How Blockchain Can Crack The Holy Grail Of Loyalty Programs

Loyalty programs give reward points to consumers for making purchases and let consumers redeem their reward points for gifts. By their very nature, reward points look like an alt-coin and quack like an alt-coin.

Now, thanks to blockchain, reward points can pass the Duck Test and become an alt-coin.

I've heard of a few platforms that help brands build their loyalty programs on the blockchain. But the only blockchain loyalty program I've come across is the one from Rakuten.

Japan’s largest retailer recently announced a blockchain-based loyalty program on which reward points will be issued in the form of an alt-coin called Rakuten Coin. According to CoinDesk, Rakuten has moved US$ 9 billion worth of existing Super Points into the blockchain to give a fillip to Rakuten Coin.

Let's see how blockchain will help improve adoption of loyalty programs and drive repeat purchase, which is the primary goal of a loyalty program.

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By offering rewards for spends consumers anyway make, loyalty programs have a strong value proposition. This has helped them become very popular. An average American is reportedly a member of seven loyalty programs and many of them reportedly have 10-15 loyalty cards in their wallet. While I couldn't find figures from other countries handily, I'm sure people everywhere are members in at least a handful of loyalty programs.

In theory, loyalty programs drive repeat purchase of a brand by giving rewards to incent consumers to buy that brand (as against competing brands).

(https://twitter.com/GTM360/status/453117809716121600)

In practice, their performance has been mixed.

Amazon Prime is widely hailed as the greatest driver of Amazon's success. So are the frequent flyer programs of most airlines and loyalty programs of many credit cards. On the other hand, Walmart (worldwide), DMART (India) and Indigo Airlines (India) are examples of a few brands that have done very well without any loyalty programs.

What gives?

I attribute the mixed performance of loyalty programs to the notorious "too many loyalty programs, too few reward points to redeem" problem caused by the very nature of the programs:

1. Reward points are spread across different loyalty programs
2. Reward points lapse after a certain period, usually one year
3. An average-spending consumer doesn't earn enough reward points to be eligible for redemption
4. Reward points lapse on expiry date
5. Consumers lose loyalty.

(https://twitter.com/GTM360/status/848534053871603718)

Over time, the "too many programs, too few points" problem dampens consumer enthusiasm and makes them decide future purchases based on price, discounts and other factors - exactly the kind of behavior supposed to be curbed by loyalty programs.

To revive flagging interest in loyalty programs, brands and third party loyalty program providers have attempted many tactics over the years. Chief among them are the following:

Coalition Loyalty: Payback (Germany, India) and Nectar (UK) are two leading coalition loyalty programs that let consumers earn reward points by making purchases from multipleEarn Partners and redeem them for gifts at multiple Burn Partners. To that extent, they widen the network of merchants where consumers can earn and burn points and give a better chance to consumers to redeem their reward points before they lapse.

Reward Exchanges: Here consumers can trade reward points in one loyalty program with reward points of another loyalty program. Suppose you have airline points and grocery store points and are unlikely to use your airline points before they expire and I'm relocating to another city where my grocery points will become useless. A reward exchange would allow you to trade your airline points for my grocery points, thus ensuring that both of us safeguard the value of our points holdings. Reward exchanges should not be confused with loyalty consolidators like Using Miles and KeyRing. While the latter help consumers manage multiple loyalty programs from a single portal / app, they don't support trading of points across programs. So, if points lapse before they've reached a level where they can be redeemed for something meaningful, tough luck.

But these tactics have had limited success because of a few reasons:

• Coalition loyalty programs operate under a major limitation: They can accept only one Earn / Burn Partner per product category - or at least this is what I was told when Payback let go its existing fashion partner Big Megamart (now Big Unlimited) in India when it signed up the bigger fashion brand Fashion Big Bazaar (FBB). As a result, liquidity - industry speak for stores where reward points can be redeemed - is restricted to one brand / merchant per product category.
• While there has been a lot of buzz around reward exchanges over the years, I haven't come across a single exchange that's actually operational. That's probably because of "breakage", the term used in the loyalty industry to refer to reward points that are not redeemed. As industry insiders know, breakage can be as high as 30%. It's open secret in the industry that breakage is baked into the business model of loyalty programs. So, consumers trying to trade reward points in one loyalty program will always get a lower value of reward points in another program. When they find this out, many consumers prefer to hold on to their original reward points instead of trading them at a steep discount. This makes reward exchanges unviable in actual practice even though they sound great in theory.

So, despite years of efforts, the "too many programs, too few points" problem hasn't gone away and the performance of loyalty programs remains lacklustre.

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Blockchain can provide a huge shot in the arm to loyalty programs and raise their performance to the next level.

Key Metrics of Blockchain Loyalty Program

Let's see how, by using Rakuten's blockchain loyalty program as an example.

By objectifying all rewards to a single branded token - Rakuten Coin - Rakuten immediately solves the problem of fragmentation of reward points across different loyalty programs.

Coming to redemption, it's a no-brainer that Rakuten Coin should be redeemable for gifts at all Rakuten Group companies.

But that's not enough - a program with such a restriction would merely be applying the blockchain lipstick on traditional coalition loyalty programs.

On the other hand, we can't expect Rakuten to negotiate with all merchants in the world - or even Japan - to accept Rakuten Coin.

Fortunately, it doesn't need to. Blockchain offers more than just the ability to convert reward points to an alt-coin.

As MIT Technology Review explains in Let’s Destroy Bitcoin: “These tokens are not unlike the points systems and gift cards that companies have used to hem in their customers for decades. What changes when you record these assets on a blockchain is that they become easily and securely transferable.”

What Rakuten can do instead is to list Rakuten Coin on leading cryptoexchanges.

This will help Rakuten to crack the Holy Grail of loyalty programs by delivering two major benefits:

Unlimited liquidity. Consumers will be able to freely trade their Rakuten Coins for Bitcoin and other cryptocurrencies that are widely accepted by tens of thousands of merchants (many of whom may not even have heard of Rakuten). The question of where Rakuten Coins can be redeemed becomes moot.

Buoyancy. Cryptoexchange listing will inject buoyancy into Rakuten Coin, even if the added lift is largely speculative in nature at this point. The buoyancy will curb feelings of misgivings when consumers find that their $100 worth of points in one program trades for only $70 worth of gifts in another program. It's human nature to rationalize the fractionally higher cost today as a premium if there's a chance of earning multibagger returns on the investment tomorrow. Ditto corporate nature, going by Aswath Damodaran's take on the premium paid by Walmart for Flipkart. Writing in Economic Times, the Professor of Finance, Stern School of Business, New York University, observes, "where you have hundreds of billions of dollars in play, a multibillion premium paid on an acquisition is penny change." But I digress.

From my back-of-the-envelope calculations, Rakuten Coin is already exhibiting buoyancy: 1 trillion Super Points have been convereted to Rakuten Coin worth $9.1 billion. This translates to a Burn Ratio of $9.1B/1T Points i.e. 0.0091 $ / Point, or almost 1 cent per point. This is 2.5X of Payback’s burn ratio of 0.4 cents per point (being $ equivalent of 0.25 INR / Point).

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By harnessing the full capabilities of the blockchain, loyalty programs can delight consumers.

That should be benefit enough for brands to embrace the blockchain for their loyalty programs.