Chapter 9. ALIGNED INCENTIVES
“There is no influence like the influence of habit.”
Gilbert Parker
Summary
Blockchains and tokens unleash a powerful new incentive structure that could evolve to craft near-perfect alignment between action and reward. They could become a key tool for capturing attention and shaping behavior. But they also give new power to the crowd, which will, in turn, influence the shape of business.
Tokens are a flexible, high-fidelity incentive mechanism that could be used to shape and reward behavior. Companies will eventually learn how to use tokens to align interests, but it is a two-way equation: the community will also learn they can shape the business.
Tokens have the potential to be leveraged creatively to drive engagement, and could solve some of the most challenging problems facing marketing executives. But tokens will be most interesting when used to motivate an entire community to contribute to advancing a product, a business, or a mission—or as a mechanism for aligning the interests of various parties within an ecosystem.
In fact, by their very nature, successful tokens don’t live in silos—they break the boundaries of brand and business. Businesses that want to leverage these tokens will find it demands a shift in how they think about success and will require new kinds of collaboration.
The Setting
The Steady Extinction of the Loyal Customer
Winning the attention, engagement, and loyalty of today’s consumers is a continual and difficult battle for marketers. Consider shopping as a microcosm of new digitally driven consumer behavior. The internet, social, and mobile have made “shopping around” habitual. Looking through the lens of search data, Google reports that not only have mobile searches for “best” grown over 80% in the past two years, but there has also been higher growth among “low-consideration” products (apparel, beauty, personal care, dining, food and groceries, occasions and gifts, retailers and general merchandise) than “high-consideration” products (business and industrial, consumer electronics, finance, real estate, travel, vehicles).116 This indicates consumers are reconsidering brand choices more habitually and more frequently, even for smaller items of less consequence.
The internet, social, and mobile have made “shopping around” habitual.
Consultancy McKinsey found that not only was loyalty ephemeral, but consumers frequently switched brands once they decided to shop. In a recent report, a full 87% of consumers shopped around and just 13% (in the categories studied) were “loyalists.” And after shopping around, a full 58% ended up switching brands. When they dug deeper, the report continues, McKinsey discovered how vital it is to be included in the set of brands that first come to a consumer’s mind when he or she is triggered to make a purchase decision. Nearly 70% of the brands purchased by consumers who made a switch were part of these consumers’ initial consideration set when they started shopping.117
These studies show the importance of being everywhere, all the time. But earning initial consideration goes well beyond simple brand name awareness. Shoppers need to have a clear understanding of benefits and value. That means robust and authentic content that elevates products, and brands must dominate not only media channels but social networks as well (especially for millennials, who heavily leverage social media for feedback on buying decisions).
Being Heard Is Harder Than Ever
At the same time, the marketer’s arsenal is losing potency. While there may be more options to reach a target audience than ever before, it has never been more difficult to earn the attention and engagement of consumers.
Harvard Business School professor Thales S. Teixeira studies the “Economics of Attention.” Professor Teixeira defines attention as the allocation of mental resources, visual or cognitive, to visible or conceptual objects. Of course, before consumers can absorb advertising or other forms of brand messages, they first need to be paying attention. I recently spoke with Thales about his research.
“The quality of consumer attention has been falling for decades,” Thales explained. “Consumers have lost interest in the information content of ads because they can access more and better information on-demand. So, the supply of attention has gone down, while at the same time the number of companies and brands advertising has increased. It’s a simple law of economics—when demand goes up in relation to supply, the price goes up.”
He continues, “The net result for the CMO is that the cost of attention has been rising. In fact, even after accounting for inflation, it’s a seven- to nine-fold increase. That is the biggest increase companies are facing—bigger than wages, health care, and insurance.”118 Figure 9-1 illustrates this trend.119
Studies have shown that consumers are exposed to thousands of brand messages a day and switch screens over 20 times an hour. Meanwhile, they are becoming incredibly adept at filtering out what they don’t want to see, and more savvy about completely blocking ads altogether. Millennials in particular have developed what seems almost like an evolutionary feature that imbues them with the power of selective filtering to curate their digital-world experience in real time.
Figure 9-1. The rising price of attention. (Source: Thales S. Teixeira, www.economicsofattention.com.)
New Tools Haven’t Always Driven ROI
New engagement channels that seem promising at first often are hard to leverage effectively. For example, take a look at mobile apps. In 2013, the Chair of the General Management Program at Harvard Business School, Sunil Gupta, declared apps “the best way to win the hearts and minds of mobile consumers.”120 And many brands invested heavily in apps, often encouraged by agencies that saw an exciting new revenue stream in the work of creating these resource-intensive digital interfaces.
Fast-forward a few years, and few brands have been able to crack the code to drive ongoing engagement through mobile apps. In fact, the majority of users (51%) download no apps over a month. Smartphone users spend half their time on a single, top-used app, and spend nearly the entirety of their app time in just 10.121 So, while apps are indeed an important part of consumers’ digital experience, it’s very difficult for a brand to earn the position as one of the few that they actually use.
Over a hundred years ago, department store founder and marketing pioneer John Wanamaker declared, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” Back then, there were very few channels to reach consumers. Now, the marketing landscape is a stunningly complex and ever-changing kaleidoscope of options. Channels that didn’t exist a few years ago—native advertising, flavor-of-the-year social platforms, and in-app advertising—now contribute to the fragmentation of marketing team attention and budgets. Even with their tracking tools, analytics, and in-house data scientists, marketers are still guessing. They still can’t be sure what they do is actually driving the behaviors they want.
Even with their sophisticated tools, marketers can’t be sure what they do is actually driving the behaviors they want.
