What You Need to Know About Token-Gated Commerce

0:00This is the way forward in this new era of private internet that is not trying to skirt around rules. it's enthusiastically saying, yes, commerce is best when people actively, openly want to shop as themselves. Hello, welcome to Shopify Masters, your companion for starting and building a business. I'm Shuang Esther Shan. Imagine if you could create a shopping experience tailored to each individual customer. Turns out that's possible thanks to something called token-gated commerce. It allows your customers to opt in into a new way of shopping and rewards them for doing so. Think of it like a loyalty program, but built on Web3.

0:43Shopify has been working on this for years. And today I'm joined by Alex Danko, Director of Blockchain and Systems Thinking. Alex, thank you so much for being here. Shwen, thanks for having me. Super excited to get into all of this. But to be honest, I got to check in with you. How did you feel about our definition of token gated commerce? How do we do? You know, it's like everybody talks about token gating slightly differently. There are definitely some people who talk about it as a kind of loyalty program where you can say, hey, your biggest fans really care about you. This is a new way for you to recognize and reward who they are and what they have done.

1:22There's another way to look at it that is much more like top of funnel marketing. Here is a new thing that looks like an affiliate program, but has some really nice characteristics. Your fans can go to the concert, get their ticket, and then tomorrow show their ticket and get the exclusive product. That's not really like a loyalty program. That's more top of funnel. It's a way to find new customers. Then there are other ways to think of it that are much more about collapse. They're saying, hey, I want to recognize and reward your fans. How about I gate a product to your fans and you gate a product to my fans and have it really be about cross-brand collaboration and bringing fan bases together?

1:53All of these are right ways to talk about it, right? This is something that's new. This is something that is still being built. So it has a lot of creases and tough UX around the edges, and this is not something that is done. But we really think that this is something that, when it will be done, will be a mechanism that is just sort of lying underneath a lot of the way that we do customer discovery and how buyers go through the funnel of discovering and falling in love with a merchant and finding great products that they love. And this will just be something that is way below the surface, not really within visibility of most merchants most of the time, but will be making buyers and their journeys just somehow work a lot more delightfully across merchants and across brands.

2:31So that's something that's really excited that we're working on. But your definition was great. I really liked it. It's always nice to hear other people from outside of our work that we're doing say, hey, is this what this is about? And we can say, yes, you know, like that is what it's about. It sounds very multifaceted, but it sounds like you're putting a community at the heart of it, whether it's getting new individuals involved in the community and also building on more engagement within the group of fans that you've collected over the years. Yeah, so I think a good place to start when you talk about token gating and about the broader effort that my team and I are working on is to start with customers.

3:06The most obvious thing that you can say about a business and really about Shopify is that at Shopify, I think we've done a lot of great work over the past many years of making a lot of the process of building a business a lot easier, a lot more delightful, a lot less toil. But there's still one part of it where we're just sort of really getting into now, which is the whole customers part. Who are these people, right? Like, where are they? The obvious thing that you can say about your customers is that they're outside of the building. Your customers are not in your store. They are outside of your store.

3:35They have to go on a journey of finding your products and falling in love with them and arriving at your store and buying your product. It's really helpful to think of your product as being at the end of a journey that the buyer goes on to discover and find your product. and another sort of really obvious thing that you can say about a product is that from the merchant's point of view all sort of buyer journeys and how the merchant thinks about crafting that buyer journey and thinks about bringing buyers into the store and thinks about how they go about marketing their products starts with something this is going to sound kind of banal to start with but it starts with an important characteristic of the product which is what is the gross margin of the product?

4:14If this product costs me$10 to acquire, and I think I want to sell it for$30, okay, well, I have a$20 budget, and I have to go spend that budget on getting my buyer to come into the store and buy my product. How am I going to think about allocating that budget? The answer is it's going to depend a lot on what kind of product that you are selling. If you're selling a relatively low margin product, like the grocery store or something, These are very low margin businesses. You need to have a lot of volume coming in. It's probably going to be something that your buyers already know they need. They already know their want.

