Designing Tokenomics for Customer Loyalty and Holder Value
Cryptocurrency has disrupted much of the monetary and banking systems already and is headed for customer loyalty programs. Customer loyalty is the gold standard of a brand’s success and is worth significant value. Despite their prevalence, many loyalty programs miss the mark in actually providing customers any real value. Now enter cryptocurrency tokens to redefine value and loyalty for customers.
Cryptocurrencies are best known by Bitcoin and Ethereum, which is not what I am talking about here. Those are the gold and silver equivalent of the emerging asset class. I am talking about security and utility tokens. Many people call these tokens altcoins (or more flattering, sh*tcoins). When designed correctly, these tokens can become the most effective customer loyalty program a business can offer and create value for investment.
Let’s start with the business end of why these tokens increase customer loyalty. Every business that has an existing loyalty program should be thinking about introducing a crypto token designed to deliver value. There are 2 main advantages of a tokenized loyalty program vs traditional programs.
First, the biggest advantage of a token is it reduces the company’s balance sheet liabilities. If you look at any company with a prominent loyalty program, they hold huge liabilities against the outstanding loyalty points. That’s because the company owes their customers until the points are used. That means almost all programs are designed to be transactional. I give you points and the customer needs to spend them (or they expire).
Second, customers holding tokens become an extension of your marketing team. All of a sudden, the company has an army of influencers on social media talking about their interaction with your brand, answering customer questions, and explaining to their friends how they can earn or buy the company’s token. With a properly designed token structure, customers hold something of value. This will greatly increase customer loyalty from the transactional system.
Customers also get a number of benefits. Their token is more liquid and can be converted to another token. The loyalty program is more transparent. They can now understand the economics of the program and decide to invest in the company’s growth. Thus, the value for customers exceeds that of traditional programs.
Here are some key aspects when designing tokenomics to increase customer loyalty. The structure needs to encourage customers to hold the token. It should be less about spending or transacting in it. Holding more unlocks additional features and creates value for customers.
Total supply needs to be constrained relative to total or expected users. When done correctly, token holders receive price appreciation. This encourages token holders to get more customers into the ecosystem, and they then are rewarded with more appreciation.
It becomes a loop of value for both the company and the customers. It’s a mutual benefit of creating and sharing value. As this plays out, these token holders become life-long customers because the have not only participated but received personal monetary value.
All of this can be modeled using network economics depending on each businesses goal. The complex work is figuring out the holding amounts to unlock features. This usually can be achieved using an optimization model to balance both the company’s goals and the delivered customer value over time. This last step is critical in getting the best value creation for shareholders and token holders.
Now that we understand why companies need tokens and how to think about design, let’s dive into what gives tokens value for investment. Given the length of the topic, I am splitting into a second article called “Token Value & Investing.”
Conclusion, Part 1
All companies with a loyalty program should be thinking of introducing cryptocurrency token designed to encourage holding. This incentivizes customers to bring in more customers which creates value in holding. The aforementioned mutual benefit optimizes value for both shareholders and customers.