And it’s made much worse by bot fraud and click farms. Bot networks can now be rented by the hundreds of thousands, and they have become quite sophisticated at mimicking humans. The Association of National Advertisers (ANA) reports in their Bot Baseline Report that the economic losses due to bot fraud were estimated at $6.5 billion globally in 2017.122 Throw in pixel stuffing, cookie stuffing, ad stacking, search ad fraud, ad injections, and domain spoofing (to name just a few tactics), and it’s easy to imagine how ad fraud overall will have reached $19 billion in 2018, according to Juniper Research.123
Loyalty Programs Are Broken
Loyalty programs have historically been an attractive tool for influencing consumer behavior. In various forms, they have been used by marketers for over 100 years. But it was the debut of airline frequent flyer points nearly 40 years ago that sparked a cultural obsession. This early success spawned loyalty programs across industries as diverse as retail, entertainment, grocery, and hospitality. US consumers hold 3.8 billion memberships in customer loyalty programs,124 and the average US household participates in 29 different programs.125 That gives consumers a complex and often fragmented labyrinth of points systems, currencies, redemption rules, and exchange programs to navigate.
Loyalty programs are increasingly falling short of businesses’ expectations. A McKinsey study found that 58% of loyalty program members don’t cash in their points, claim their vouchers, or otherwise follow through on the offers they’ve signed up for.126 And those that don’t redeem are more than twice as likely to defect.127 These programs have proven poor at driving consideration, targeting instead a much smaller (although high-value) segment of customers. And returns have been diminishing. Airlines in particular have been cutting back on their programs because they are becoming too expensive—exacerbated by accounting requirements that mean unused miles weigh down balance sheets.
Businesses are clearly struggling to continually be seen, heard, and understood by consumers and influencers. Where do they turn?
What Blockchains Make Possible
Powerful Incentives at Scale
Blockchains can enable a powerful new incentive model that can be used to craft near-perfect alignment between action and reward: tokens. There is much uncertainty today about how tokens will be regulated or even taxed, but there are many leaders in the space working to make them available as a strategic tool—and with good reason. Should tokens become mainstream, they could potentially be more effective at shaping behavior and driving action at scale than anything we’ve ever seen before.
The first blockchain, the bitcoin blockchain, created a secure, decentralized digital currency that, with a clever twist of incentive design, plays a key role in securing the blockchain and making it resistant to attack. Now, we have many blockchains, and many tokens. And these tokens can work to do much more—they can be adapted to incent any behavior.
Elad Verbin, the Lead Scientist at Berlin Innovation Ventures, explains, “Incentive design is one of the killer features of blockchains. Blockchain systems are uniquely able to implement fine-grained incentives tied to complex business logic. They also have the potential to be highly scalable, so they can support giving out incentives in tiny increments (e.g., micropayments), as well as enormous incentives given all at once.”128 Prominent blockchain innovator Trent McConaghy describes it like this: “The blockchain community understands that blockchains can help align incentives among a tribe of token holders. Each token holder has skin in the game. By rewarding them with tokens, you can get people to do stuff. Blockchains are incentive machines.”129
Hit Me Again, Please: What the Heck Are Tokens?
In broad strokes, tokens are a privately issued asset that can hold the same characteristics that all money does: they are fungible, divisible, portable, and durable, and are in limited supply. They exist only in digital form or code, and are secured using cryptography.
Tokens are typically created and distributed through a token sale (which is also used for fundraising) or giveaways (often with the intent of building a community). Often, foundations govern these tokens, with open source rules that anyone can see. To sustain value (beyond speculation), these foundations will need to attract an ecosystem of buyers and sellers that find value in transacting with the token. These are essentially self-sustaining mini-economies, called token economies. Today, the “value” of tokens is driven largely by speculative investors, and it will be a difficult transition to move from this “speculative value” to value derived from true utility—there is much debate in the community as to what path this transition will take.
Thousands of tokens have been created so far. While technically tokens could be created by a knowledgeable developer in less than an hour, creating a token that will have sustainable long-term value is very difficult, and it is very likely that the vast majority of these tokens will fail (simply visit deadcoins.com, a site that tracks the fallen, to get a feel for the scale of this challenge). However, those that are intelligently designed, well governed, and attract vibrant “token economies” could be contenders for long-term sustainability. These are the tokens that have the potential to become a compelling new tool for shaping behaviors and incenting engagement.
Your Token or Mine?
Theoretically, anyone can issue a token. However, it’s extremely challenging to issue a good token (as defined by long-term utility), and even more difficult to issue an unquestionably legal token in the face of the global regulatory uncertainty surrounding cryptoassets. Add in the complexity that long-term value depends on also building an economy around the token—an ecosystem of places a token can be used in exchange for goods and services—and you can see this is real work. But anyone could use a token that is already in the market and that has a “vetted” design (although few have truly been battle tested yet) and an active token economy. Or, they could use one of the growing number of token-as-a-service companies for a templatized path to a custom token. We have yet to see how consumers will react to the universe of tokens, and even with the market shakeout in the second half of 2018, it is quite possible the sheer number of options thrown their way as projects advance will feel overwhelming or confusing. Bottom line, there is a lot of growing up that needs to happen before we will have clarity on how to best use this new incentive tool. Even with this (large) uncertainty, it’s clear this is an important area to watch.
One token can be exchanged for another or into traditional currencies on exchanges that are built specifically for this purpose. Not all tokens are listed on exchanges, and the user experience of signing up and securely using them is intimidating for first-time users. However, there are many companies very interested in making this experience easier, and getting more and more people involved in using and investing in cryptoassets. We will most assuredly see rapid improvement in this experience.
While the universe of tokens is still young, the cryptocurrency market cap was over $200 billion for most of 2018. And as the space evolves, there will be increasing clarity as to which will be winners—essentially those that are successful at attracting consumers, businesses, and other members of the ecosystem to their “movement.”
