Tokenizing Loyalty Programs: The Role of Tradability

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 with others or for 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 allows us to uncover the underlying mechanisms behind 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, generating a market switch effect. However, tradability may also encourage strategic waiting, creating a purchase delay effect that potentially reduces profitability. The value of tradability depends on the interplay of these two effects. 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 relatively high. Notably, tradable LPs achieve win-win outcomes for both the firm and customers when the repurchase discount factor is relatively high. Conversely, traditional LPs yield higher profits when customers are highly strategic and the repurchase discount factor is moderate. Incorporating various market features reveals that tradable LPs do not always improve reward redemption rates; a more efficient token allocation does not guarantee higher profitability; and the presence of speculators enhances the value of tradable LPs. Finally, under dynamic pricing, traditional LPs consistently generate higher firm profits than tradable LPs, though this advantage may come at the expense of consumer welfare. 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.