Loyal customers are the best customers. Not only do you avoid expensive marketing costs, but targeting this core demographic can drive the bulk of your sales. According to Smile.io, 41% of an eCommerce store’s revenue comes from just 8% of customers, and the top 5% generates 35%.
Little wonder companies turned to platforms like Smile to deliver loyalty points to their customers. However, the shift toward Web3 technologies and tokenomics fundamentally alters how customer loyalty works. It’s not just a technical shift; it’s a new paradigm shaping how customers engage with brands.
Forget loyalty points: it’s all about tokens, NFTs, and crypto. Want to learn more? Read on.
Token Incentives: The Key to Long-Term Engagement?
Tokens are digital assets issued on the blockchain. Normally, these represent a particular fungible asset or utility. Rewarding users with tokens for performing specific actions incentivizes user engagement. Key concepts such as “staking” or “farming” describe different forms of user engagement.
- Staking refers to user participation in a proof-of-stake (PoS) blockchain network. Rather than mining crypto, validators lock up a certain amount of their tokens in the network to help achieve consensus and maintain blockchain security. Staked tokens cannot be spent or sold, reducing token velocity and increasing the value of tokens overall. In return for staking their tokens, participants gain the opportunity to validate transactions, add new blocks to the blockchain, or earn network fees or rewards.
- Farming, on the other hand, (aka yield farming or liquidity mining) involves providing liquidity to a decentralized finance (DeFi) protocol by depositing or “pooling” tokens. Newer than staking, it allows tokens to be used for certain actions. A percentage of the rewards from these actions will go to the yield farmer, although the rate of return is based on market conditions.
By incentivizing individuals to not only hold onto a platform’s tokens but use them to help foster user engagement and loyalty. Indeed, financial compensation encourages a sense of ownership and participation, further enhanced by the voting rights such practices confer.
Utility Tokens vs. Loyalty Points
Most consumers are familiar with loyalty points. Earned by completing transactions on a particular platform, loyalty points can be redeemed for certain goods, services, or privileges.
Utility tokens work in a similar manner. Designed to provide digital access to an application or service, users can unlock certain benefits within the blockchain ecosystem by earning these tokens. However, the key principles of tokenomics are tradability and interoperability.
Unlike loyalty points, which are confined to a specific company, utility tokens function across the entire blockchain network. Holders can sell tokens to other users or use them on separate platforms. Greater options increase their overall value.
How Token Governance Empowers Users
Token governance is fundamental to Web3 platforms. Traditional loyalty programs simply conferred perks and benefits to users. Tokenomics, however, allows users to participate directly in platform development and strategic direction.
By casting votes directly proportional to token holdings, users are incentivized not just to hold onto tokens but to join in the democratic process. There’s no greater sense of customer loyalty.
No longer do users feel powerless or frustrated at a platform’s direction. Through token governance, they can actively participate in the community, contributing to decision-making and cultivating commitment. It’s a complete revolution from passive consumers to active stakeholders and embodies the spirit of decentralization.
Gamification and Tokenomics
Another key aspect of tokenomics is gamification. Implementing game-design elements, like milestones, rewards, and levels, further incentivizes user engagement.
Don’t underestimate its potential: Extraco tested a gamified process to teach clients about the bank’s offers and benefits. The result: a rise in the conversion rate from 2% to 14% and an increase in customer acquisitions by 700%.
In token-based ecosystems, earning tokens based on milestones or reward levels creates a sense of natural progression. Users get a boost when they “level up,” promoting regular platform usage. Tokens could be earned by participating in platform governance, contributing content, or just regularly logging in.
Indeed, Starbucks recently launched its Odyssey platform: a new Web3-powered loyalty system. Customers earn points and digital collectible stamps (NFTs) for completing certain real-world actions. The higher you rise up the levels, the greater the perks and benefits become.
Risk Management and Customer Education
Of course, not all users will be familiar with tokens. Educating users about the volatility of the token markets, potential risks, and how to manage their assets securely is critical. Try these ideas to keep your customers informed:
- Create clear, comprehensive guides explaining token volatility and market risks.
- Offer step-by-step tutorials on secure wallet use and asset management.
- Develop regular updates on regulatory changes affecting tokens.
- Provide best practices for backup and recovery of digital assets.
- Use in-app prompts to remind users about security measures.
- Promote active learning with interactive quizzes and assessments.
- Collaborate with industry experts for webinars or live Q&A sessions.
Case Study
As mentioned, Starbucks launched a gamified token-based loyalty program. It was a wild success selling 2,000 NFTs in 20 minutes. But it’s not the only success story.
Uniswap, for example, is a prominent decentralized exchange (DEX) that leverages tokenomics to bolster its user retention strategy. UNI, its native token, rewards users for providing liquidity to its pools and ensures users participate in governance decisions.
The results are astounding. According to Statista, Uniswap’s users grew by 300,000 since early 2022. Part of this success is due to the DEX community’s transparent and democratic governance model, helping guarantee higher user retention rates.
Future Outlook
The transition from traditional customer loyalty programs to the new tokenomics paradigm continues. But what happens next? Here are some trends to consider:
- Integration with Traditional Rewards: Brands may combine Web3 tokens with conventional loyalty points, enabling cross-platform rewards and redemptions.
- Regulatory Alignment: Stricter regulations may shape token usage, requiring compliance measures and transparency in reward distribution.
- Personalized Token Incentives: AI-driven personalization may tailor token rewards to individual preferences and behaviors.
- Collaborative Ecosystems: Interoperable tokens will continue to foster collaborations between platforms, creating a seamless user experience.
What’s your take on integrating tokenomics into traditional customer loyalty frameworks? Is this a lasting trend or just a passing phase? We can’t wait to hear your thoughts.
Written by Irene Patrikios Clark,
Web3 Customer Success Specialist.
Sources:
https://beincrypto.com/learn/yield-farming-vs-staking/#h-what-is-yield-farming
https://blog.smile.io/repeat-customers-profitable/
https://www.coindesk.com/learn/what-is-tokenomics-and-why-is-it-important/
https://www.pewresearch.org/internet/2012/05/18/the-future-of-gamification/
https://webinarcare.com/best-gamification-software/gamification-statistics/
https://stories.starbucks.com/stories/2022/the-starbucks-odyssey-begins/
https://moralismoney.com/blog/starbucks-odyssey-everything-you-need-to-know
https://www.theverge.com/2023/3/9/23633169/starbucks-nfts-odyssey-siren-collection-rewards-program