Note that a discussion of tokens can quickly get complicated. There has been a great deal of excitement in the community about special categories of tokens with unique characteristics, like non-fungible tokens (NFTs) and security tokens, for example. For the purposes of this chapter, I am focusing only on one function of tokens: incenting consumer behavior at the application layer. If you are interested in learning more about the fascinating role of tokens in making blockchains work or how it is possible for a digital currency to even have any value at all, I have included resources on my website.
Tokens Build on a Foundation of Behavioral Psychology
Token economies have actually been around for a very long time. In fact, simulated, nondigital “token economies” have been used by therapists as an effective mechanism for shaping behaviors since the 1960s.
In 1958, Dr. Nathan Azrin arrived at Anna State Mental Hospital in Illinois as the new director of treatment to find his new charges unwilling to dress or apply basic hygiene. With his colleague, Teodoro Ayllon, Azrin created the world’s first official token economy. It was a system in which patients bartered for tokens by modifying their behavior in incremental steps, and could later exchange the tokens for goods or privileges. Soon, the majority of the hospital’s population was dressing themselves, and some had even created a token-exchange store on the ward where token holders could trade their earnings for coveted items like lipstick.
Token economies have since become one of the most successful approaches in applied psychology and are used in education, couples therapy, military training, employee supervision, prisoner management, addiction treatment, athletic coaching, and parenting. According to the Encyclopedia of Mental Disorders, a token economy refers to a behavior modification system that utilizes some form of token to encourage the increase of desirable behavior, and the decrease of undesirable behavior.
Now, with the advent of cryptoassets, token economies will infiltrate our digital experiences to reach a scale never seen before. It is yet to be revealed what happens if this tool is easily accessible to any marketer. And despite broad use in their pre-crypto form, there has been very little research in the wild that would help us project how these systems will interact with our psychology when applied with this scale. Watch closely.
Fine-Tuned Calibration—and Impact
Tokens, when tied into a digital interface, can be very finely calibrated to incent behaviors that drive new levels of engagement and action. They have three key attributes that work in concert to deliver this new, powerful incentive model:
- High reward relevance
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Businesses have historically been limited in the kind of rewards they could offer consumers, with many resorting to loyalty point or service credits. As this space evolves, consumers will have the flexibility to use tokens they have earned to buy an increasingly broad range of goods and services. Tokens could potentially be portable between applications and even platforms. Consumers could even convert them to cash they can hold in their hands, if available in a growing number of exchanges focused on this purpose. This means they can tailor their reward to be more meaningful to them.
- More precise targeting
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Tokens are not only highly divisible, but also can be easily targeted to micro-behaviors. Rewards can be focused on driving small, discrete tasks, or even used to influence the shaping of broader behavior by continually rewarding very small actions. (First introduced by behavioral psychologist B.F. Skinner, shaping is the process of reinforcing successively closer and closer approximations to a desired, or targeted, behavior and can be a powerful method of influence. It is this concept that drove the initial idea for Dr. Azrin’s first token economy.) Over time, as practitioners learn more about how consumers interact with their application or platform to earn tokens, they will be able to incent “quality” micro-behaviors at higher and higher fidelity. As the practice evolves, it is likely we will see the earning of tokens pegged to actual impact as well—for example, the success an influencer has on getting his or her followers to take action.
- Immediate gratification
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A fundamental component of effectively influencing behavior is immediate reinforcement of actions with rewards. This instant feedback loop could be made easier with tokens (versus waiting for a transaction to clear or a monthly statement, as in the case of miles or points). The reward can be embedded directly in a digital interface so that users can see the results of their actions, as in a gamified system.
The Potency of Tokens + Gamification
In fact, the practice of using the triggers, stimuli, and approaches pioneered in games will be an important tactic for all businesses, regardless of industry, that want to influence behavior with tokens. Non-gaming industry professionals call this practice of using gaming fundamentals to drive engagement outside of an actual game gamification (a term that can make true gaming industry insiders cringe). Gamification is nothing new. It’s a well-worn and proven strategy in a broad range of industries. MySugr uses it to help manage diabetes, Duolingo uses it to teach language, and even Facebook deploys gamified campaigns to help brands engage consumers. All of these examples give us that familiar, lovely zing of dopamine (a hormone that makes us feel good) by rewarding us for specific actions. And they trigger serotonin (which can boost mood) when we think about past successes, such as looking at badges we’ve earned.
But game designers have long held a unique and extremely effective tool in their arsenal. It’s a mechanism that hasn’t been broadly accessible to industries like health care, education, and social media: virtual currency. Game designers have spent years working to shape consumer behavior with a rich range of in-game transactions—all fueled by virtual currency. They have learned how to drive engagement and revenue, no matter how good a player is or where they are in the game. They have even learned how to use virtual currency to help build communities. They have learned how to keep “in the game” and to drive habit. They have built best practices around what works and what doesn’t when it comes to creating new economies that motivate and reward users’ behaviors. Recently, social media players like Kik (instant messaging) and YouNow (livestream video chat) have experimented with in-app virtual currencies (and both have designed tokens).
When they hit the mainstream, tokens could be even more potent than an in-game virtual currency, and applicable to a much broader audience. In fact, the combination of tokens plus gaming fundamentals could give a range of businesses across industries the potential to tug more deeply at our psychology than ever before.
The combination of tokens plus gaming fundamentals could give a range of businesses across industries the potential to tug more deeply at our psychology than ever before.
In our modern, digitally driven world, we are an increasingly receptive audience. As Mary Meeker explains in her 2017 Internet Trend Report, millennials and Generation X have been gamified since birth. They’ve become wired to respond to the gaming mindset, such as the feedback loops and desire to progress to higher levels and achieve mastery. In Mary Meeker’s words, “Games are now foundational to digital success.”130
More Powerful, Aligned Communities
But the power amplifies by an order of magnitude when applied to an entire community. Blockchain entrepreneurs could use tokens as levers with which to influence a community’s direction of movement, and motivate community-level action. It is here that some of the most disruptive use cases are sure to originate. Tokens align the incentives of a user and a community, offering the possibility to reward actions that contribute to network value and community cohesion. Token holders also have “skin in the game”—the value of the token is driven by the size and engagement of its community and overall ecosystem. They have a vested interest in increasing token value, and supporting the participants in that token’s ecosystem.