4:45They have a habit of coming in. On the other hand, if you're dealing with a very high margin product, like luxury goods, right? If you think about like the streetwear business, the fashion business, you may have a lot of budget to think about. I want to craft a really meaningful journey for the buyer to come on so that when they end up at my store, they really want to buy this product. And this product will have a lot of meaning to them because of the journey they went on discovering this product and coming to my store. And so, therefore, I can afford to spend a lot of budget on making that journey to the store really meaningful to the buyer.

5:17And when done well, this can be one of these really nice virtuous cycle that successful brands are able to establish, which is creating this really nice environment where because buyers have a lot of connection and a lot of affinity to your product, you can afford to spend a lot of money on really beautiful retail experiences or really beautiful merchandising experience for them because it creates that meaning that the buyer will feel with your product, right? Which therefore generates the budget that you can spend on promoting your brand. It sounds like you are truly enhancing that relationship between your customer.

5:51And also throughout that interaction, it's actually a chance to have those meaningful relationship and entice people to actually return and wanting to be on that journey again. And again, going back to these two very related concepts, which is one, like, what is the gross margin on my product that I'm going to spend some of on this journey? And two, how are you thinking about, okay, like, what is the relationship that I'm going to have with my buyer as they go through what you call like the funnel from discovery to intent to purchase through to what I really think of as the end of the funnel, which isn't actually purchase, it's relationship, right?

6:25Like the first product that you buy is not the end, that's actually the start of your relationship. And so what's really great to start is to thinking about this overall challenge that every merchant has, which is how am I spending my budget on getting buyers through that journey, through that funnel and through that discovery? Now, there are a couple of ways you can do it. One way that you might do it classically is you might say, I'm going to spend that budget on a store on a really nice high traffic street. And then my store will be able to advertise products to all the people walking by. That's one way you can spend that money is on rent.

6:56Another way that you can spend the money is on ads. You can say, okay, I'm going to go to Facebook, I'm going to go to Instagram, or I'm going to go to somebody else who is able to put ads in front of my buyers. And then they will take that money and they will go show them ads. And then some of those buyers will make their way to my store and then some of them will convert it to customers. And that's another way I can do it. A third way that I might want to spend that budget, and this is one that's really interesting, is on the affiliate relationship. I might say, hey, you have a bunch of fans.

7:22Why don't you go tell your fans about this product? and then you give them a code or you can give them a URL and then that URL or their code takes them to my store where they get a discount for coming in and referencing you. And then I give you maybe a 10 % or a 20 % referral fee for that customer every time they shop. And that's a way for me to allocate my budget. These are all ways for the merchant to say, okay, like how do I go think about allocating this budget towards making sure that buyers come to my store? And overall, what you want is you want a strategy where the way in which you are distributing this budget is going to be consistent with your brand story.

7:55There are some D2C brands that are very consistent with, I'm going to bombard you with very well-crafted Facebook ads until you buy the product. There are other that are much more community-style products where it's like, you know, you don't really want to be served ads about something. It's really a product that spreads through word of mouth. So again, if you think about some certain like streetwear brands, it's like these, they work much better through world of mouth. So you might want to pursue that kind of strategy. I like the way that you've explained it, because I think a lot of founders, when they think about their business, they think about ads, they think about affiliate marketing, but they probably don't link affiliate programs with token gating or with Web3.

8:32They find those terms actually a little bit intimidating, but you've made it sound much more approachable. So for those founders who do get intimidated, what do you say to them? Sure. Well, before we even get into any Web3 stuff, because, again, we'll get into that in a second. But the overall stage that all merchants need to set for their business when they start out and as they improve is how am I continuously getting better at knowing who are my fans? Who are my existing buyers? Like who is in my email list? Who is in my loyalty program? And then, you know, more importantly, who are all of the buyers that are adjacent to those buyers?

