Loyalty programs stand as crucial tools for businesses in today's competitive landscape. Traditional models, however, grapple with issues such as fraud and scalability. Blockchain technology emerges as a transformative force, promising secure and transparent loyalty systems. Its integration poses challenges - transaction fees raise financial considerations and the decentralization of customer data sparks privacy concerns. Additionally, the technology's complexity may hinder consumer adoption. Meanwhile, loyalty programs stand as pivotal tools in shaping customer relationships, driving brand success and fostering sustained engagement. Delve into the core of their significance through key statistics that illuminate their impact on a global scale but you may ask, why, to those organisations bother offering loyalty programs? The answer is actually very simple - it is easier to sell a product or service to an existing client than it is to a new customer. Indeed, according to Podium.com,“44% businesses focus on customer acquisition, only 18% focus on customer retention” whilst the probability of selling a product or service to an existing customer is around 60% -70%, and acquiring new customers is seven times more expensive than retaining already-existing ones. And, if the success rate of selling to a customer you already have is 60-70%, the success rate of selling to a new customer is only 5-20%. It is therefore easy to understand why businesses need to focus more on being ‘farmers’ as opposed to being ‘hunters’, i.e., reward and look after existing clients as a means to help drive higher sales and profitability.

Loyalty programs have not only proliferated but have become essential in the retail landscape. According to Queue-It's Loyalty Program Statistics, these programs are transforming the way businesses interact with their customers:

· over 90% adoption - more than 90% of companies have embraced some form of a loyalty program, showcasing the widespread recognition of their importance in customer retention and engagement.

· global brand - from McDonald’s to Amazon, major global brands are integrating loyalty programs into their business models, emphasizing their universal appeal and effectiveness across diverse industries.

· repeat business impact - 65% of a company’s revenue comes via the repeat business from existing customers, emphasizing the financial significance of customer loyalty.

Furthermore, the impact of loyalty programs extends far beyond individual businesses, transcending borders and industries. Simply put Google into your search bar and type in any brand along with the words “loyalty program,” “rewards program,” or “membership” and see for yourself. The average American consumer belongs to 16.7 customer loyalty programs. Meanwhile in the UK, over 77% of the population are members of a loyalty program and 61% of Europeans are members of at least one loyalty program. The prevalence of loyalty programs is a testament to their universal adoption across various sectors. Indeed, loyalty programs play a pivotal role in the aviation industry, not just as a means of customer retention but as substantial revenue streams. Airlines, often partnering with credit card companies, utilize these programs to award points whereby creating excitement among passengers seeking to maximize the value offered. American Airlines' AAdvantage claims to have 100 million members and Emirates have 30 million members. In 2020, American Airlines, which was valued on the stock market at approximately the same value as it is currently ($13.5 billion), was looking to issue a bond and pledge its loyalty program as collateral, claiming that it was worth up to $31.5billion. However, Delta Air Lines' SkyMiles (with 120 million members) operates the world’s largest loyalty program, so helping to explain why Delta estimates it will earn a staggering $6.5 billion from Amex in 2023 – and it aims to grow this revenue stream even further to $10 billion by 2028.

Tim Carswell, COO of ClearEquity, has said. “Blockchain and digital technology is enabling ClearEquity to develop a user-friendly app for consumers to boost their savings by storing loyalty tokens for conversion into equity shares in a secure, transparent and regulated environment whilst simultaneously providing businesses with a cost-effective and scalable means of eliminating fraud, protecting data and enhancing their brand by delivering a first-class customer experience."

The retention of brand-loyal customers and enhanced profitability are certainly benefits attributed to the effectiveness of loyalty programs. Nevertheless, although successful loyalty programs aim to motivate customers for frequent purchases, sometimes they fall short. LoyaltyXpert's analysis pinpoints four common problems that companies may overlook, potentially impacting the effectiveness of loyalty initiatives, including:

· inaccessibility - customers avoid complex loyalty programs. To enhance accessibility, loyalty programs should be easy to use on all devices, ensuring a straightforward enrolment and reward redemption process.

· confusion - complex rules and unclear instructions create confusion. Transparent rules, an explainer guide and accessible contact information help customers understand the program, so fostering participation.

