Part 3: How artists can use tokens to increase engagement

Part 3: How artists can use tokens to increase engagement

August 22, 2023

Part 3: How solo creators and builders can use tokens to increase engagement and revenue per fan

Using tokens to grow your business and community holds promise if you’re a solo builder or creator. Tokens can help bootstrap growth, but it’s not an easy feat. In this series I’ve been exploring how to do it. In part one we explored three kinds of growth a creator or builder might be interested in: growing new users, growing the average revenue per user or fan (‘ARPU’) and growing non monetary engagement. I proceeded to analyze five categories creators and builders can offer their community in return for growth: equity, money, goods & services, social capital and experiences.

In part two we set out to find the right incentive-growth fit between the different categories a creator can offer, in comparison to their business goal, starting with growing their users and community.

Our analysis so far of what artists can offer and what they’re looking for
Our analysis so far of what artists can offer and what they’re looking for

In part three I’ll explore the remaining categories: how solo creators can use tokens to grow the revenue per user and engagement in general. I’ll finish by offering an example token playbook and a summary of the entire framework. You’re welcome to skip to the playbook at the end and in part four.

Growing engagement with fans and users

Engaging with fans and users is what it’s all about. While growing the absolute number of your users and fans is often considered sexier, growing the engagement with fans and users is more profitable. This can mean having fans not only stream your music, but buy concert tickets, swag, or collectibles (digital or physical). If you’re running a SaaS businesses this means users upgrade plans, become affiliates or increase the number of team members using your product.

In many industries, such as gaming, it’s a well known fact that the majority of revenue comes from a tiny fraction of users known as ‘whales’. Increase engagement with the ‘right’ user and you’ll increase the average revenue per user (‘ARPU’) for the entire business.

While increasing engagement and ARPU sound similar, there’s a difference. ARPU is simple, it’s quantitative. The average revenue per user. It’s measured in dollars and can be easily measured, charted and analyzed. It’s worth understanding more in depth as a metric for business (whether you’re a creator or SaaS). You can read more about it here. The main point to be aware of is that while ARPU tracks the overall trend well, it’s important to subsegment your audience to better understand who the most valuable users and fans are (from a monetary point of view). In gaming for example the ‘whales’ will only be 1% of a games’ users, but they’ll shift the ARPU much higher.

Engagement is a much softer metric but don’t be fooled into thinking it’s any less important just because it has no direct monetary number associated with it. Engagement can mean different things such as:

  • More user engagement with your product that’s hard to monetize: higher streams for songs or constant usage of your app. Think daily active user instead of weekly or monthly active user.
  • More engagement with your brand: while not directly listening to your music or using your product more than average, they are highly engaged with your public persona or brand — social media or commenting publicly etc.
  • Deeply caring users: users who care and engage deeply around you, your roadmap and future plans. They aren’t spending more money than average, but they provide feedback, thoughtful critique and support and generally care deeply about your journey.

While engagement is harder to measure, it’s just as important as ARPU, because it usually drives organic, word of mouth, growth. It’s the deeply engaged users who will provide the most important feedback, spread the words to their friends and increase your social media footprint. What makes engagement harder to track and measure from a business perspective is that it’s harder to quantify a ‘like’, ‘share’ or the value of really good feedback, but we all know that sometimes one critical share is all we need to get off the ground. Last but not least, often times, higher engagement leads to higher ARPU, so it’s a good leading metric to track.

Using tokens to increase engagement

Because they’re different, especially in terms of the user personas, in the analysis below I’ll separate ARPU from engagement. Fans with more engagement arguably have more passion and intrinsic passion, while higher ARPU can be more transactional.

Can tokens be used to grow your fans?
Can tokens be used to grow your fans?

Equity as a lever for ARPU and engagement

Giving away equity is tricky. On the one hand, it gives a sense of ownership to your fans, which is great. Ownership should align incentives. On the other hand, you’re also giving away ownership of what you’ve built and future cash flow and/or decision making. You could also be giving ownership to the wrong people, or not enough to align incentives over the same time horizon.

What makes equity convenient, or a good tool to use, is that the promise is in the future, making it a popular tool for early stage projects. As in, you’re usually giving away something that’s not worth much now for some tangible return now. ARPU makes things simple when calculating this — in theory, this lets you value your equity, and if you can get ‘more bang for your buck’ for that equity by an increase in ARPU, than it might be worth it. For example if by giving 1% of your equity away to a user, their ARPU rose enough to increase the value of the equity by 2%, that could be worthwhile. However, these calculations are usually not easy to perform: valuing equity is very hard and most individual users or fans will never pay enough to ‘make it worthwhile’.

For example, if a concert ticket cost $50, you could reward $20 worth of equity as an incentive to anyone who purchased a ticket. In theory, you’re spending $20 to get $50. But how do you know if you’ve valued your equity properly? What if you’ve now given away a lot of your equity to fans who don’t care and just came out for a one time show?

