Blockchain for Loyalty Rewards Programs

By Guillaume Goutaudier • November 8, 2019 • 4 min read

Introduction

I wanted to share some thoughts on the benefits of implementing loyalty rewards programs on Blockchain. It is very easy to find white papers that explain all the benefits of Blockchain for rewards programs, but it is a bit difficult to understand the real value of Blockchain behind the marketing smoke. In this article I will try to describe these benefits in layman’s terms, and imagine what an actual implementation might look like.

The promise of Blockchain

There are potential Blockchain benefits for both the issuer (company) and the user (customer) of the rewards.

[Company Benefit 1] Taking off rewards from your Balance sheet: from an accounting perspective companies are required to write the loyalty rewards in their balance sheets. What is means is that if a company issues a $1 reward to a million customers, they need to consider that they have "spent" $ 1 million. This is usually not representative of their actual investment, because only a fraction of those rewards will be redeemed. Blockchain offers the potential to better value those rewards.
[Company Benefit 2] Offer more ways to spend the rewards: a given company can have multiple subsidiaries all issuing rewards. Likewise, multiple companies can decide to cooperate to make rewards from one company usable in the other. If all these rewards are tracked on Blockchain, exchanging them can be easier.
[Company Benefit 3] Collect customer data: Blockchain usually provides good traceability. Without entering into the debate of whether this is good or bad practice, companies can collect data on user behaviour to run analytics and eventually improve their marketing strategies.
[Customer Benefit 1] Liquidity of the rewards: having multiple rewards, often in quantities that are not sufficient to claim interesting discounts or benefits, can be frustrating for customers. Having the ability to easily exchange their “long tail of unused rewards” against useful ones can be enabled by Blockchain.
[Customer Benefit 2] Ease of use: all rewards could be stored in the customer Blockchain wallet, instead of multiple papers or multiple loyalty cards. One might argue that loyalty cards are already digitalised today and that it is easy to store all of them in a single applications like Stocard.

Implementation

How can a Blockchain solution be implemented to obtain those results? During the last ICO boom, we have seen many companies proposing a "one token to rule them all" approach. The devil is certainly in the details, but essentially it consists in converting all existing rewards into a unique token (often the token that the company issued during the ICO). The idea is that this token could then be used in lieu of the loyalty rewards. This approach is great but requires the creation of a strong partnerships with all the participating companies.

An alternative to this approach is for companies to issue directly their own loyalty tokens in the form of ERC 20 tokens. This way, most of the benefits would be realised:

[Company Benefit 1] if the ERC 20 tokens are traded, an average price can be used as a fair valuation of the tokens in the company books.
[Company Benefit 2] the loyalty tokens can be traded by consumers on a crypto-exchange against other tokens without any additional implementation effort.
[Company Benefit 3] all token exchanges can be tracked easily.
[Customer Benefit 1] small quantities of tokens from various brands can be traded for other tokens or Ether (we will assume here that the fees of the trade are negligible compared to the cost of the tokens, which in practice will only be the case when scaling solutions like Raiden gain in popularity).
[Customer Benefit 2] all loyalty tokens can conveniently be stored in a Blockchain wallet (the ERC20 standard making it easy to support from the wallet).

A zero sum game?

Cool! But let's go one step further here, and try to see who would benefit the most from this paradigm shift. Let's assume that we are in the previous scenario where multiple companies are issuing loyalty rewards in the form of ERC 20 tokens. To make things simple, let's consider a simple example where 2 companies are issuing reward tokens:

Company A is a big coffee company serving billions of customers worldwide, and has a loyalty reward policy where each $10 coffee gives you 1 token (ERC20 token A). 10 tokens can be exchanged for a coffee (coffee A).
Company B is a much smaller coffee company serving customers locally, with the same loyalty reward policy: each $10 coffee gives you 1 token (ERC20 token B). 10 tokens can be exchanged for a coffee (coffee B).

As a customer, how will you value these tokens? Well, it is pretty clear that there will be a market for token A, so its value will be very close to $1. For Company A it means a high value in its books. Conversely, the value of token B will probably be lower than that, say $0.5, because the demand for such tokens will be lower. Company B will therefore have a lower value in its books.

So at a first glance we might think that the small company will benefit from this system. But the main point is that customers will get a more interesting reward from company A (because the traded value of the reward is 2x higher than the one from company B). So it will make coffee A more attractive from a cost perspective. We can even imagine people who prefer coffee B starting to buy coffee A, then trade token A against 2 token Bs... the logic being that after 5 coffee A you get a free coffee B ;-) From company B's perspective this coffee would be given away against rewards and not fiat money… in other words for $5 instead of $10.

A proper economical analysis should be made here, but we can ask ourselves whether the liquidity brought by Blockchain will create a bias towards larger companies. The future will tell.