Is Sephora going to tokenize VIB rewards?

A Web3 fairytale

As the Web3 marketing world waits on bated breath for Starbucks to release their version of a web3 loyalty program, I’ve been thinking a lot about the tokenizing of loyalty programs and how that might play out.

For those unfamiliar with this corner of Web3 technology, tokenizing refers to the basic blockchain idea that anyone can create a token to represent anything of value and trade it with any other assets on an open network under a common standard. NFTs are non-fungible tokens, e.g., they are 1/1, but your company could release any number of tokens, all of which would have the same value, and you would take the proceeds of this mint/release and get to keep the money. Those holders of the tokens could then trade them on an open exchange, maybe like OpenSea, maybe like any other kind of exchange. The value of these tokens would rise and fall depending on how the market perceives their value. In many ways, you might be thinking, gee, this sounds like a stock exchange, and tokens are equities. And in many ways, you would be right. 

But, for most people in Web3 and currently the SEC, they are NOT equities. And in our forthcoming VIB example, they shouldn’t be seen as equities, because the value is derived not from the future profits of Sephora, but by the benefits you get from being a token holder.

So why would Sephora do this? (disclaimer, I have nothing to do with Sephora’s VIB program, aside from, you know, being a member, they are just an example I have a hunch many of my readers will be familiar with)

The basic premise would be, Sephora would take their three-tiered loyalty program and mint (sell) tokens for each tier, or users could earn those same tokens, accumulating enough to reach those same tiers, like airline loyalty points. Historically you have entered Tier 1, to put it crudely, by trading your email address for small discounts and benefits. Entry level, they are effectively paying you to add you to their CRM and start collecting data.

The next two levels are spend-based, re-pricing their offering to the highest-spending customers, giving them discounts to ensure their loyalty. E.g., discriminatory pricing, as the economists say. The existing system is based on points being traded for % discounts off purchases, but for this blog post, we’ll just assume they are straight discounts for being in each tier.

In a tokenized version, you are buying a membership to these tiers, either paying cash or paying the old-fashioned way, with your data or spending power. 

A key to the Web3 version of VIB, I’ll call it VIBTokens ™ (don't think I can really ™ that, but it’s fun), is that you can sell these tokens to someone else. In the secondary market, consumers will price the value you’ll derive from getting discounts against what you’ll be able to save via the discounts or gain from the other benefits, like early access to sales or special gifts with purchase.

These are the pros and cons as I see them.

Pros

You keep only your most engaged users. Customers who reach the highest tier by buying everyone in their family a Dyson hair dryer one year (fancy!) but aren’t loyal customers and aren’t likely to become one, can sell off their token.

You intrigue new types of customers. People interested in Web3 or tokens, younger consumers impressed with the opportunity to “own” their membership, etc.

Owners should be better/more loyal customers. Ownership empowers holders. They feel more attached to the brand. And because they can sell, holding on to the token is an active choice rather than a passive one, further increasing their affinity for the brand due to biases we hold towards things we’ve already “bought.”

You are giving customers a stake in the game. This is NOT FINANCIAL ADVICE, and tokens are not equity. BUT. They might go up in value, which would introduce your holders to some of the Web3 wealth which has historically been accrued to men, and I am going to assume Sephora’s VIB program skews female. 

Cons

The economics require more sophistication. There are so many questions to be asked, particularly when you need to price in the idea of a resale market. Initially, in tier 1, the retailer was buying their customers' email addresses. Assuming that emails are attached to these tokens, which is a huge assumption given Web3’s supposed commitment to pseudonymity (need a primer on that, I’ve got ya covered), the customer who “earns” a token enter into the same economic agreement, small discount in exchange for an email. But if they sell that token, they are recouping (maybe even profiting?) from the original sale of their data. As ever with Web3, small beta tests will be necessary to see where the financial holes are in the model.

Web3 ideals of ownership imply membership can’t be rescinded or changed in the future. While no real brand’s legal team would let them do this without significant legal protection, it’s not in the ethos of Web3 to launch a program you can rescind or downgrade in the future. Tokens are priced on the idea of true, transparent, public ownership. This can be scary for brands.

Brands will have to rethink benefits. Ownership benefits are different, they appeal to different segments of customers, and those customers may demand more, special events, special services, or a community. These demands are actually a pro and a con, as they will force brands to invigorate their offerings, but it’s also a lot of work and a big unknown.

In sum, as usual, mostly questions and very few answers, but I’m eager to see how this space develops. And if Sephora does launch VIB tokens, you can bet I’ll be out there earning them.

Further reading, if you’re into this stuff…

https://www.flauntnft.xyz/blog/a-guide-to-nft-utility-for-brands

web3 loyalty from TPan

https://taschalabs.com/utility-tokens-from-real-businesses-will-drive-next-wave-of-crypto-adoption/

I should add, if you’re into this stuff, this stuff being the intersection of fashion, beauty, and Web3, please subscribe.