Capturing a customer’s business and achieving customer loyalty is like learning to dance with a partner who keeps setting a faster pace, changing the music, and varying the dance steps at the same time.

The inventor of net promoter score, Frederick Reichheld of Bain & Company reports that it costs businesses between five to 25 times more to acquire a new customer than it costs to sell to an existing customer.

According to a research by Accenture Interactive, customers who become a part of a retailer’s customer loyalty program generate 12% to 18% more revenue. Given these statistics, it only makes sense for companies to offer incentives in the form loyalty programs to keep them happy.

The shortcomings of the existing customer loyalty programs

A loyalty report by Bond Brand Loyalty found that only 23 percent of the 19,000 people surveyed were satisfied with the way rewards and benefits are earned.

In the United States alone, the number of loyalty program memberships have grown from 3.3 billion in 2014 to 3.8 billion in 2016, reports Statista. This sheer number of loyalty programs makes it difficult for an average consumer to monitor every program that they are a part of.

Another report by Maritz Loyalty Marketing notes that 70 percent of surveyed consumers abandon loyalty rewards because it takes more than six months to accumulate enough points to redeem rewards.

The same Bond Loyalty Report points out that loyalty reward program users who do not use the redemptions are 2.7 times more likely to defect from the program and join another program.

A few reasons the existing customer loyalty programs are ailing include – the absence of a uniform loyalty and rewards program management system – resulting in confusing the customer and translating to the lack of member’s activity.

Additional problems include account inactivity, low redemption rates, time delays and low customer retention. All this sums up to the fact that the consumers do not value loyalty points as much as they are expected to. Also, customer inactivity negatively impacts their loyalty to the brand. The unclaimed rewards are a liability to the company balance sheets.

Can blockchain be the future of loyalty programs?

For starters, blockchain can be used to improve customer loyalty by converting rewards points into digital tokens, which can then be used by customers with multiple retailers, by creating universal rewards. Hence, customers with a multitude of loyalty programs in their kitty will now have a single platform allowing instant redemption and exchange for multiple loyalty point currencies. In addition, with interoperability of tokens, consumers can use digital tokens as a payment method for buying other products. Using a loyalty-based platform and developer interface, brands can build their own applications within this system.

Blockchain technology can be leveraged to offer loyalty programs beneficial to both brands and their customers. And, blockchain can address hurdles such as loyalty program fragmentation, account inactivity and a user’s concerns over security and streamlining data management.

For instance, rewards earned at a clothing store can be used for buying cookies at a coffee shop. Blockchain allows consumers to convert these digital tokens into other digital assets and currencies, which can then be utilized for investment or payment modes.

The beauty of blockchain being that not just e-commerce companies but any online company who adopts or uses customer loyalty as a marketing strategy to retain existing customers can use it. This includes SaaS platforms incentivizing users for using their platform, fin-tech companies rewarding customers for cross-selling and up-selling and media outlets intending to increase audience engagement.

As for businesses, a blockchain-based loyalty rewards program reduces system management costs with smart contracts that report secure, tracked, transparent transactions to legacy systems, reducing costs associated with errors and fraud. This is in view of the fact that loyalty programs are extremely expensive to develop, implement and maintain, and most of them do you reciprocate with comparable results. Any brand, irrespective of their size can integrate either their existing loyalty programs or build a new one.

To permission or not to permission

The question that now arises is whether loyalty program service providers should base their platforms on a permissioned distributed ledger or a non-permissioned one. For the uninitiated, a permissioned blockchain only allows certain users to transact on the blockchain and serve the network by writing new blocks into the chain. It allows restricted access to those who can create smart contracts.

On the other hand, in a non-permissioned blockchain, anybody can join the network and participate in the process of block verification to create consensus and also create smart contracts.

With these characteristics, it becomes clear that a permissioned blockchain would be a viable option for loyalty program service providers, giving them control that they would prefer as rewards issuers. Besides, rewards do not require mining, as they are issued by such program providers. Hence, the necessary fraud-proof record of transactions can easily be achieved through encrypted proofs by several designated agents on separate nodes within a defined network.

With such clarity in operations, it is opined that at a time when blockchain's integration with core financial applications is being explored, loyalty programs are ripe for blockchain implementation.

Palash Bagchi
Palash Bagchi

The author is the founder and CEO of Retainly, a US and Hyderabad based blockchain powered marketing automation platform focused on the loyalty marketing space.

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