Brief

Beyond Bored Apes, NFTs Will Revolutionize Customer Engagement
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At a Glance
  • NFTs for business go well beyond art or sports video clips. The technologies underlying NFTs provide a way to reimagine how companies engage their customers.
  • Starbucks and Breitling are among the consumer companies taking advantage of NFTs’ unique characteristics to change the loyalty and rewards game.
  • While the user experience remains clunky and regulation is still not standardized, the challenges in this nascent market are solvable.
  • Companies that want to experiment with NFTs can start by defining the desired future state of how NFTs fit with their strategy; then they can build prototypes for testing with early adopter customers.

The hype and price bubble for nonfungible tokens may already have peaked, but the more interesting and enduring business uses have just begun. NFTs have upended the art world: Beeple’s “Everydays: The First 5000 days” sold for $69 million, and Bored Apes have become a new status symbol to adorn social media profiles and metaverse avatars.

Sports organizations have started to embrace NFTs as a way to deepen fan engagement, from the NBA’s Top Shot for trading video highlights to the Australian Open minting NFTs for each small square of the tennis court. With the latter, holders receive key video replays for those squares, and even the ball itself in the case of a championship shot. The bid price for the NFT where champion Rafael Nadal's winning shot landed promptly surged more than 4,000%.

Do some of these investments constitute a bubble that depends on a greater fool coming along to buy the next one? Business luminaries such as Warren Buffett and Bill Gates believe so and disparage the rush to speculate in cryptocurrencies.

But set aside the wild spending on JPEGs of art, sports, and entertainment for a bit, as well as the recent crash in cryptocurrency prices. More relevant and promising for consumer businesses are the underlying technologies. NFTs provide an ideal set of capabilities to reimagine how companies engage their customers not only in rewards and loyalty programs but also in other creative ways.

Skeptics should keep in mind that the first NFTs appeared in 2014 and the first NFT standards were proposed in 2017, so the whole enterprise might be just 1% complete, like the ride-on-demand concept was before reservation, mapping, payment, and rating functions were combined into one mobile app. So far, more than 2 million Ethereum addresses have interacted with one of the largest NFT marketplaces, OpenSea. However, given that a person can maintain numerous Ethereum addresses, the number of people who bought Ethereum NFTs on OpenSea is likely much lower—and well below the number of people who have purchased cryptocurrency.

The mechanics of NFTs

An NFT serves as a unique identification and ownership receipt for a physical or digital asset. It’s stored or recorded on a blockchain—a digital ledger that cannot be edited, changed, or tampered with—for anyone to see.

More broadly, NFTs have become a key component of web3, the emerging third generation of Internet services, including verification and execution of transactions through a token-based economy. As a decentralized yet highly interoperable system, web3 departs from the tight control of customer information of today’s consumer technology platforms. In a web3 environment, a customer’s digital assets and information work across platforms; she owns them, decides what to release or communicate, and has a wallet that can be used on any site that accepts it.

As a component of web3, NFTs have advantages over centralized systems for digital customer engagement because the centralized approaches have not developed to be fully interoperable—sometimes not even between operations of the same company in different countries. NFTs rely on an ecosystem of companies building infrastructure, standards, and developer tools, making it easier to build upon existing elements rather than create a new system that stands alone. Moreover, if more people adopt digital asset wallets and other features of web3, they will likely demand access to NFTs.

Mass and elite appeal

Innovative use cases for NFTs are emerging in consumer goods, retail, media and entertainment, and travel industries, including direct consumer engagement, product life-cycle traceability, and wallet payment solutions linked to rewards and incentives (see Figure 1).

Figure 1

How NFTs will change customer engagement

Starbucks is creating a digital community for its 27 million active US rewards members, offering coffee-themed NFTs accompanied by exclusive content and other perks.

In luxury and fashion goods, Arianee issues digital ownership and authenticity certificates on behalf of partner brands such as watchmakers Breitling and Audemars Piguet through an NFT wallet. A brand can replace the authenticity card for a new watch or handbag with a digital certificate—an NFT. If a consumer wants to sell that watch years later, the NFT proves authenticity to the buyer, serves as the mechanism to transfer the certificate, and allows the brand to stay in touch with the new owner even after a transfer.

And in music, the band Chainsmokers gave away NFTs through Royal to 5,000 selected superfans and awarded NFT holders with a share of streaming royalties. The NFTs provided exclusive access to a collector-only channel and entry into a raffle to win a VIP prize package.

Not your father’s loyalty program

Think of an NFT as a programmable digital ticket that gives someone trackable, verifiable, tradable rights to an asset. The owner can add more content to it over time, and the NFT creator can govern its behavior with rules designed in advance. This opens up many possibilities for innovative ways to engage and reward customers because NFTs are uniquely game-able, stackable, tradable, programmable, and interoperable.