Where could this work? For your ‘whales’ or super fans, i.e the fan base who spends a lot of money on your offering and care deeply. If you have a user base that splits in such a fashion it becomes more compelling to offer equity to these users. Why? Users with high spend usually correlate to the ones who care the most. Giving them equity can give them a sense of ownership and belonging which can further increase their passion for your product. This can be incredibly valuable for these whales, if they’re the right kind — the kind who care about you and aren’t simply transactional. How much you give is a function of the distribution of your fans: how many are super fans or whales? How much do they spend? Can you give enough equity so that it will feel meaningful to them but not so much that it’s a detriment to you? Often it’s tricky giving something that can be valued in monetary terms to people who have not been thinking in those terms regarding your offering.

When comparing using equity to drive ARPU vs to drive engagement we get a different picture. High engagement users and fans, can often be the exact participants in your community that you want to have ownership. This can be because they ‘deserve’ it more and you trust their motivations, or alternatively because they have outsized impact on your results and you want to align the incentives with them more. For example you could have a user who is very engaged with your product, who offers feedback, takes an active role in the product roadmap and even markets it to friends. Alternatively, you could have a fan who has a lot of social clout who promotes you on social media or engages with you in depth. These are the exact types of users who rewarding with equity can drive positive behavior and further enhance and maintain this engagement. Equity can be a way to reward these super fans and show that it’s ‘worth their while’ — whether in the form of appreciation, as expressed by shared equity, or monetarily.

Tokens are a very useful tool for giving away ownership, but they are a double edged sword. The benefit of tokens is that they’re easy. Using tokens for this use case is simple and straightforward. Once you know the tokenomics of your project, you know how many you can give away, to whom, and for what reason. This is very different from traditional equity grants that require a lot of paperwork — both at the time of granting and later on. The downside in using tokens is that they’re usually far more liquid and transferable than traditional equity. This means that what you considered to be an additional method of creating stickiness to your biggest fans, can actually be easily ‘quit’. There’s a reason that airline miles are so hard to transfer  —  airlines don’t want their best customers transferring loyalty between brands. They want them locked in. If you give tokens that represent a form of equity that are easily tradable to your biggest fans, you are giving them the right and ability to transfer that very ownership the moment they want out.

While tokens are an easy tool to use in distributing equity, the ARPU use case doesn’t always make sense — both because it could be hard to value properly and because of the transactional nature of the users. One important caveat to make is that ARPU for a fan of a creator can be very different from ARPU from a SaaS user, and each case should be considered separately — a fan who spends the most on going to each and every concert isn’t transactional at all — they’re a super fan.

On the other hand, tying engagement to equity in the form of tokens can work magically. Connecting token equity amounts to levels of engagement can serve to align interests and promote desired activity — for as long as the engagement exists.

Using tokens as equity to grow ARPU and engagement
Using tokens as equity to grow ARPU and engagement

Using monetary tokens as a lever for ARPU and engagement

Providing monetary incentives can be a very powerful growth lever. While it’s usually a way to grow new users, programs that reward users with money — either in the forms of ‘money tokens’ like airline miles or actual cash back, like credit card programs, abound. Usually these programs are built around increasing ARPU, not engagement — as they have a direct monetary cost to the issuer of those ‘money tokens’. Think of Starbucks Rewards or airline miles as an example: there is a direct cost to the business for every star or mile earned. Airlines even sell miles to other companies (like car rental or hotel booking companies) so that they can offer them to their customers — this gives miles a direct monetary value, and thus a cost to the airline issuing them.

Why is money not usually used to drive engagement? Because different users have different motivations and an engaged fan might not care about a monetary reward. This is something that many projects in crypto forget. While financial incentives can work for financial products or users who care directly about financial rewards, they won’t often work for other kinds of motivations. As I explained here:

Humans don’t do things purely for monetary reasons. When they do, it’s usually about a financial activity — like maximizing income. Paying someone to exercise involves all kinds of motivations: self worth and ego, external appearance, upcoming events. Money isn’t a primary motivator. Because money isn’t the primary motivator, to make it matter becomes a question of making money become the primary motivator — which can be very expensive. Different people have different motivations. For some, exercise is a powerful motivation. For others, money is. Tokens work on the financial level really well, but don’t work on any of the other ones. This doesn’t mean that if you ask people to put a price on motivating to do an action, they couldn’t. They probably could, it’s that these are completely different problem areas. In economic terms, they’re non substitutable

Cash back might work for a credit card loyalty program but it won’t work for concert tickets. For the former I care about cutting costs, for the latter it’s about listening to music I love.

How can tokens be used to grow your business?
How can tokens be used to grow your business?

Tokens with a monetary value can be a very convenient and smart way to incentivize growing ARPU, but for engagement in most products — they’re not the way to go. The playbook for tokens like these has already been written by companies like Starbucks, Visa and the airline industry — you need to be able to offer a monetary value that makes sense on both sides of the transaction: the monetary value you offer back needs to be impactful enough for users to get them to increase their ARPU *more* than the cost of the program — which includes not only the direct cost of the tokens but also the user experience effects for all your users and fans.

Using tokens and goods and services to grow users

Goods and services are often a fantastic way to engage with users and fans: that’s exactly why they’re engaging with you in the first place. It’s customer segmentation by tiers of offerings. While companies like Dropbox used goods and services to grow users, offering different service tiers to different users has become a staple of all businesses.

