The Power of Coffee
My girlfriend – let’s call her Taylor because she likes her privacy – long-ago disclosed that heading into our first date she was very worried that I would subject her to a jeremiad on the benefits of decentralized finance.
I had made the mistake of mentioning in our early texting that I was into crypto.
She– like most of my family, friends and fellow human beings– is not a crypto person.
But she is a coffee person.
So - partially as a joke, partially because she loves me and partially because she wanted to better understand my occasional rants about NFTs, she signed up for Starbucks Odyssey in December.
Six weeks ago, she joined ~30,000 other Starbucks/NFT fans who were admitted into the Starbucks Odyssey beta.
According to Starbucks, Odyssey is a “Revolutionary Web3 Experience” built in partnership with Polygon that will, and I quote, “ allow our members to access experiences and ownership that was not possible before (while) [...] transcending the foundational benefits that our Starbucks Rewards members have come to love.”
So that sounds good.
On the other hand, according to Gizmodo (and most of the tech press), Odyssey is a “dumbass NFT program” that, rather than reward customers, gives them the opportunity to spend more money at Starbucks on things they don’t need in the Metaverse.
So that sounds bad.
Two months in, Taylor’s opinion has ended up somewhere in between.
According to her, Odyssey is strangely addictive, surprisingly lucrative and an entertaining glimpse into NFT culture. And I have to say, while I was skeptical about a corporate NFT cash grab, I’m coming around to her point of view.
Odyssey is a tangible manifestation of the mechanics that make Web3 exciting. For many people, including Taylor, it’s their first real exposure to this world. And these mechanics are what Taylor has found engaging. So engaging, in fact, that it’s something we now discuss almost daily.
If Web3 is going to realize its promise of democratizing data and economic tools, it will not do so on the backs of ideologues.
Balaji can keep screaming about the end of the USD. Pixelated punks can keep reminding you that all fiat currency is a Ponzi scheme. But if web3 is going to win, if it is going to empower the many to own and operate digital economies, then it will do so on the backs of established brand partnerships.
That’s why it’s important to pay attention to the Starbucks of the world, who (along with Adidas, Square-Enix, Nike and Mercedes’) have been piloting their own NFT projects. These brands capture the imagination and participation of skeptics. These are the experiences that can tangibly demonstrate the benefits of a user-owned digital economy.
Starbucks’ program is an update of the age-old loyalty program. To prove its merit, Odyssey needs to do more than win on the ideology of a “decentralized web.” It needs to win on use-cases.
But to understand what the use-cases of a loyalty program are, and where Odyssey succeeds, we need to first take a brief tour through the history of the programs it is trying to replace.
A Brief History of Loyalty
In the United States, the modern loyalty program was a response to inflation.
During periods of inflation, people hoarded cash. This hit shopkeepers especially hard. People were not using currency to buy, and shopkeepers did not have a means to give change. So to stimulate demand they started offering their own coins as “gift certificate”-changes that could be spent at the store.
Yes, American shopkeepers seemingly invented the original money printer. But soon after they did, banks realized this was a convenient way to invent currency out-of-the-ether. So in the 1850s, the US government passed laws banning the minting of private currencies.
This limited shopkeepers’ ability to call their loyalty tokens “money,” but it did not stop the innovative among them from continuing to incentivize repeat customers.
BT Babbit, a soap manufacturer, started the “box top” system. He told customers to cut out “trade marks'' from their boxes which could then be redeemed for prizes from his company’s prize-catalog.
In 1912, his company went even further – they allowed their customers to redeem their box tops for profit shares, following a model of “co-op tokens” that began in 19th Century England.
For most of the 20th Century, box-tops and other kinds of customer rewards were limited to the grocery store and other household goods. But that changed when the US government deregulated airlines in the late-1970s. For the first time, airlines had to compete freely over every route. Each airline needed a way to differentiate themselves and to keep their customers flying only with them.
So in 1981, American Airlines launched a first-of-its-kind Frequent Flier program. AA’s system rewarded customers for “miles” flown. It then allowed them to spend these miles either on repeat travel or on status perks – like first class upgrades. This system of a private reward currency was a step backward to the time of shopkeeper currencies. But it had dramatic results for American and inspired instant copycats. Within a week of launching, United launched a copycat program. By the end of the decade, every airline in America had its own frequent flier program.
And for good reason. Loyalty programs work.
In a 2019 study of loyalty programs across industries, Malika Chaudhuri found that “firms that introduced an LP (loyalty program) in our sample experienced an average increase of 7% in total sales and 6% in gross profits in the first year following the introduction compared to a matched set of control firms. Three years after the introduction of the LP, firms experienced an 11% increase in total sales and 6% increase in gross profits relative to the same set of control firms.”
Yet, if loyalty programs have a drawback it’s that they are one-dimensional. You spend money, you get rewards. But spending money is not the only thing that brands, today, want from their customers. They want them to become emotionally invested in the company. They want them to become advocates. They don’t just want customers, they want champions.
Which brings us back to coffee.
Setting Sail on the Odyssey
At first glance, Starbucks Odyssey seems like any other loyalty program – no crypto required.
Buy Starbucks products, get free stuff.
But that’s not the whole story.
Starbucks Odyssey is not just a loyalty program. It’s a corporate-branded open world game. In an open-world game, a player does not need to follow a linear sequence of story events or actions, but is instead free to pursue any challenges or quests that appeal to them.
As a result, no two players are likely to have the same experience – a critical point that makes Odyssey work.