Tokens can also be used to align the interests of a B2B ecosystem of businesses. They can be designed to drive productive contributions and positive behaviors even from a diverse range of businesses in a way that delivers value back to the ecosystem and all its members.
But blockchain-era communities will also have the power to exert great impact on the business itself. Because tokens are often designed to be portable, communities will have a new tool with which to wield their collective power. If a business is not serving a community, or violates the ethos or values of a community, that business could be abandoned en masse, along with all the economic weight that community represents. Companies that can find ways to align their business models to values and beliefs of a community’s will find themselves in a position to better tap its potential power.
Blurring the Lines between Business Owners and Participants
On a token-driven platform (imagine a tokenized version of Amazon, Facebook, or Uber), the lines between participants can blur—all participants, whether buying or selling, consuming or contributing, would benefit from the increasing value of the network. This raises the possibility that token holders may act as promoters, working to refer and engage others, and growing the overall value of the network. Historically, businesses based on network effects struggle to get to the critical mass that makes a network truly valuable. Amazon, Facebook, and Uber derive much of their value from the size of their network. Tokens could, if the network is designed well, help propel a business past this classic dilemma; with everyone getting a share of the value created, all participants are motivated to make the network successful.
KJ Erickson, the cofounder and CEO of Public Market, a tokenized ecommerce protocol, believes that these centralized-network-effect businesses are primed for displacement. “As network-effect businesses grow, the value of participating and the cost of switching becomes higher, and so they naturally drive towards monopolies,” she explains. “All for-profit companies have a fiduciary duty to serve shareholders, and so they extract as much profit as possible through huge fees—understanding that even if network participants are frustrated, they have few alternatives. I argue that the network effects of tomorrow will often be built around decentralized, tokenized ecosystems with no distinction between network participants and network owners. They’ll capture the value of the network for participants without charging ‘rent,’ in the form of fees and data. It’s a better outcome for everyone—and if well designed, these decentralized networks could even supplant some of today’s most powerful companies.”131
James Glasscock, a founder of both a blockchain consultancy and a crypto venture fund, describes a vision for a new balance of power. “In the current system, the incentives are not properly aligned for the good of the community. The incentives are aligned for shareholders. But isn’t this backwards since the count of the community members that use these services far outnumber[s] the count of shareholders? Think about it, Netflix subscribers outnumber Netflix shareholders, Facebook users outnumber Facebook shareholders. Blockchain can help switch this paradigm and better align the interests of the shareholder and the customer.”132
Implications: Program the Incentives, Program the Behavior
Clearly, blockchain-driven tokens are in their infancy. Today we can only speculate how we will behave with broad exposure to multiple token economies, when tokens become more easily exchangeable for traditional currency, and when they become integrated into a greater share of our digital lives. It is also uncertain whether we will become confused or develop “token fatigue,” overwhelmed by all the tokens that are thrown our way.
It is, however, likely that we will go through several phases as we learn about tokens, and figure out what role we want them to play in our lives. We may start by discovering them, experimenting with them, and then eventually simplifying—curating a portfolio of tokens we care about and to which we are willing to dedicate mindshare. It is this select set, perhaps, with which we create habits and loyalty, eventually incorporating them into our daily lives. Perhaps the order changes, or the cycle repeats continually. Perhaps communities gravitate to favorite tokens or suites of tokens. But in some way our relationship with tokens will settle into some kind of cadence over the years to come.
Regardless of how this evolves, it is clear that tokens have the potential to trigger and interact with our psychology at a chemical level. It is clear they hold power. It is clear they could shape behavior at many levels. There is no doubt: this is an area to watch closely. Watch carefully how it develops, and conduct your own research to understand your customers’ mindset around tokens, and how that changes over time. Experiment yourself with using token economies, and experiment—thoughtfully—as a business. But for now, let’s unpack some of the areas in which tokens could have impact.
Driving Escalating Commitment
It’s a fact of every business: different segments of customers want different levels of engagement. Some just want a transactional relationship, to make a purchase and move on. Some want to believe in a business, and may spend great time and effort giving product feedback, making suggestions, evangelizing, and otherwise contributing to its success. And some fall in between. Blockchains and tokens in combination are flexible multi-tools capable of delivering tight-fit incentives for all. Token-based incentives will be versatile, easily scaling from rewarding a micro-behavior to incenting business-changing contributions.
They could also be used to cultivate a committed relationship from something that started much more casual. As tokens accumulate, users will likely take notice—suddenly, a balance earned through small, barely noticeable actions is worth something of value to that individual. This can offer a pivotal moment for the relationship between a business and a customer. It presents the opportunity for nurturing customers from casual users to more devoted customers and even promoters of the business. And this effect could escalate quickly. Because the value of the token theoretically rises with the value of the network, the more tokens a particular individual holds, the more vested they are in the success of the business, and the more they want it to increase in size and vibrancy. A simple reward could thus evolve into a currency that individuals actually personally care about.
They may care about it simply because they (eventually) could exchange their balances for goods and services they value, or convert it to local currency they can use at the grocery store. But there is also the possibility for something more. It’s been well documented that today’s consumer desires more “meaning.” Tokens or token campaigns could be tied to social causes or brand missions that help a consumer feel they get meaning from their interactions with that business. The more aligned a brand is with an individual’s values, and the more the individual sees the brand as helping them appear as the person they want to be, the more likely a business will be able to spark this effect. For this reason, it’s quite possible we see many businesses of the blockchain era flex very closely to the macro (and micro) values and desires of their customers.
