As blockchain, NFTs, Web3, and cryptocurrencies capture the headlines, marketing leaders face the challenge of understanding the main value drivers and investment opportunities for customer engagement and loyalty. Brands are looking into new ways to engage customers using tokenized assets in Web3. As businesses contemplate incorporating tokens into their existing offerings, it's crucial to comprehend the challenges and possibilities linked to this novel loyalty program strategy.

Challenges of Existing Loyalty Programs in Web3 Marketing:

1. Fragmented Loyalty Relationships: Customers often juggle multiple loyalty accounts, which results in a flood of promotional messages that weaken the impact of individual programs. Brands need to create appealing loyalty offers with user-friendly and engaging UX while maintaining valuable partnerships with other programs.
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2. Longtail of Low Activity Users: Many programs experience a large number of minimally active users, especially in sectors like travel, hospitality, and luxury goods. Engaging these customers could transform their passive participation into revenue. Brands should investigate various incentives and rewards, including cash and tokenized assets, to involve inactive users.
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3. Closed Ecosystems: Prominent digital players control customer attention, making it difficult for merchants and smaller brands to compete. Brands must access these ecosystems to reach more customers, even if it involves dealing with the complexities of partnerships.
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4. Complexity Scaling Partnerships: Collaborative loyalty partnerships can offer more comprehensive benefits, but scaling and managing them is challenging. Web3 presents ways to scale partnerships and handle intricate details, promising flexibility as companies improve loyalty offerings.
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Web3's Potential in Transforming Loyalty Programs

Loyalty programs are a staple in the Web2 world, where brands incentivize customers to use their products or services through points or miles. However, these points often have limitations, such as non-transferability and restricted redemption options. Web3 can provide customers with full control over their loyalty points or miles by tokenizing these assets.

Tokenization enables customers to accumulate loyalty points or currency from various sources into a single tokenized asset. These assets can be sold, exchanged, traded, or redeemed for different items in a marketplace. Tokens can be fungible or non-fungible tokens (NFTs) representing ownership.

Tokens can be programmed via smart contracts to allocate a specific percentage of the sale to the brand, generating a new revenue stream. Offers from brands could be sent directly to the consumer's wallet, promoting higher loyalty and stickiness. Today, many loyalty programs destroy value for brands and consumers through "use it or lose it" schemes, which could be monetized, creating value for both parties. Once Web2 and Web3 work in tandem, a significant amount of value can be unlocked.
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The Path Forward

Numerous companies are experimenting with various approaches to integrating tokens into their existing products or services while investigating new business models and revenue streams. These companies will facilitate the widespread adoption of Web3, which will be integrated into Web2 value chains as an extension. Consumer adoption will occur for real value, moving away from today's speculative token traders. Ownership, interoperability, and portability will be central to Web3-driven loyalty programs. These tokens will act as digital passports, unlocking value through experiences within or outside the loyalty program.

The value unlocked by these tokens can also be incorporated into the earning structures of each loyalty program, pinpointing milestones that unlock benefits across multiple programs using a single wallet linked to the user's identity.

Skeptics argue that brands are merely applying a Web3 layer to existing paradigms and creating new walled gardens of value instead of adopting the principles of Web3, which state that users should own their data, not corporations. They also seek explanations for why Web3 methods are superior to Web2. If we are transitioning from closed to open ecosystems, brands like Starbucks have not yet allowed their NFTs to be redeemed at Peet's or other competing outlets. Some airlines and hotels have done a better job of partnering with others on loyalty point redemption, but they come with unequal exchanges or burdensome redemption terms.

Despite skepticism, a wallet can help eliminate the friction between the brand and intermediary platform by establishing a direct relationship between them. Brands can repurpose those costs to reward consumers for their time, attention, and engagement in meaningful ways, fostering a new emotional connection to enhance loyalty.
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A Framework for Web3 Loyalty Offerings

Many organizations have begun experimenting with Web3, often taking an opportunistic and ad hoc approach to launching initiatives. However, the commitment should be much more deliberate. Companies must adopt a structured and strategic approach to defining their Web3-based loyalty offering.

We have developed a six-pillar framework to help companies consider their Web3 loyalty proposition.