You see, Starbucks offers a variety of Journeys that users can choose to follow:
Take, for instance, the “Doing Good” Journey. To complete this Journey, you need to visit a Starbucks and buy drinks in your own refillable mug three times, order two non-dairy drinks and complete a lesson about Starbucks sustainability efforts.
When you successfully complete one of these quests, you receive an NFT Stamp from Starbucks. Each Journey offers a different NFT with different benefits. And each NFT might open up a new set of Journeys only available to its holders.
This means that each player will likely earn different NFTs. You may earn NFTs that have benefits you really like. You might earn ones that reward you in ways you couldn’t care less about. That’s what makes this system work.
Because in any system where some players win rewards that other people value more than they do, there’s an opportunity for trade. Most traditional loyalty programs prevent you from selling Miles or other benefits. But where Starbucks Odyssey differs from these programs is that you are not only allowed to sell your rewards, you’re encouraged to do so.
Here is the key innovation: Starbucks has integrated an open crypto economy to supercharge its (let’s be honest, kind-of-boring customer loyalty game) with an NFT Flywheel.
That flywheel has three components. It works like this:
Exclusivity. Today there are ~30,000 members participating in Starbucks Odyssey (compared to 29M in the traditional rewards program). The limited nature of the beta inherently creates a novelty and a sense of being in on-the-ground early testing something new.
Economy. Starbucks stamps have demonstrable scarcity as a limited number of NFTs are minted for each Journey. Because the items are NFTs, they can be freely traded on any NFT marketplace for cash. So you are not just playing to earn rewards, you are playing to earn something that can make you money. We’ll return to that in a moment.
Community. In a traditional loyalty program, like say American Airlines Frequent Fliers, I have no reason to interact with other frequent fliers and if I have to interact with AA, it’s usually because something has gone wrong. But Odyssey changes this and necessitates the development of an incentive-aligned community. Announcements about benefits and upcoming releases are made in the Odyssey Discord.
Players congregate there to ask each other questions about completing quests, to seek out NFT trading partners or to give the moderators feedback. The pseudonymity of Discord makes the space comfortable for strangers to interact, while the tight-grip of moderators keeps things from spiraling.
More importantly, this community works because of the economy attached to their Stamps. Each member has an incentive to work together to promote Starbucks Odyssey. After all, the more people that are excited about Stamps and Starbucks benefits, the more demand there will be for the Stamps that they own and sell on Nifty Gateway and Opensea. Thus even in a world where players are trying to compete to earn Stamps, a positive sum ethos reigns.
To see how this works, in practice, we can look at the experience Taylor and I had with Starbucks’ Sirens. Sirens were Odyssey’s first paid drop. For $100-a-piece, 2,000 members of the program could purchase a Starbucks Siren NFT. What were the benefits of this NFT? Honestly, unknown. No, seriously. Starbucks plans to announce the benefits to the community tomorrow – one month after their first release.
So naturally, we bought two. Taylor’s parents asked her, “Is this really how you spend your money?”
But we weren’t too concerned. Because what happened next was eminently predictable.
First, people were pissed in the Discord that they were not able to purchase on.
(A note for crypto people: real-world humans care not-at-all about your entitlement or your “right” to get things from a free program you happened to be lucky enough to try. You’re making the rest of us look bad.)
And their disappointment helped build a story online that got picked up by media outlets.
Which, of course, drove demand even higher.
The secondary market for Sirens began to surge. People who couldn’t buy these stamps – because they were not in the beta, or because they were unlucky in the release – started paying multiples of their original value.
Our net-profit on two pieces of Starbucks branded digital art was $1,200.
So, if nothing else, this program may help us buy a Peloton for our new apartment.
Now, this is the type of thing that makes most people roll their eyes.
But I think these profits are actually the thing we need to pay attention to here. Because making money gets people excited. And it kicks off this virtuous flywheel. **
Exclusivity creates memetic demand. High prices attract speculators and more attention. The community proliferates this attention. This increases the sense of exclusivity and again drives up demand which raises prices…
Is it all a bit silly? Yes.
But, frankly, what non-essential luxury goods aren't somewhat silly?
We buy things that make us happy. And if we have something that will make someone else happier, we exchange it for the things that make us happy. That’s how economies are supposed to work.
Now, there’s a fair criticism to be leveled here that those experiences should just go to the people who love Starbucks the most, no speculation attached. I’m sympathetic to that. But that isn’t actually Starbucks’ goal here. Starbucks is not in the business of showering super-fans with free-love. They are in the business of selling coffee and building their brand. They give away rewards to help achieve that end.
And this system achieves that end with powerful efficiency that maximizes everyone’s well-being. Starbucks-lovers can buy their experiences. Starbucks gets their brand out there. And customers who just want cash back, can earn that cash by playing.
This is the speculative engine that works for native NFT communities. And it also, seemingly, works for Starbucks. I can’t say I am confident that this will scale. When everyone can buy NFT stamps, I am not convinced that the market for Starbucks NFTs will be incredibly liquid, or as likely to result in big cash rewards.
After all, if you’re not in early, you’re just the person left holding the bag at the end. That’s just a reality of the NFT game.
But as for today, we’re just excited to be part of the Coffee Vanguard.
As I write this, I’m drinking my Starbucks Drip Coffee in a Refillable Mug (Completing two journeys in one!) to help us qualify for a stamp-gated NFT drop. Taylor just texted me to confirm I completed today’s Journey for us.
We have coffee to drink and a Peloton to buy.
So for today, at least, we’re both crypto people.
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