Stoking Community through Tokens
These same principles can be applied at a community level, and in fact, it is at this level that tokens will reveal their true superpower. A business could use tokens to tap into an existing community and incent that community to move in a direction that helps the business. Or, it could use tokens to foster the growth of a new community. Regardless, with the right circumstances they could be used to unleash baking soda-and-vinegar–like reactions that make change happen quickly—whether they are small actions that add up to something big, or are used in the form of bounties to motivate large-scale actions that drive the business forward.
Using Tokens to Shape Individual Behavior
Highly versatile, tokens will likely be used by brands and businesses in creative new ways to incent awareness, drive engagement, and trigger action—areas that have been increasingly difficult for marketing departments to crack. While the rules governing the token and any changes are typically baked into its design at birth, the token itself can be used very flexibly. They could be used, theoretically, to reward ongoing behavior such as social sharing, going into a store, converting a friend, completing a profile, achieving a new level of mastery, interacting with ads, or just using the product. Or they could be used in sophisticated single-use campaigns that integrate other technologies—making a purchase of something specific, sharing an image that includes a certain product, or interacting with an augmented reality experience on a package or label.
Blockchains could help advertising carry more impact. As discussed in the previous section, before consumers can absorb advertising, they first need to be paying attention. Consumers could be paid to watch ads, or to interact with them—even be rewarded when they make an immediate purchase. As more consumer-ready applications gain traction, they will offer a platform for brands to launch creative, context-aware advertising campaigns that reward consumers on their terms. For example, a retail brand could reward students who complete a course in an online degree program, or give gamers a reward when they reach a certain status in a gaming application.
This new incentive model also holds interesting possibilities for marketers to experiment with honing the granularity of their campaigns, as the space evolves. For example, if a consumer or influencer has been willing to make additional data available and verifiable, it could be used to target very specific customer profiles to take an action. Imagine a futuristic scenario, for example, in which an automotive company hopes to convert recent university graduates to their brand just as they start the next phase of their lives. They could deliver a generous promotion with assurance that they were verifiably being offered and redeemed by only these graduates—without the brand having to obtain or verify the actual data themselves. Or perhaps a new meal delivery service is looking to optimize operations by increasing penetration of a specific neighborhood—they could offer significant bounties to those who refer verifiable neighbors that convert to long-term customers. One could also imagine a future in which there is barely a middleman at all—individuals share a profile of the kind of advertising they would like to consume, and brands can interact directly with them, with both parties receiving high value.
Incenting Not Just Action, but Impact
A key twist is that rewards could be tied to measures of quality. The definition—and measure—of quality will depend, of course, on what the business is trying to achieve. But the traceability of impact and results could influence the entire practice of measuring marketing ROI. One could imagine incenting the amount of time spent on an activity; how frequent the interaction, transaction, or share; or how many votes a response to a question receives from a community.
Over time, we are sure to see applications that help marketers make a direct correlation between amount of reward and the amount of value contributed to an application or platform—for example, a blog post that gets a high number of claps, likes, shares, and traffic could get a larger reward than one that doesn’t. Or brands could take this a step further—by rewarding “highly regarded” content (measured in a similar way) that makes positive mention of a particular product. B2B companies could incent customers who are also product experts to provide quality support to their community’s questions by highly rewarding answers that are completed in a certain timeframe or that receive a certain number of likes. A health insurance provider could tie rewards to the sustained maintenance of weight, and an auto insurance provider to the sustained adherence to speed limits.
The Next-Gen Influencer Strategy
Long before social, marketers used influencer strategies. For 20 years, the Milk Processor Education Program capitalized on the influence of celebrities, athletes, and social icons with the “Got Milk?” campaign. With the advent of social networks and platforms like Instagram, YouTube, and Twitter, people could go from relative obscurity to huge followings and influence from within the comfort of their own home. These influencers can command a lot of authority and trust with consumers. Seventy percent of teenage YouTube subscribers say they relate to YouTube creators (influencers who have met certain criteria on YouTube) more than traditional celebrities, and 40% of millennial subscribers say their favorite creator understands them better than their friends.133 A single nod to a product or service from a key influencer can trigger instant excitement. Brands are becoming more adept at building relationships with these valuable advocates, and better equipping them to tell brand and product stories on their behalf.
What happens if tokens become a tool for brands to incent influencers? You can imagine the same dynamics that could motivate consumer behavior being applied to influencer armies. Rewards could be targeted to specific activities, or the quality of content as measured by shares or likes. Already, blockchain entrepreneurs are launching projects that focus on incenting influencers, with token rewards for “proof of contribution.” Many of these early solutions feel experimental, although they already work to solve problems of verification, negotiation, micro-payments, and a currency that transcends borders. Larger social media companies are also getting involved and are sure to push the boundaries of how brands can incent influencers more efficiently, and with more transparency about results than ever before. When more evolved, they could provide a mechanism for truly leveraging even micro-influencers at massive scale.
The technology may also enable more creativity in influencer campaigns. Influencers by their very nature are masters of community engagement and viral tactics, and hold the potential to be a creative force supporting a brand’s objectives. Conceivably, tokens and blockchain-driven validation could enable brands to incent purposeful creativity—aligning influencers’ on-the-ground innovations with a brand’s mission by rewarding the achievement of certain metrics. In essence, blockchain functionality could boost influencers to influence with more impact.
Using Blockchains to Ensure Quality
But blockchains make it possible to go further than simply verifying and tracking metrics that indicate impact. They can go deeper, to verify the contributor is a real person. Since the dawn of digital marketing, marketers have long tolerated noise in their results from fakes, frauds, and now bots. Blockchains can certify that contribution is linked to a specific identity, and the reputation that identity has built over time. They even have the capability to verify additional data that a contributor has opted to add to their identity, such as locations, credentials, group affiliations, and other attributes. Because all of this data can be verified by a blockchain without divulging the real-world identity of the contributor, it can significantly prevent bad actors and fraudulent activity without compromising privacy.
