I originally published this via Interlace Ventures
Web3 Commerce x Loyalty
Since my first overview of Web3 x commerce, I’ve continued to study ways in which brands are experimenting with Web3. Customer loyalty stood out as an especially interesting topic.
Below are some thoughts on common loyalty platforms, the programs brands implement, and what they could look like if elements of them existed on-chain.
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Brands and retailers need loyal customers. In a time with rising CACs and intense competition in nearly every brand category, DTC and ecommerce-first brands are desperate to figure this out. Retaining customers is often more economical than acquiring new ones, with certain studies indicating that repeat customers will spend more than twice as much in months 24-30 of their relationship with a brand than they do in the first six months. This means that even a slight increase in customer retention can yield disproportionate increases in revenue.
To retain customers and incentivize them to spend more, brands deploy various loyalty programs. Whether such programs foster true customer loyalty (i.e. brand love), is disputable, and it may make more sense to refer to such programs as incentive programs. Either way, these programs do hold the potential to incentivize repeat purchases (increasing customer LTV) and perhaps superficial brand advocacy, both of which have measurable ROI. True customer loyalty is unique, requires clear customer benefits, and numerous interactions to create.
One of the more popular loyalty strategies utilized by brands and retailers are points- and tier-based programs, often in unison. These programs essentially consist of a series of if-this-then-that formulas. For example, if the customer does X, then the brand rewards them with Y.
With if-this-then-that formulas, brands can reward customers for actions such as creating a user account, spending a certain amount of money within a fixed period of time, buying a specific product, creating content, the list goes on. In a tier-based system, the accumulation of points helps customers ascend to the next tier of membership, unlocking additional perks.
Three commonly used points-based platforms for brands of the type we’re discussing here are Yopto, LoyaltyLion, and Smile.io.
Customers rack up points and can later redeem them towards various perks such as free shipping, discounts, early access to future product lines, etc. The user’s account essentially behaves as a wallet, but can typically only be accessed and used via the brand in question.
Traditional points-based loyalty programs have plenty of pitfalls. In addition to being quite transactional, according to AdAge, the majority of points-based loyalty program participants do not know their points balance and a significant amount do not know the value of their points. It’s common for consumers to feel that it takes too long to accumulate a meaningful amount of points, causing participants to lose motivation. Rewards are often not perceived as valuable, and the process of earning points commonly requires excessive communication and messaging from the brand, attempting to nudge customers to perform a host of various tasks.
Although these types of engagement methods create economic and gamified incentives for customers to “come back”, in the majority of cases, it seems like a stretch to claim that they foster true loyalty. Instead, these systems simply tend to incentivize additional spending, which I believe is different.
As with points-based programs, the same question remains with membership-based programs: do these programs foster true customer loyalty, or are they simply another method to incentivize repeat purchases and increase customer LTV? Membership-based programs are on the rise and are used by brands/retailers such as Lululemon, Restoration Hardware, Italic (Italic Bold), and even Insomnia Cookies (Cookie Magic). Some companies’ business models rely entirely on memberships, such as Costco and Beauty Pie.