The power of loyalty points and the importance of getting them right

Prominent DeFi projects such as Uniswap, Curve, Aave and MakerDAO have been falling in ETH terms since at least Q1 2021. Some see this as a fundamental failure of the DeFi protocols to capture value and an inability to create moats. It is questionable whether crypto’s composable and open nature prevents sufficient moats from being created at all.

I do not agree with this. I think DeFi projects have done a poor job of creating sticky rewards and utility with their tokens.

In traditional markets, rewards and benefit schemes are called loyalty reward programs. In this article, I will argue that loyalty reward programs can not only create moats, but become a core business of DeFi projects. The reason we haven’t seen this yet is because of a lack of understanding of how to use loyalty rewards programs properly. To support both parts of this argument, I will examine the airline industry.

The rise of air miles

Modern frequent flyer programs (FFP) were first introduced in the late 1970s. Although airlines had programs to track customers before, the biggest innovation of modern frequent flyer programs was to use mileage tracking to provide rewards to passengers. It was a clever marketing tool designed to create loyalty among its most profitable customers – the frequent flyers.

Since then, it has become much more than a tool to increase customer stickiness. FFPs developed into an important source of revenue for airlines. For example, according to this article about frequent flyer programsin the 2017-2018 financial year, Qantas Airways’ frequent flyer program accounted for 23.2% of profits for whole Qantas Group.

FFPs now extend beyond the airline industry to tourism, banking, telecommunications, insurance and retailers. Air miles have become an economy of their own, acting as a virtual currency. Sounds familiar?

Why crypto loyalty tokens are superior to traditional ones

Air miles are the most cash-like of all tradfi loyalty points, but they are only accepted at participating partners, have minimum redemption limits, expiration dates, and so on. The main innovation of loyalty tokens in the crypto world is that because you can easily redeem them for fiat, they are equivalent to real money. This means that loyalty points in the crypto world have the same power as real money to acquire customers and drive customer behavior. For projects that don’t have access to hundreds of millions of dollars in the VC runway, loyalty programs present a huge opportunity.

Failure of crypto loyalty programs

My thoughts on this are partly inspired by this Harvard Business Review article on loyalty reward programs. This quote summarizes the mistakes some loyalty programs in older markets and almost all crypto markets make:

“[T]oo many companies treat rewards as short-term promotional gifts or special offers of the month. Approached that way, rewards can create some value by motivating new or existing customers to try a product or service. But until they are designed to build loyalty, they will at best return a small fraction of their potential value… A company must find ways to share value with customers relative to the value that customer loyalty creates for the company. The goal must be to develop a system where customers are continuously educated about the benefits of loyalty and motivated to serve them. Achieving sustainable loyalty, measured this year, requires a strategic sustainable approach.”

Important lessons

These are the most prominent ideas I took away from the aforementioned HBR article. I am sure that if more projects start to internalize these lessons, they will be able to create and retain value in their project.

The value created must exceed the cost of rewards delivered.

This seems obvious, but many (perhaps most) DeFi projects with a loyalty component violate this first tenet. The playbook will typically offer a very high APY for stakes in the hope that bootstrapped liquidity will remain and the project will achieve critical mass. However, the reality is that mercenary participants will dump your token and move on to the next high-APY project the moment your rewards dry up.

The only way to avoid this is good old-fashioned product-market fit. You can start growth by using loyalty tokens as incentives, but customers need a reason to stay.

Rewards should reinforce useful customer behavior.

High APY wagering rewards are a consistent example of a misaligned incentive. In fact, billion dollar crypto firms deploy hundreds of millions of dollars to new crypto projects, suck up all the value, and move on to the next one. Your rewards teach participants to harm your project. Make sure your rewards encourage behaviors that are beneficial to the project.

Do you want your best customers to actively participate in management, and thus feel more psychologically invested over time? You can look at the possibility of rewarding them for their suggestions, votes and community outreach.

The customers are not the same.

It is common for DeFi projects to integrate tiered reward systems, but all too often rewards are distributed linearly. A more efficient model is to make tiered rewards top-heavy. This provides a compelling reason for your most valuable customers to stay with you, but it also provides a strong incentive for less valuable customers to climb the ranks – which leads to the final point:

Rewards should be ambitious.

From the HBR article:

“A company that offers products and services of average value to everyone wastes resources on over-satisfying less profitable customers while under-satisfying the more valuable loyal customers. The outcome is predictable. Highly profitable customers with higher expectations and more attractive choices are missing.”

I’ve repeatedly been struck by some of the more pedestrian rewards in some projects, such as Netflix, Hulu, or Amazon Prime 1-month subscriptions. Does it motivate people, let alone advanced crypto users? It certainly doesn’t for me.

How about rewards like a bottle of Yamazaki 12 year whiskey, or a new M1 MacBook Pro? A few quality rewards sound more appealing than a constant drip of mediocre ones.

It is often joked that crypto runs the entire history of the legacy financial system. I believe this is not limited to the financial markets. The work done in legacy markets with loyalty programs provides a proven path to loyalty and profitability. I am convinced that in a short time crypto projects will run through them to victory.

Dennis Jarvis
CEO of Bitcoin.com

Dennis is a skilled leader who is passionate about building amazing teams of people and promoting financial freedom through the use of cryptocurrency. Dennis joined Bitcoin.com in 2018 as Chief Product Officer, and became CEO of Bitcoin.com in 2020.

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