1. Web3 Loyalty Strategy and Objectives: Before embarking on pilots and initiatives, companies should identify the gaps and opportunities within their current loyalty offering and explore how Web3 can help. Leaders must define the overall strategy, guardrails, and prioritized objectives of the offering.
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2. Subsequent Web3 use cases must address the underlying objectives or shortcomings of the existing loyalty program. Common objectives include expanding program rewards to the broader, less active customer base; expanding and streamlining partnerships; attracting a new customer segment; and increasing the frequency of customer engagement with the program or brand.
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3. Tokenization Strategy: Organizations must then contemplate the tokenization strategy they will use to deploy, complement, or replace current offerings and help them execute against identified objectives. The options fall along a spectrum of archetypes that vary by technical and regulatory complexity. Careful financial modeling must accompany the chosen archetype to ensure that it achieves desirable financial objectives for the overall loyalty offering. Four archetypes exist:

• Fungible Points: Some programs may choose to create fungibility in their existing points-based program. Crypto-enthusiast customers can convert points to crypto for liquidity or investment purposes. Financial institutions like SoFi and Venmo have launched crypto rewards credit cards or enabled the conversion of points to crypto.
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• Tangential Token Offering: Brands can explore a complementary token offering made up of NFT collectibles that offer real-world utility beyond the digital token itself. These offerings can integrate with existing loyalty management solutions and gamify the program to create new ways of engaging and incentivizing customers, especially the younger, digital-savvy base. Starbucks Odyssey members can earn NFTs marketed as digital collectible stamps and unlock access to new experiences. They chose Polygon as their primary blockchain platform, a Layer 2 scaling solution built on top of the Ethereum blockchain.
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• On-Chain Loyalty Points: Companies with no loyalty program or those looking to revamp their existing loyalty management solution can issue fungible loyalty tokens/points on the blockchain. This is useful for partner-heavy programs that require optimal cross-program token tracking, settlement, and reconciliation.
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Concluding Thoughts

We are still in the early stages of asset tokenization as enterprises and consumers adapt to exchanging value on peer-to-peer networks. Most tokens do not yet have real-life value at scale, and many chains are striving for their adoption vectors like product-market fit.

Value will likely be created from Web3 features embedded into existing Web2 businesses that people use today, rather than trying to replace Web2 with Web3 overnight. Tokenization with liquidity on the blockchain will unlock several layers of innovation and creative accretive GDP. We are in version 1.0 of tokenization, and with advancements in scaling technology, interoperability, regulation, and security, many asset classes and forms of liquidity will be created.

As the world of Web3 marketing continues to evolve, businesses and marketing executives must adapt to the changing landscape to stay ahead of the curve. Tokenized assets have the potential to drive customer engagement and value in loyalty programs, offering new opportunities for brands to strengthen their relationships with consumers. By embracing the potential of Web3 and tokenization, businesses can unlock new revenue streams and create more personalized, meaningful experiences for their customers.

In the coming years, as Web3 mature and become more accessible, we can expect to see more businesses experimenting with tokenization and integrating Web3 features into their loyalty programs. Early adopters will have the advantage of learning from their experiences and refining their strategies, while those who wait may risk falling behind in an increasingly competitive market.

To stay relevant and competitive in the era of Web3, businesses should:

1. Invest in understanding and learning about Web3 and their potential applications in marketing and loyalty programs.
2. Develop a clear strategy and objectives for incorporating Web3 features into their loyalty programs, focusing on addressing gaps and opportunities in their current offerings.
3. Collaborate with other businesses and technology partners to develop and implement innovative tokenization strategies that drive customer engagement and value.
4. Monitor and learn from the experiences of early adopters in the industry to refine their own approaches and stay ahead of emerging trends.
5. Engage in ongoing dialogue with customers to understand their needs, preferences, and expectations in a rapidly changing landscape, and adjust loyalty programs accordingly.

By taking a proactive approach to embracing Web3 and integrating tokenized assets into loyalty programs, businesses can drive customer engagement, create new revenue streams, and build stronger, more meaningful relationships with their customers. The future of marketing and customer loyalty lies in the convergence of Web2 and Web3, and businesses that recognize and seize this opportunity will be well-positioned to thrive in the years to come.

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