Another way blockchain entrepreneurs drive the quality of an exchange or interaction is through a mechanism called, in crypto-speak, staking.
With staking, the individuals or parties involved put up tokens as a form of collateral. With this skin in the game, they are more incented to follow through to produce the promised outcome, whether that’s providing a good or a service. If everything goes well, these stakes are returned to the original contributors. If it doesn’t, they can be redistributed according to the rules of that protocol (and there are typically arbitration channels to deal with disputes). While there is still a lot to learn about this approach, it could evolve to be a powerful tool to incent behaviors that add value to a network.
Blockchains also have the potential to solve some of the advertising industry’s biggest challenges, and blockchain entrepreneurs are swarming to this space. They are developing decentralized ad platforms and consent-based ads, and pairing up with ad industry R&D groups in consortiums to prevent fraud. The level of innovation that we will see in the next few years is sure to change the shape of the market. Many of these innovators are focused on developing transparent and secure marketplaces in which advertisers can validate directly that they are getting what they are paying for; this would indeed be a breakthrough in “truth in advertising.” However, we will also see a range of new functionality that leverages token incentive models to garner attention and increase engagement from consumers—consumers that are verifiably real people, not bots.
But Where Do You Start?
Knowledge of cryptoassets among the general population is currently very low. But this will not stop businesses from experimenting with the use of tokens. It may take some time, but best practices will eventually emerge to match consumers’ readiness. The journey will likely start by framing tokens as something a consumer understands already, like a loyalty point or a reward. Consumers could accumulate and even use tokens without a need to understand the full extent of how they function or the richness of what they do—or even without knowing that these are cryptoassets at all. As more and more businesses incorporate tokens, and collectively invest resources in educating the general population, it is quite possible that one day in the near future we will see a rapid uptick in adoption of cryptoassets as a whole.
Agile Strategies, Smarter Marketing
Astute marketing teams may learn that tokens not only give their consumers feedback loops but also give the marketers themselves useful insights. With a proliferation of options for marketing spend, better clarity into what actually drives ROI is a highly attractive prospect. Marketers will be able to observe with higher fidelity and traceability how effectively a particular incentive triggers a specific action at a certain time or in a certain context. Tokens could be used very flexibly to tune behaviors, and the most effective teams will be those that have the unique skill sets to use agile strategies of rapid experimentation, measurement, and execution—and that have the skill sets to analyze and learn from the data these experiments produce. Over time, these teams could leverage these learnings to improve efficacy and even, one day, to optimize marketing budgets.
Reinvigorate the Loyalty Program
Another area that is receiving a great deal of attention from blockchain entrepreneurs is loyalty programs. One day, we could hold tokens as loyalty “points,” and combine those from a variety of brands into a single unified wallet. These rewards, even if multiple “currencies,” could move without friction on a single platform. Consumers would not have to manage a maze of different program restrictions and redemption policies, and could potentially be more actively engaged with these valuable wallets of cross-program loyalty points than they are with today’s fragmented and scattered programs.
Brands could gain visibility not only into how consumers earn loyalty points, but also into how they respond within the freedom of a larger redemption marketplace, potentially driving new insight on customer behavior. Consumers could even be incented to make different choices within that marketplace at different times.
We can also expect structural changes to how loyalty programs work. Brands may strike partnerships or create coalitions to develop “loyalty networks” that both meet their business objectives and give consumers a form of points that they value more highly than what they have access to today. New partners could be rapidly added to these networks without today’s complexity, making it easier for loyalty programs to stay fresh and even to partner with complementary emerging brands that don’t have the infrastructure or resources to support a traditional loyalty program partnership.
In fact, the idea of a formal points “partner” may one day fade away, to be replaced by a vast ecosystem of merchants of all sizes. Marketplaces of granters, earners, sellers, and buyers may even emerge, as may consumer-to-consumer point exchanges. As the idea of a formal loyalty “program” begins to dissipate, we may see a replacement that looks more like a series or network of highly targeted, and increasingly tailored, ongoing loyalty campaigns.
As loyalty programs collide with blockchain capabilities, relatively feature-rich loyalty incentives could be offered by just about any size or maturity business. No longer will extensive program development or the buildout of a complex support infrastructure be necessary. Industries that were never able to effectively leverage old reward point structures may find new opportunities in this next-gen version. Service providers will likely spring up to assist businesses with every aspect of these loyalty campaigns, making them “turn-key accessible” to virtually every merchant, organization, or even home-based seller.
Brands will need to keep a close watch on the evolution of the loyalty points space so they can effectively respond. While early, one could imagine that consumers may begin to expect rewards at every turn—every ad they watch, every share they post, and at every point-of-sale transaction. This could depress the value of an endorsement (“he’s doing it just because he’s getting rewards”). Because having multiple partners on a single platform increases the value of the rewards on that platform, there may be great pressure to join a network in order to remain competitive. Consumers may develop distaste for the lock-in that typifies today’s programs. But if these next-gen loyalty networks become commonplace, the competitive advantage of any one brand’s approach may diminish. Over time, consumer interaction with these programs could look less like loyalty and more like a transaction-level preference for whomever happens to be offering the best reward at the time.
Brands will need to think very carefully about how to design and participate in these next-gen programs to ensure they effectively reinforce the relationship customers have with their particular brand. There could be benefit to brands by moving early to develop a blockchain-based loyalty platform that is attractive to both their business and their customers. Early movers could set a precedent for the governance of these new networks, the design of the incentives, the regulation of who owns the customer and has access to their data, and the rules for the program. But while there are many highly regarded brands that have put out a press release or other indicator that they will use tokens in a loyalty program, actual implementation must move in lockstep with the maturation of the space.
