Loyalty Points – Ripe for Disruption?

According to a study done in 2016 by Nielsen, the UK was said to be “drowning in a sea of loyalty cards”, with British shoppers to be the second most likely to have a loyalty card. However, the same study revealed that consumers had little interest in the programs. It is quite remarkable that retailers in the UK wouldn’t find more creative ways to reward their loyal customers, as they would generate more reliable sales, and would boost the reputation of the brand. A satisfied, loyal customer is a brand’s promoter. Research conducted by Fred Reichheld, one of the best known promoters of loyalty as a marketing strategy, has shown that there was a strong correlation between the net promoters of a company (the portion of customers that were “extremely likely” to recommend to another person) and the company’s growth rate. It may seem that a loyalty program is no substitute for a company’s core service or product offering, but the picture is in reality more nuanced.  Some remarkable research has shown that loyalty programs can cause customers to overlook the negative competitive evaluations of the company’s service. In other words, the customer’s enthusiasm about the loyalty rewards maintains their satisfaction with the company, even when the quality of the service is inferior to the competition. So to an extent, a well designed loyalty program can be a means of customer satisfaction.  

Blockchain provides the un-falsifiable ledger on which crypto-currencies, or tokens, are built. The technology therefore naturally lends itself to the reward program context, as loyalty points are a form of currency internal to the retailer. The main question is whether applying blockchain technology produces anything of substance, or if it leaves the rewards program the same but with a buzzword appended. To answer this question, we would need to compare the 2 different setups, with and without blockchain.

Currently reward programs mostly function as “in store credit” or otherwise as points redeemable at another store. There is some variation on this model, notably with charity contributions made by the company in exchange for customer loyalty. The customer sets up their membership for the program, and then redeems the credits awarded for regular purchases at the store, in app or online. After a certain period, if the points are not redeemed, they expire.  

There has been some work done around blockchain rewards by some household names like TCS or Deloitte, which have emphasized the advantages around seamlessly connecting partner organizations. This would reduce the operational and financial complexity of  redeeming points across partners, and would allow the user to have multiple reward schemes in one “wallet”. TCS has in fact launched its blockchain rewards platform several weeks ago. 

Part of the problem of most conventional reward programs is how cumbersome they are. They require an additional card, and the process for redeeming points can be inconvenient. In the case of the Tesco Clubcard, customers would have to browse through the partner offers, converting their points into a discount on the website of a travel website, for example. With the Tesco example, £150 spent converts to a £1.50 voucher. Given the tiny size of the voucher, the entire process is dull and uninspiring.   

Cryptocurrencies are a much more robust financial instrument in comparison to loyalty points. Currently, the accounting around loyalty points involves representing them as a liability, and this process is complicated by the fact that not all points are redeemed, therefore requiring an estimation of redemption. Furthermore, the accounting setup requires that the points expire, which is a major problem for customer satisfaction. Indeed this somewhat contradicts the whole logic of loyalty rewards: if I am getting compensated for loyalty to the retailer, why are my rewards expiring after a few years? This significantly takes away from the perceived value of the points. Cryptocurrency rewards could be structured as a mini-financial instrument. Just like a company does an equity or bond issuance, it could “issue” loyalty tokens and then hold them on its balance sheet like a financial instrument. 

Furthermore, the robustness of cryptocurrencies would enable more advanced capabilities for rewards use. Currently, rewards program are “linear” in nature: a set amount of points has an equivalent monetary value, with which products are purchased at their ordinary listed price. There can be variations on this, such as a multiplication of points for the purchase or redemption of certain products, or special offers that can be purchased through points, but this is still a static and rigid pricing scheme. A much more interesting and deeper approach to this issue would be to create a dynamic alternative pricing scheme for a wide set of products using quantitative methods. For a retailer, the cost of unsold stock is a very big headache, to the point where it is a threat to the finances of the business. Being able to offload this dead inventory in a smart way, which would not disincentivize purchases at full price, but boost other success metrics of the business like customer loyalty and satisfaction, would be a huge win for the retailer. 

Juggling the interplay between loyalty and the financial ramifications of selling inventory would be tricky, and to optimize its benefits would require a systematic and rigorous methodology. With the help of some expert data scientists though, this could easily become a winning strategy. The value of such an approach is also its scientific rigor, the success of failure of the loyalty program could be measured much more precisely.