Cryptotokens vs Loyalty Points for Customer Acquisition

Companies employ a variety of tactics to acquire new customers, but two of the most popular are loyalty bonuses and low price. Airlines, credit card companies, and many retailers tout the benefits of loyalty points and offer consumers big, upfront bonuses for signing up. Competing on price is a tried and true acquisition strategy, especially for new market entrants. Amazon used it to disrupt bookstores, Southwest to challenge incumbent airlines, and Uber to take on taxis. Even when the product or service is better than existing options, as in the case of Uber, low prices drive consumer interest and encourage switching.

Blockchain technology has enabled a new breed of startups that are trying to revolutionize industries. For many of these startups, cryptocurrency in the form of tokens power their business models. There is a tremendous amount of press and marketing hype about these tokens, but how do they compare to loyalty points and low price as a customer acquisition approach?

In evaluating the usefulness of tokens vs. loyalty points to incentivize behavior, there are a few criteria to consider:

• Fungibility: For many consumers, cash is king, which is why low price can be such a motivator. Many loyalty points are only redeemable for products and services within the program. For example, airline miles are used for flights and retail rewards are used for store purchases. Only for some credit cards do loyalty points turn directly into cash. Tokens, on the other hand, have real cash value as long as those tokens are exchange-listed, so consumers can easily and immediately convert them to real currency or other cryptocurrencies.
• Redemption Rules: Loyalty programs have wide discretion in setting redemption rules. As a result, minimum spends, expiration dates, devaluations, limited reward inventory, and other program changes are relatively common. All of these rules create friction that reduce the incentive for consumers. In contrast, once earned, tokens are basically unrestricted, subject only to market value changes related to supply and demand of the token.
• Perceived Friction: At this point, consumers are very familiar with loyalty programs and understand how to value and redeem loyalty points for products and services. Tokens, however, are still a very new and mostly unknown entity. The hype around cryptocurrency and tokens can increase the perceived value for many consumers, but negative press and fluctuating value may turn consumers off. Either way, many consumers do not understand how to set up a wallet. Although blockchain companies and associated dApps will quickly solve this access and user experience challenge, the perceived friction associated with something new can affect consumer behavior.

Overall, tokens can and should function more like cash discounts as a customer acquisition tactic, allowing companies to mirror Uber’s approach of offering a better product or service while also charging less for it. Key to that strategy for these blockchain startups, though, will be to ensure the token has market value and liquidity and that consumers have an easy path to cashing in their tokens whenever they want. In addition, the best blockchain companies will think through the design of the monetary policy that underlies the token in order to maintain steady appreciation of the token and keep incentives aligned. We will discuss monetary policy design in a future post.

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