9:06Who are the buyers that are like those buyers? How can I reach incremental segments of buyers? And how will I know who they are? How will I know what kind of characteristics they are in so that I can recognize them? and effectively create brand touch points with them or effectively get ads in front of them or otherwise know who they are when they come to the store. Especially like online, buyers walking around the internet are these relatively anonymous people, right? Ideally, we believe like shopping is actually better when you're not anonymous. Shopping is better when you're you, right? When you can show up as you and when merchants can recognize you as you.

9:38Because not only can they maybe present you with better offers or a more personalized storefront experience, it also gives the ability for you to actually have something accumulate as your relationship goes on, right? It's really nice when a shared history between you and your buyer can develop as you see each other, as they browse on your store, as you buy products and you develop a relationship. Now, over the history of the internet, there have been a few different ways that people associate buyers on the internet with attributes they have. And I'll give you a couple examples. So the oldest example, right?

10:08Really the old school way that you would do this is with something called the browser cookie. As a buyer, I'm on my web browser. I'm on Internet Explorer back in the day or on Google Chrome now or Safari or something like that. And as I go around shopping, you know, what's something that used to happen is you'd say like, OK, I'm going to add a browser cookie to this user's web browser. And then as they go around to other websites, those other websites might be able to recognize that cookie and say, oh, it's this person. I'm going to do something. And, you know, people tend to be of two minds about this.

10:33Some people sort of come at this through the lens of privacy and this is bad. Right. And like in general, people should be their information should be private and not easily shareable. There are other people who come up through this at the lens of generally it's really nice when people can trade information about each other because that's how you personalize. That's how you can effectively serve good ads regardless of whatever side of this issue you come down around. Another way that you may have noticed by simply using the internet is have you ever noticed that when you click on a link from let's say like a newsletter to a website, that link has a whole bunch of decoration at the end of it.

11:03It has all these characters and strings attached to it. that's a way for the newsletter to tell the website that you're going to, hey, this is a person that clicked through from my newsletter under these circumstances. All of this is allowing somebody in one domain, like one web domain or somebody in one place, to tell another party in another place, hey, this person who's coming over, they have this set of attributes. Therefore, you should do the following things about them. It's just a way for people over in one room to tell somebody in the other room, hey, this buyer has these characteristics.

11:34And then maybe the buyer goes and makes a purchase on the second domain. And that second person wants to be able to shout back to the first person, hey, they made the purchase. All of e-commerce and this whole ecosystem of like, how do I make ads and how do ads successfully know if a purchase happens so that you can do payouts appropriately and so the ad platform get better, depends on this ability to sort of say back and forth to each other, hey, like, here's what's going on. Think of it as a buyer walking from one room of a house to another room of a house, right? It's important if the people in the rooms can kind of talk to each other about what's going on with the buyer.

12:04For sure. Yeah. As someone in content marketing, I've filled out so many UTM tracking and links, you know, telling a site where a reader has come from. So totally understand that. And it sounds like this is kind of like the perfect timing to be talking about this. A lot of merchants have had so much struggle with iOS 14 updates that has taken away a lot of the customer data to actually allow them to have understanding and advertising tailored to their customers. So what are the projects you're working on and how is Shopify helping with that? Yes. So like this is really like the big question of e-commerce right now.

12:44And which is not just iOS 14. I think iOS 14 and Apple specifically are held up as sort of the reference example of people who are changing how the internet works. Really, it's a lot of things. But overall, like the general inevitable change that is happening to the way that the internet works is that it is becoming more private. And the internet is rapidly moving into this world where your actions that you take and your person as a buyer going around the internet are becoming fairly private by default. And there is generally an expectation for much, much more active consent on the part of the buyer or of the user or the person on the internet for people to be able to do very much with your data and especially for them to be able to pass things that they know about you from domain to domain or from person to person.

