For decades, brands have relied on points-based loyalty programs to attract and retain customers. But now, momentum is shifting in a new direction.

Recently, both BMW and Starbucks announced they were launching blockchain-based loyalty programs. BMW customers will be able to earn rewards that they can spend on the manufacturer's products and services. While Starbucks Odyssey will allow customers to earn new rewards, including digital assets that unlock exclusive experiences.

These announcements hint at a new opportunity for investors — one where brands no longer reward loyalty members with points, but with customizable tokens based on blockchain technology.

Why are brands rethinking points-based loyalty?

The loyalty program market continues to grow annually, but that growth isn't matched by customer engagement levels. According to a 2022 study, customers are enrolled in 16 loyalty programs but actively use only half of them.

Clearly, there's a problem — and that problem is rooted in how the traditional points-based loyalty model works, or rather, doesn't work. Limited rewards, confusing conditions, and a frustrating user experience are common causes for low loyalty program engagement.

Brands that are starting to realise that fact see tokenized loyalty as a potential answer.

Point vs tokens — what's the difference?

When brands reward customers with loyalty points, they're stored in a centralised place — the customer's online account. The points don't have value outside of that account, and typically can't be shared, swapped or donated.

In contrast, tokens are stored in a decentralised place — the blockchain. Customers can access them via their own digital wallet, exchange or trade them with other users, or redeem them with participating brands using the same loyalty platform.

How does tokenization increase loyalty?

Here are just three ways a tokenized loyalty program can keep your customers engaged and spending more — over the long-term.

1. Tokens provide more options

A major limitation with traditional loyalty programs is choice. Customers typically have the option to redeem their points with the brand they're buying from, or a limited number of secondary partners. In contrast, loyalty tokens can be redeemed across a much wider ecosystem of multiple programs.

Let's use a hotel chain as an example. Today, a hotel guest that accrues loyalty points can spend them with the hotel chain, and maybe a small group of travel brands, such as airlines or car hire firms.

But when they're rewarded with loyalty tokens, that guest could redeem their tokens with a gym, fashion brand, or any business using the same token platform as the hotel. In theory, they could also trade their hotel reward points with their friend's airline points. In short, tokens give customers far more choice and control over how they get rewarded.

2. Tokens provide more value

Traditional loyalty programs often leave customers short-changed. In the case of a supermarket chain, the points a customer spends with a secondary partner will be worth less than with the supermarket chain itself.

This dynamic essentially forces customers to make a value call: spend points on what they'd potentially most like (cinema tickets for the family, for instance) or on what is more economically prudent (a weekly food shop).

Things are very different with tokens, because they keep their value: customers get a like-for-like reward when they redeem their tokens with other brands in the same loyalty ecosystem. And unlike some loyalty point schemes, tokens never expire. This can incentivise customers to save for longer towards bigger, more desirable purchases.

3. Tokens eliminate friction

From the customer's perspective, managing multiple loyalty accounts is a hassle. There are different reward points from different companies with different redemption policies — all needing to be accessed in different places. And the hassle increases when customers are expected to use physical cards and vouchers.

But a tokenized loyalty program built on blockchain eliminates that problem. Customers can access multiple rewards programs from multiple companies in one place, like a digital wallet. This frictionless experience can vastly increase the odds that a customer remains active and keeps spending with a brand.

The future of brand loyalty?

Blockchain-based loyalty programs are still in their early days, but companies like Libra Incentix are ahead of the game. Their LIX platform can be integrated with any existing loyalty software, and then customized to how and when a brand wants to reward their customers.

Andrew Doxsey, co-founder of Libra Incentix, sees considerable opportunities for investors that want to break into this industry.

As Doxsey puts it, "Traditional loyalty programs have reached saturation point and customers are tuning out. With the likes of BMW and Starbucks adopting blockchain-based loyalty programs, I think we'll see more brands experimenting with this technology to try and differentiate from competitors."

Widespread adoption might take a while yet, but for early investors, there are signs that the tokenized loyalty market could be about to take off.