Tokenizing Loyalty Programs: The Role of Tradability

Abstract

Problem Definition. Loyalty programs (LPs) are widely used to enhance customer retention and firm profitability. With technological advancements like blockchain, many brands are exploring tokenized LPs. Unlike traditional LPs, where rewards can only be redeemed for future purchases, tokenized LPs introduce tradability, allowing customers to trade their loyalty points for others or cash. This paper examines the value and potential drawbacks of tradability in LPs. Methodology/Results. We develop a model in which a firm sells to strategic customers who make repeated purchases over two periods, which allow us to uncovering the underlying mechanisms behind the traditional and tradable LPs. While traditional LPs primarily boost firm profitability by encouraging repeat purchases, tradable LPs provide an additional benefit-they enable low-valuation customers to participate in the market through token trading. However, tradability may also encourage strategic waiting, potentially reducing profitability. Under a static pricing strategy, the firm prefers tradable LPs when customers are relatively myopic or when the repurchase discount factor-how customers value repeat purchases relative to first-time ones-is either low (e.g., durable or experiential products) or high (e.g., frequently consumed products). Notably, tradable LPs can achieve win-win outcomes for both the firm and customers when the repurchase discount factor is moderately high. Conversely, traditional LPs yield higher profits when customers are highly strategic and the repurchase discount factor is moderate. With dynamic pricing, however, traditional LPs consistently generate higher firm profits than tradable LPs, though this advantage may come at the cost of consumer welfare under moderate repurchase discount factors. Managerial Implications. These findings provide economic rationales for the excitement and adoption challenges surrounding tradable LPs. They also offer practical guidelines for optimizing LP design under different market conditions and pricing strategies.