· unappealing - stereotypical rewards may not appeal to diverse customer preferences. Diversifying rewards based on individual tastes and adding value to products or services enhances customer satisfaction.

· obsolete - repetitive rewards can lead to customer boredom. To keep programs engaging, it is important to introduce new and exciting rewards and regularly promote these updates, so as to sustain interest.

Hence, effective strategies are essential for overcoming these challenges and optimizing loyalty programs, including:· ensuring intuitive access across devices and a straightforward enrolment process.

· providing clear rules, an explainer guide and accessible contact information.

· tailoring rewards to diverse preferences to enhance satisfaction and loyalty.

· keeping programs fresh by regularly introducing new and exciting rewards, actively promoting updates.

By addressing these challenges and implementing these strategies, businesses can create loyalty programs that not only attract customers but also enhance satisfaction and retention. Blockchain technology offers some interesting solutions to address some common challenges that loyalty programs face and can help improve client retention and reduce the costs of running loyalty programs costs. Whilst rewards programs are a helpful tool for customer loyalty programs, inefficiencies persist due to the lack of uniform management systems; using blockchains can help to streamline processes and boost member activity.

Blockchain, with smart contracts, lowers system management costs by ensuring secure and transparent transactions, so reducing errors and fraud. It centralizes customer loyalty programs, whereby offering a trustless, decentralized solution for seamless access and management of rewards. Blockchain's near real-time recording enhances the efficiency of loyalty programs, speeding up point crediting and the technology ensures security by creating an immutable and traceable record of transactions, preventing fraud and manipulation. By enabling large loyalty program providers to offer value-added services, blockchain fosters a mutually beneficial ecosystem. Furthermore, by incorporating blockchain into loyalty programs, it addresses existing challenges and opens new avenues for efficiency, security and business growth. Cezary Olejarczyk, CEO of Open Loyalty, claims the use of blockchain is gaining popularity, especially among younger generations familiar with cryptocurrencies and NFTs. Loyalty providers are experimenting with blockchain, driven by its technological promise and rising popularity trends. Whilst some are early adopters, genuine applications will, unsurprisingly, require time, investment and experimentation. By using blockchains it is easy to digitize rewards, enabling secure transfers and exchanges among program members. Blockchain-powered platforms streamline reporting, reduce system management costs and enable rewards to be exchanged between members, or redeemed, whilst providing a transparent, fraud-resistant environment. And smart contracts can provide greater automation and generate reports for efficient program management. Examples of loyalty programs using blockchain technology include Qiibee, Starbucks and Flycoin, and there are a variety of airlines experimenting with blockchain technology.

Undoubtedly, loyalty programs have been transformed by the advent of blockchain technology - a topic discussed by Dr. Dimitrios Salampasis, who examined a variety of ways that loyalty programs from organisations such as The Lawn Tennis Association that organises Wimbledon, Starbucks and Disney have done used blockchain technology as part of their recent loyalty programs. However, disadvantages exist and challenges need to be navigated when implementing blockchain technology into loyalty programs. Given that some blockchains use considerable amounts of energy to function, organisations need to be mindful of possible negativity of creating loyalty programs with poor ESG credentials. Furthermore, there is a balance between transparency and security - whilst blockchains use encryption and anonymization, potential unauthorized access to consumer data poses privacy challenges. Consumer and staff adoption face hurdles due to blockchain's unfamiliarity and, in some cases, its poor user interface, especially when non-technical people must handle digital hot or cold wallets and sequences of memorable phrases and passwords. The integration of blockchain-powered solutions may well require educating consumers, developing user-friendly interfaces and providing effective staff training. Blockchain emerges as a catalyst for transformative change, offering heightened security, transparency and customer engagement but whilst the prospect is promising, the path is not devoid of challenges. The intricate dance between reaping blockchain's benefits and addressing concerns such as transaction fees, data privacy and user adoption is essential. Navigating these intricacies demands strategic foresight and a commitment to innovation. As businesses embark on this blockchain journey for loyalty programs, the question lingers: will they seize the potential rewards and create a paradigm shift in customer loyalty, or will the complexities obscure the path to a truly decentralized and customer-centric loyalty experience?

This article first appeared in Digital Bytes (16th of January, 2024), a weekly newsletter by Jonny Fry of Team Blockchain.