The Power of Partnership
It is true not only of loyalty programs that the more opportunities for redemption, the more valuable it becomes to the consumer. This is true for the use of any incentive—the more places a token can be used, the more utility value it holds. For this reason, blockchain-based tokens are most powerful when tied to a thriving ecosystem of participants and partners.
To be a “success,” tokens have to earn liquidity in the marketplace, and connect to a thriving ecosystem where they can be directly earned and spent. While thousands of tokens exist today, there will be a much smaller number that gain long-term prominence. They may be optimized for different uses—there may be a dominant token (or a set of several) for media, another for education, and yet another for gaming, for example, but regardless, the winners will have a booming ecosystem and vibrant mini-economy. Watch carefully and be deeply thoughtful in picking teams, making alliances, and selecting platforms.
But do partner, wisely and often. Partnerships will be an important component of success to businesses in a blockchain world, and the successful businesses of tomorrow will become increasingly adept at navigating these alliances to mutual gain. As we evolve to a more collaborative relationship between customer and business, we could also evolve to more collaborative relationships among businesses themselves, aligned by a common mission and vision for the customers they serve.
Partner wisely and often. Partnerships will be an important component of success to businesses in a blockchain world, and the successful businesses of tomorrow will become increasingly adept at navigating these alliances to mutual gain.
The Beauty of System-Wide Alignment
When orchestrated well, tokens could be used to align all stakeholders toward a common goal to drive the organization forward. This includes not only individual customers and networked communities of customers, but the ecosystem of partners and even employees and investors as well. The lines separating the roles of these contributors could blur as motivations and actions move in concert. Applied especially against missions that advance society, this is when these potent incentives turn beautiful—and could bring great long-term success to the organizations that master it.
The Dangers of a Coin-Operated World
From a social science perspective, I cannot emphasize enough the grave responsibility that comes with this powerful tool. There is a flip side of token-fueled, gamified technology. One day, we may all be interacting with multiple token economies on a daily basis. If and when this happens, we will need to be more mindful about how we humans stay in control. The feedback loops, the immediate gratification, and the manipulation of micro-behaviors that tokens enable (especially combined with gaming fundamentals) mean that tomorrow’s applications could be plugged more directly into our chemical circuitry. They may constantly reward us for participating, and could become addictive in nature. We will need to work harder to make sure the technology is serving us—versus us serving it.
We can use gamified applications to help us exercise more effectively, eat more healthfully, learn new job skills, build important sources of income, and connect more deeply to our communities—or we could let them alter our belief of what’s important. We’ve seen how hard it is to strike this balance with Web 2.0 (think of the teen who starts to tie his sense of worth to the number of Instagram followers he has). It will be harder as we are surrounded by more and more token economies vying to influence our behavior.
As you deepen your exploration of this space, my hope is that you will be thoughtful about the implications of the technology and your work. Importantly, there is a strong argument for this approach from a coldly quantitative perspective as well. In the blockchain era, the businesses that will thrive are those that do right by the community. Every community is composed of many individuals, and their stakeholders—parents, peers, and partners—who will all be watching to see who is serving their interests best now, and for the future.
Throughout your journey, there will be opportunities to make decisions that impact your customers’ lives. I believe there is always an option to choose a direction that more symbiotically supports customers’ health, success, and happiness. And while at times there are short-term hard costs associated with this choice, the organizations that follow this path will enjoy longer, stronger relationships with customers, stronger communities, and long-term business results. This kind of symbiosis, in fact, will be a key driver of the new collaborative relationships that will typify this next era.
Cautions and Considerations
New incentive models present both threats and opportunities to existing businesses. While some of these cautions and considerations are very future-focused, they are meant to provoke your thinking about what could come. This is by no means an exhaustive list; it provides additional food for thought on how to prepare for this new paradigm.
Cautions
Overestimating (or underestimating) the value of tokens to the consumer
In this early stage there are a lot of unknowns about how tokens will be valued by a consumer. Today, much of a token’s “price” is determined by speculative investing activity. But until tokens have reached broader acceptance from both consumers and merchants, we will not understand their true, nonspeculative value. While a token may look like it has a certain value associated with it, today that is only the value for someone who knows how to exchange it for other cryptoassets, traditional currencies (also called fiat), or the limited goods and services currently available for that particular token (if any). Research your customers’ mindsets to understand how they perceive token value, or experiment with incentive campaigns for a token’s already-enthusiastic users. And conduct lots of research to understand how this changes over time as the market evolves—perceptions could change rapidly.
Trying to explain too much or too little
Just as most consumers don’t understand the inner workings of your loyalty programs or what happens to get a PayPal payment from their account to yours, they will not understand the ins and outs of how tokens work. To the consumer, many of the details will be—and should be—opaque. Incentives should be communicated in a way that is exciting and attractive, and introduces near-zero friction.
At the same time, make sure that more information is available for those who want and are ready to know more. The blockchain movement has high standards for open sourcing everything: code, governance, even how money is spent. Don’t make it look like you are trying to hide a cryptoasset. Make sure that those who want to understand more can.
Treating customers like a social experiment
Consumers are not rats. But if you overdo it on rewarding for small tasks before you know the nuances of how to do it right, they may feel like you think they are. Companies need to learn the nuance, for their particular industry, of giving both large and small context-aware, value-added rewards to different demographic and psychographic segmentations of customers, in different settings. At this stage, this is the work of pioneers—there are no best practices, and there are no guardrails. However, you may be able to be a part of establishing them, or can leverage the specialists who are sure to emerge.
Considerations
Understand what quality engagement and content means to you
This early stage is also a good time to more deeply understand what kinds of engagement results in business value, and what that value is. Gallup research has found that customers who are fully engaged represent an average 23% premium in terms of share of wallet, profitability, revenue, and relationship growth over the average customer.134 But what does engagement mean in your business? What specific triggers or actions could potentially be encouraged through incentives?