13:28Now, why does this matter for e-commerce? It's like, well, this matters for e-commerce a lot because many, many shopping journeys start in one room of the house and then go to another room of the house. So this whole challenge of like, how do we move the e-commerce industry into a world where this starts working for merchants again is one of the big problems that Shopify is working on right now, including me and my team. And here's where the story actually takes a really, really interesting turn and where all the NFT stuff and the crypto stuff enters the picture. So maybe, you know, two, three years ago, if you look at like the beginning of the big NFT wave, something really interesting started to happen, which is you saw these people who started collecting and selling these things called NFTs, right?

14:08And like, what were these as well? Like people really didn't know what they were at first. It's like, these things are ugly art. Like these are JPEGs. That's like, why do they have value? It's like, clearly people were very into the fact that it's like, these are something that like you could own, right? With a crypto wallet. Like you could sign for them with your crypto wallet address. But nobody could really agree, like, are these things products? Are they worth money? And again, as Shopify, we had a lot of merchants come to us early on in this bubble and say, I want to sell NFTs. I see all these brands.

14:35They have all this great IP. They want to monetize it. They want to sell these NFTs to your fans. And we said, you know, absolutely. Look, we want to help you do what your intentions are. Let's look to see whether we can support you selling these as products. But fairly quickly, we noticed something much more interesting going on, which were brands that came to us. And they said, hey, my best fans are the ones who have these NFTs. I want to be able to tell who they are when they get to my store so we can offer them exclusive discounts or exclusive products or things like free shipping. They're saying these people are my fans.

15:04I want to be able to recognize my fans so that I can reward them with something. And we took a look at that. We thought, wait a minute. This is way more interesting. I think we understood fairly early on that the idea that like these things are innately worth money was sort of a temporary bubble phenomenon. on, but what was much more interesting about these NFTs and these NFT collections. And it's very important that we talk about that in terms of collections. I'll get to why in a second. But these things were really like, they weren't products, right? These are more like attributes of buyers.

15:34Buyers were showing up and saying, I want to show up and connect my wallet and show that I have these three tokens, and therefore I can unlock that great experience. We looked at that, we thought, oh man. Now, this isn't a new kind of product. This is a new kind of marketing, right? Like this is actually a new way of identifying who a buyer is in a way where buyers can have these attributes that persist across all the rooms of the house that they go. Furthermore, as a buyer, when I show up to a room in the house and I connect my wallet and say like, look, I have this thing. I want to unlock this perk, right?

16:08Maybe I say like, I want to doodle from this collection. I want to unlock this gated merch that somebody has for me. That's me being very actively excited about the idea that you're going to personalize the store to who I am. This is me being very willingly engaging with this idea. This is a buyer doing something very important, which is them actively enthusiastically consenting for you to personalize to them around their experience. Now, in the context of how the internet is changing right now around being very default to private and being very default to opt-in first-party consent, we looked at this and we thought, oh, man, this is sort of a triple threat good.

16:45It's good for buyers because it lets them get recognized and rewarded for who they are and what they've done. It's good for merchants because it gives them a new way for them to identify people of interest, like people who have done this thing, and therefore I care about identifying buyer segments of people who might be my fans or might be like my fans. But most importantly, this is a way forward in this new era of private internet that is not trying to sort of like skirt around rules. It's enthusiastically saying, yes, commerce is best when people actively, openly want to shop as themselves. Here is this new way, basically this new sort of way to say, I have a wallet address.

17:22That wallet address can own various tokens, collectibles, attributes that I've collected around the internet. This is a way for me to show up to a new store, show up to a new room of the house, and then take out my backpack of inventory and say, here's who I am. We really believe, like, again, like, I believe on my team and we really believe at Shopify, that if we get this right, this could be a very, very important component of how buyers identify themselves and how buyers have attributes for online shopping. But I can say very confidently that, you know, two, three years ago when people were saying, oh, we're going all in on NFTs, it was like it was very hard to tell whether people meant it or whether they were just chasing a fad.