  • Game-able: NFTs can easily turn into a “loot box” full of consumable virtual items, to use the gaming term. A certain set of activities may be guaranteed to earn the consumer a reward with a minimum value, but how much else is in the loot box varies. For instance, after 10 purchases, flights, or hotel stays, the consumer earns an NFT redeemable for a gift. Some share of the firm’s customers might also randomly earn a shopping spree, a seat upgrade, or a bottle of wine at check-in.

  • Stackable: NFTs can have content subsequently attached to verify participation and capture the memory. One reward on a dining platform might consist of an upgrade to the chef’s table, and the NFT could have the menu and a picture of the party with the chef attached to it as a keepsake. This sort of anticipation and memory is particularly powerful for experiential rewards, which can be more valuable (and harder to price) than rewards that offer tangible value.

  • Tradable: It’s easy to share NFT-based rewards with friends and family, for a group to collectively save for a group experience, or for a timeshare owner to trade their weeks at a vacation condominium.

    Businesses might be queasy about customers selling rewards on the open market, but if a customer has more use for a concert ticket than a flight segment, what’s the harm in swapping? Everyone benefits, and the economic value from these programs stems from prompting incremental customer behavior: Buy more, stay longer, recommend to friends, cost less to serve. The rewards program becomes more effective the more customers value it, and they value it in proportion to the opportunity to actually use the NFT, even if that means selling it for cash.

  • Programmable: If the business wants to impose a small trading fee on any sale, it can. If it wants the reward to expire on a certain date, or provide a richer benefit at off-peak times, that can be included up front in the smart contract.

  • Interoperable: NFTs can operate in a decentralized manner, enabling easy connectivity and collaboration with other brands, creators, influencers, consumers, and collectors. Companies add to the NFT with new forms of value, such as entry to an exclusive event added to a watch certificate.

What needs fixing

While experimental buds are blooming, many components of a robust NFT system have not yet developed, limiting mainstream adoption. Three areas in particular need attention, though these will not be impediments for long.

The user experience is still clunky. Users need to purchase cryptocurrency on an exchange, move that crypto over to a self-custody wallet, connect the wallet to an application, and then engage with marketplaces and smart contracts that leave little room for error. That’s three apps required, each with their own learning curve. Adoption will take off once the user experience is simple enough so that every transaction can be easily completed in a single wallet with no jargon or technical requirements and users experience fewer hacking risks and less hassle with activities like recovering an account.

Nascent regulations have not standardized. Uncertainty about laws and regulation of NFTs remains. However, the US Treasury Department has already published a fact sheet outlining how it would work with foreign regulators (who in several jurisdictions are more advanced than the US) to address the risks and harness the potential benefits of digital assets and their underlying technology.

High transaction (“gas”) fees and a large carbon footprint plague NFTs. Both problems stem from intensive computer server use to mine cryptocurrencies through the proof-of-work process. These concerns will be addressed by Ethereum’s recent upgrade and would shift the chain’s consensus mechanism to proof of stake, which would almost entirely alleviate the carbon footprint issue. Other blockchains exist where users can mint NFTs without engaging in energy-intensive proof-of-work mining.

The desired future state and how to get there

Consumer companies that want to revolutionize their customer engagement and loyalty programs to open new streams of profitable growth should not wait for these problems to be fully resolved or for competitors to demonstrate how NFT technology can deliver loyalty. Catching up to the leaders may be too difficult and costly.

Instead, companies can start with a “future back” exercise to imagine what an NFT-powered loyalty and engagement system might look like for their business. The questions to answer include how NFTs fit within strategic priorities, which customer groups to target, which behaviors the company wants to encourage, and whether it should sell NFTs or give them away as an engagement mechanism.

Next, they would determine what’s needed to bring that future state to life—what data, technology, talent, partnerships, and innovation systems they need to set up. Developing a roadmap to build those components follows soon after.

Once companies have determined the desired future state and roadmap, they can start a “today forward” effort to build early prototypes of NFT-based engagement systems for testing with early adopter customers.

Making brands more memorable

Mainstream use of NFTs is within sight. We view tickets for events such as the 2024 Olympics, which is considering using NFTs, as the gateway to broader adoption and relevance.

Traditional points-based loyalty and rewards programs have had a good run in the airline, credit card, and other consumer industries. They’re not dead, but companies such as Amazon and Rakuten have already demonstrated more powerful models.

If we were to start with a blank slate for a new loyalty and customer engagement program, it wouldn’t resemble the old points-based system. Embracing NFTs with solid business outcomes in mind will power a whole new wave of innovation in customer loyalty. NFTs will also make it easier for brands in a wide range of industries to stay memorable with consumers through far more effective two-way engagement.

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