Recently, we hosted a fascinating discussion about loyalty and points programs at the Variant office. The conversation covered best practices from the web2 loyalty space and how they could be cross-pollinated to crypto; the distinction between points and tokens; what kind of rewards and redemption experiences users care about; and whether to put points onchain. Attendees included a mix of crypto founders across consumer, DeFi, and infrastructure; web2 loyalty experts who have designed programs for American Express, Delta, and other companies; and our Chief Legal Officer Jake Chervinsky.

Below, Jake and I share some of the takeaways from that conversation:

Points as a tool to move users up the loyalty ladder

Loyalty programs are ubiquitous in the offline and web2 worlds. Many companies spend millions on consultants to design them. Despite that, most programs are ineffective in engendering deeper loyalty. Best practices are still developing, leaving a lot of room for creativity and improvement. 

So, then, what’s the point of a point?

• Points programs are the gamified manifestation of the first layer of Maslow’s hierarchy of needs: physiological and safety needs. They reward the customer for their behaviors with tangible benefits, allowing the user to experience utilitarian and financial value. 
• Customers will continue engaging with a brand when they feel recognized, the second layer in Maslow’s hierarchy. This is when they believe they are being treated differently from the next customer based on the series of behaviors they have demonstrated to the brand.
• True loyalty occurs when an emotional relationship is formed between brand and customer. This is the top layer of Maslow’s pyramid: self-actualization. A customer feels a sense of psychological ownership with the brand, whereby the brand becomes intertwined with the user’s identity.

Points program design

In a world where many crypto projects have points programs, the core product will be what matters most. Nonetheless, products should still take into account several factors when designing a program.

• Should points be targeted at user acquisition or retention? Most discussion participants agreed that in the web2/offline world, points were a more effective retention tool for existing customers; users don’t use products simply for the existence of a points program (e.g. I don’t switch my coffee shop just to collect points). However, in web3, behavior is skewed by users’ belief, whether justified or not, that points will eventually convert into tokens. For that reason, points have been extremely effective for user acquisition in crypto.
• Should points even be redeemable, or are gamification and status enough? Most agreed that for a program to sustain user interest, users must be able to redeem points for rewards.
• What types of rewards are enticing for users? Participants agreed that there should be a mix of easily redeemable rewards, which allow users to experience value from the program, as well as more aspirational or experiential ones that create memorable moments and emotional connections.

Differences and tradeoffs between points and tokens

Points programs are well-established for traditional companies, but the onchain world often relies on tokens, which can bring particular advantages.  

• The two main characteristics that distinguish “points” from “tokens” are that the latter are (1) onchain and (2) freely transferable.
  • Point values are determined by their creator based on what those points are worth in the creator’s closed ecosystem.
  • The value of tokens is determined by a secondary market based on what purchasers are willing to pay, which may or may not reflect their actual value in a loyalty program.
• A major benefit of turning points into tokens is composability, which allows many different companies to honor points in a single ecosystem and for there to be more partnerships and collaborations (for instance, earning Delta SkyMiles through riding with Lyft). Some suggested that there is true demand for this improvement and that the main reason it has not occurred in web2 is because of tech debt, which public blockchains resolve through easier composability of various programs.

Drawbacks of onchain points

Transitioning to an onchain points program may seem at first blush to be a straightforward decision. However, they can come with unique drawbacks, depending on their implementation.   

• Loyalty tokens might be less effective in incentivizing consumer behavior because of the confounding effect of speculation interfering with a company’s goals for the loyalty program.
• By reducing switching costs and creating the ability to exit through selling tokens, companies will not be able to achieve customer lock-in, which is critical to a loyalty program.
• Onchain points open up the surface area for competition by making it more transparent who a business’s customers are (e.g. Uber could poach Lyft drivers and vice versa).
• Transferrable onchain points entail significant legal/regulatory concerns (see below).

Legal and regulatory

Web3 founders seeking to incentivize consumer behavior with tokens have run into significant legal and regulatory challenges in recent years due to hostility from regulators like the U.S. Securities and Exchange Commission (“SEC”). Points programs offer an alternative mechanism to incentivize user behavior.

• Points programs may offer a way for web3 founders to acquire and retain users with less regulatory risk than tokens. For the same reasons that web2 loyalty points generally aren’t treated as securities under U.S. law, a well-designed web3 points program shouldn’t be subject to regulation by the SEC.
• Even if points programs have less regulatory risk than tokens, there are many other laws and regulations that apply and could create trouble for founders who don’t address them. Web2 points programs may be “overlawyered” at times, but they include critical terms, conditions, restrictions, and controls that are important for web3 points programs too.
• Points programs may provide more flexibility for founders considering a potential token distribution in the future. Distributing a token is often a “one-way door” decision — once done, it can’t be changed or walked back. Points programs give founders the ability to iterate, reflect, and analyze their strategy with the help of counsel before taking a step with significant legal and regulatory ramifications.

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This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.