While it may prove elusive to quantify value for many forms of engagement, you can map out the relative value of specific actions and events that trigger a customer to more deeply engage with your product or brand (i.e., specific enough to be reflected in code). You can also map out “signals of quality” for influencer, social, or community content to better understand what drives value in that area. This kind of analysis can help you home in on what incentive models may be most compelling to experiment with first.
Understand how your community, ecosystem, and mission intersect
You’ve seen how in the blockchain world, power comes from aligning the interests and values of community and ecosystems. Study your universe to identify what drives your customers, what drives your partners, and where these interests intersect. Use this filter to give you a compass with which to assess other potential partners or members of your ecosystem.
Find your crypto-savvy customers and collaborate with them
Identify segments of your customer base or influencer network that are early adopters of cryptoassets, and bring them into the fold. These early adopters will likely have a unique profile and many characteristics may not be extensible across your broader customer base. However, they can help you bridge two worlds: your brand and the world of token economies. Talk to them, learn from them, and brainstorm with them. You will likely generate insights for how to start experimenting in the space.
Use someone else’s application or platform to run test campaigns
Grow your knowledge of how to use token-based incentives by testing campaigns on a blockchain application or platform that is gaining traction with your customer base (using their token). While not every company will be able to find an appropriate partner at this early stage, new players will continually emerge. Start by putting together a list of the kinds of companies that could be a potential fit, and keep watch on the space as it develops. Once you find a company that is a fit, work with their team to get practiced with different ways to target different kinds of behavior, and gain some early insight on how to measure the return to your business.
Examples
Entrepreneurs are using incentives to shape and align behavior across a diverse set of use cases. Time will tell if they will work out in the long run, but right now, here are a few projects chosen to give you a glimpse of just some of these.
Swytch: Incenting Global-Scale Adoption of Renewable Energy
A sophisticated team from investment banking, energy trading, and academia came together to create Swiss nonprofit Swytch to incentivize the world to adopt renewable energy at scale. They saw that while billions have been spent by governments to incentivize renewables, overall success has been limited. Carbon emissions continue to hit record highs and the threat of climate change looms larger every day. The team is developing a blockchain-based platform that seeks to verify and reward the production of sustainable and renewable energy through the Swytch token. By capturing data directly from IoT and smart devices and through market aggregators, Swytch can create immutable proof of production and dynamically allocate tokens. Swytch aims to serve as a globally standardized incentive for producers, and allow consumers to validate their own sustainable actions.
The team aims to address key systemic issues that have held back the broad adoption of renewable energy: the lack of a global, easily tradable incentive mechanism; the difficulty of verifying and securing production data at the source; and the dearth of quality public data on where and how renewable energy is produced. The team has been cultivating partnerships from cities and corporations to build interest in the initiative. Eventually, they envision incenting consumer actions, such as the use of an electric vehicle.
“We hope to accelerate the switch from fossil to sustainable energy, but in a highly equitable, decentralized manner,” explains founder John Henry Clippinger. “I think it is a very reasonable aspiration. Solar and battery power is getting cheaper and more decentralized, and people can be incentivized to not only transition, but actually produce and monetize their own energy. We want to make it as easy to develop your own solar energy business as it is to buy a car, and we want to open that up anywhere in the world. This not only creates a new infrastructure, but changes two fundamentals: the source of the energy and the source of value generation. Blockchains can help us move to this concept of the ‘prosumer,’ in which people are both producers and consumers of value. It’s a very different world.”135
Mobivity: Aligning an Ecosystem of Brands and Consumers
Mobivity Holdings Corp. touches 30 million Americans and tens of millions of transactions weekly through a proprietary platform that helps restaurant and retail brands such as Subway, Round Table Pizza, and Smashburger better understand customer behavior across thousands of brick-and-mortar locations. I sat down with CEO Dennis Becker to learn how his company, which is investing in a blockchain-based infrastructure, was thinking about the technology. “We see blockchains as an architecturally superior way to unlock new business models that solve problems these brands face,” he said. “It can serve as an enabling infrastructure that makes new kinds of interoperability possible. It can open up opportunities that no one has ever before attempted because they would be a logistical mess.”
Dennis walked me through multiple layers to explain these opportunities. He started with a view into how blockchains can align the behaviors of an entire ecosystem of supply chain and food service operator brands. “Billions of dollars are moving from brand to brand to fund joint marketing,” he said. “But because their systems are proprietary and the data lives in silos, there is very little visibility into what is actually working, and very little control once those dollars go over the wall. It’s like a multibillion-dollar shadow economy.” Blockchains could provide an infrastructure that sits between brands, providing an interoperable data, accounting, and payment layer that could trace the redemption of a joint promotion directly to an individual franchise—and compensate them immediately. “By making it possible for these brands to talk to each other technically,” Dennis went on, “by giving them visibility into the same data, it can help bring them closer and align them on their value proposition.” This blockchain-driven infrastructure can also help companies that “have no way to leverage customer relationships across an umbrella of brands because each has its own centralized, proprietary data stores and infrastructure.”
Dennis then walked me through the customer view. “There is an opportunity to create a more trusted relationship with the consumer, giving them more control, and giving both brand and consumer more value.” He described how consumers could choose to let a brand know a little bit more about them in exchange for more targeted, personalized offers. “Let’s say I want to try out ‘smart offers,’” he said. “I could let a brand look at my location or other data, and so when they reach out to me I can get more value out of it—more of what I want.” So, a coffee purchase this morning, followed by a sandwich at a different merchant this afternoon, could fuel a personalized discount for dinner tomorrow, with each transaction informing the brand, the consumer, and the consumer’s profile. The data could be stored in a “personal information wallet, not on a brand’s servers, and I could turn off a brand’s access whenever I want to.”
“But,” explained Dennis, “it’s still very, very early.” His company is developing blockchain infrastructure in parallel with their existing platform so that “when business users are ready to experiment, the infrastructure is already there,” ready for them.