wallet can provide an additional layer of security to protect their rewards. By using a wallet that sits separate from users PII that is typically hosted in a businesses’ centralized database, reward security is in the hands of the customer rather than the business.

*Loyalty fraud accounted for 27% of all fraud attempts experienced by online merchants in 2021 according to* *Statista*.

Benefits for customers‍

The perks of TPLs aren’t just a one way street. For customers, value from TLPs can be added in the following ways:

Gamification and social engagement

This new form of program can offer customers the opportunity to engage in gamified experiences, such as loyalty program challenges or competitions. This can make the loyalty program more fun and engaging for the customer, especially if the rewards for completing these challenges are of high value. They can also give customers the opportunity to connect and interact with other loyalty program members, through features such as social leaderboards or referral programs. This can make the loyalty program more social and engaging for the customer, and build a community rather than just a customer base.
Rarity and exclusivity

TLPs can offer customers the opportunity to earn rare and unique rewards that are not available to the general public. These rewards could be scarce or one-of-a-kind items, or they could have special traits or characteristics that make them highly desirable. This can increase the value and perceived exclusivity of the rewards for the customer. For example, a TLP could offer customers the opportunity to redeem tokens for limited edition products, VIP experiences, or other rare and unique rewards.
Transparency

The use of blockchain technology can enable the creation of transparent and objective rules and criteria for earning and redeeming rewards. This can help ensure that the loyalty program is perceived as fair and equitable by all participants.
Physical activations

Benefits from loyalty programs don't just have to come from purchases. TLPs can enable customers to earn rewards through a wide range of activities, both online and in the physical world. For example, a loyalty program could offer customers the opportunity to earn rewards by participating in certain in-person events or activities, such as attending a concert or trade show, or visiting a physical store or location. These rewards could be in the form of digital tokens, such as POAPs (Proof of Attendance Protocols), which can be easily tracked and redeemed through a digital wallet.

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TLPs Role in the Broader Adoption of Digital Currencies

TLPs have the potential to play a significant role in the adoption of digital currencies and blockchain technology. By offering customers the opportunity to earn and redeem rewards in the form of digital tokens, businesses can introduce customers to the concept of digital currencies and the benefits of using them. This can help educate and familiarize customers with the use of digital currencies, which can in turn encourage broader adoption of these technologies.

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In the future, it is possible that TLPs could become more widespread and integrated with other digital currency and blockchain applications. For example, TLPs could potentially be used to create decentralized marketplaces for the buying and selling of goods and services using digital currencies. This can further drive adoption of digital currencies and blockchain technology, as customers become more comfortable with these technologies and see the benefits they offer.

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Potential Tax Implications

‍In the US, the Internal Revenue Service (IRS) considers the exchange of tokens for goods or services to be a taxable event, unless the tokens are classified as a "non-taxable coupon." This means that businesses that offer TLPs may be required to report and pay taxes on the value of the tokens redeemed by customers. Businesses that offer TLPs in the US should carefully consider the tax implications of their programs and seek guidance from a tax professional to ensure compliance.

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Stu Richards (aka Meta Mike) leads Partner Success at GigLabs and has a passion for contributing to the education and enablement of the open metaverse. Gigantik is an end-to-end web3 engagement platform and marketplace provider built for enterprise brands. It empowers marketing teams to own the experience of creating, selling, and distributing NFTs while enabling them to generate repeatable customer loyalty campaigns and activations using built-in utility tools. Gigantik provides a seamless end-user experience and onboarding using credit card and wallet integrations.

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