17:56I think now in 2023, us being able to say, yes, we are deeply committed to this mechanism, right? This is actually going to really deeply solve a problem. People are actually much more interested now. They're like, hmm, you've stuck this out for this long. There must actually be something to this. Thank you so much for the context of token gating. And we're going to get into a real life example of how businesses are using it now. I'm chatting with Alex Danko, director of blockchain and systems thinking. if you're enjoying today's episode or if you want to give us feedback for the show, give us a follow or subscribe if you haven't already.

18:31It helps others to find the show. Thank you so much. So like I mentioned, there's some exciting examples, especially now that the Barbie movie is out. I would love to hear about the example of Mattel using tokens and also how they're really unlocking this frontier for e-commerce. Sure, Mattel is one of our biggest and best customers of token gating on Shopify, they've been finding fantastic ways to recognize and reward their fans. And part of what makes Mattel so great is that they already have these fans who've been loyal to them for a generation. If you think about Hot Wheels, one of the great brands that Mattel has, we all collected Hot Wheels as a kid.

19:10There are a lot of people who as grownups have a great amount of affiliation to this brand. So what has Mattel done? So first, Mattel has launched a series of NFTs that are just straight up collectibles, right? You can pay money for them and then you get a digital collectible that is yours and that you own. It's like trading cards. It's like baseball cards. It's like fans love collectibles, whatever shape or form they may take. That step one was fairly easy. But then step two is Mattel said, okay, if you own one of these collectibles, you can now show up to the store and you could redeem a limited edition physical product that represents the Hot Wheels card that you have the collectible of.

19:44So only if you have the collectible, you can show up to the store, you can unlock the physical collectible, which they will mail to your house for free. Buyers love this. Mattel is now doing these drops on a regular cadence across different segments of Hot Wheels cars and different Hot Wheels series, two different segments of buyers. They really understand this go-to-market muscle around the just idea of fans get the token, and then the token unlocks the physical version of the product. So that's a great example of, I think, token gating in single player where there's one brand, you have one fan, and it's just that fan and that brand building their relationship together.

20:20In contrast to some of the other ways we've seen token gating, which is across fan bases and across customer bases and across product lines. But it's good to start with the basics, and Mattel is a really good example of how to do the basics right. Sounds super fascinating, and it sounds like they are leveraging omnichannel experience, really blending that online in-person experience as well. Well, so I know that in the perfect ideal state in the future, token gating will be available for all merchants and it will be really seamless at their admin. But before we get there, what are some business profiles and what types of businesses are really suitable for token gating currently?

21:00I'd say typically there are two kinds of brands that we have seen try this out successfully. The first kind of brands are brands that have a very explicit connection to the Web3 community and subculture. There is a group of people that just already wants to do this, and if you want to reach out to those fans or if they already are your fans, then you can do a token-gating loyalty program already. That works fine. The other segment of brands that we've seen try this out are sort of the – I'm just going to sort of paint with a brush stroke here, but it's luxury brands. It's a lot of the brands where they're like, hey, we kind of understand what's going on here around this idea of things that are scarce.

21:36These are brands that sort of like when they saw these things selling for hundreds, thousands, tens of thousands of dollars, they sort of looked at this and they said, okay, well, I don't know if it makes sense for like this picture of a monkey to sell for 10 ,000 plus dollars or a hundred thousand plus dollars, but I can see clearly that there is a behavior around this thing that looks like affinity and that looks like community and that looks like the kind of ingredients that you need in order to sustainably run a luxury goes program. So they went into it and said, okay, maybe we can try to recreate some of these dynamics.

22:07We've seen a lot of those sort of luxury brands have their own successful versions of saying, we're not necessarily selling to those people, but we're replicating those mechanics around this idea of like, how do you develop and cement a reputation with a high margin luxury good brand? So those are the other examples of people who have had some success with it so far. But again, we think that the real success for this will come when merchants are not seeking this out. So I think this is the question to ask, right? If I'm an early merchant, someone thinking about a business, maybe all I do is collect email addresses and I'm trying to think more about token gated commerce, wanting to get into it.