Tokens in freemium and premium offerings
Tokens in freemium and premium offerings

Examples here could be offering premium users faster delivery, more database API calls, office hours with a creator or behind the scenes takes on writing music. This category is built around offering an enhanced version of what you already offer to your most engaged users. Why? To incentivize them to either grow ARPU or engagement of course.

Amazon’s faster delivery directly impacts the amount people shop. Behind the scenes videos of the song writing process could directly grow a fans engagement with you and their propensity to buy your next album. The best thing about goods and services is that structured well, they’re built around offering something you already do and can offer at a lower dollar cost to yourself.

Tokens here can be used as a gating factor. Own enough of token A equals unlock service B. Fungible tokens or NFTs serve the purpose equally well. Tokens are the database for which user deserves what service. This is very popular already in lots of DAO Discord servers, where different token holders have access to different channels, badges or colors. It can also expand into the real world giving token holders access to behind the stage tickets at a concert, better customer support or direct access to you, the creator.

How can tokens be used to grow your business?
How can tokens be used to grow your business?

When considering what services make sense, you have to carefully evaluate the cost to you in offering it. While it’s ‘cheap’ to offer office hours or a live stream once a week, that hour and the preparation leading up to it could cost a lot in stress, time or other opportunities. Services you offer ‘for free’ always have some alternative cost and figuring out how to price them in alternative currencies (like how many tokens grants what service) isn’t always easy.

Using tokens to unlock social capital to increase engagement and revenue

Social capital is a tricky lever to pull for increasing ARPU and engagement. On the one hand, there’s no doubt that social capital matters. On the other hand, there’s a direct trade off between the amount of people with social capital and the value of that capital. The dynamics of how they received that capital also matter. If everyone has social capital, then no one does. Social capital only matters if you can ‘skip the line’. If everyone can, then being able to skip the line is meaningless. Additionally, social capital often needs to be seen as justifiably earned to be worthwhile. In ‘pay to win’ games, no one values the winner. It’s simply a symbol that they bought their way to victory.

A great example of this dynamic is when Twitter let anyone buy a verified ‘blue checkmark’ account for $8/month. Being a verified account used to signify a certain amount of social capital — whether in the real world (like being a journalist) or on the platform itself. By making it available to everyone, Twitter reduced the value of the social capital associated with a blue checkmark. Both because it could now be bought and because more people could have it.

It’s for this reason that using social capital to increase engagement can be tricky. In a way this is like telling someone “I’ll let you into my club, skip the line and get free drinks for your friends and all the social capital that’s worth for engaging with my club”. If that person is Beyonce and her engagement is meaningful, it could be worth it. But if you’re offering anyone else that amount of social capital, it might not be worth it. The engagement of the people being crowned with ‘social capital’ needs to be very meaningful — especially because you can’t offer it to everyone (because that dilutes social capital).

On the other hand, using social capital in more measured forms, like badges that signify individual accomplishment to increase individual user engagement can be very impactful. Reddit is an excellent example of using badges that signify social capital to drive users to become more active, contributing to the community in desired ways.

Driving revenue and ARPU is a different, more straight forward matter. Often, because social capital needs to be rare to have value, tying it to high priced items can work beautifully. It’s important to not have a ‘pay to win’ dynamic, but many interactions don’t: VIP boxes at games, backstage or inner ring tickets that make people feel important and premium badged accounts can work really well for driving ARPU up without being a net negative to the social capital experience.

How can tokens grow engagement?
How can tokens grow engagement?

Tokens, specifically NFTs and profile picture NFTs, hit the ground running in signaling social capital. Punks, Bored Apes and a other profile picture collections hit market fit as signaling mechanisms for being a crypto OG or NFT connoisseur. Using them as high priced, social signaling is a perfect use case if you have the right kind of social capital for sale.

Using NFTs to grow engagement.
Using NFTs to grow engagement. Source

Alternatively, using them as badges in a Reddit like style is also very intuitive. You can award special NFTs to fans and users who engage enough in wanted ways. Those NFTs could offer social signaling via how they look or via what they let those fans and users do — a digital or physical way to ‘skip the line’. A few ideas could be invite codes for hot new apps, being ‘in the know’ on new releases and product road maps or getting exclusive access to community moderation or fan engagement tools as a power fan. Sometimes it can just be enough for someone to be able to signal that they’re an OG or an expert to make it worth their while.

Using tokens to unlock experiences to increase engagement and revenue

Our last two categories are how you can use tokens to grow ARPU and/or engagement via offering unique experiences. The experiences you can offer are very different based on your product and don’t work for everyone. Assuming you have some unique experience to offer, the answer is yes and yes. Experiences can be used to both increase engagement and ARPU.

Using tokens to access experiences.
Using tokens to access experiences. Source

For ARPU, experiences can be used in two ways: ‘extreme one of a kind experiences’ and ‘premium experiences’. Extreme experiences, like tickets to a coveted concert, backstage access or a developers conference can be used to grow ARPU easily: the more you spend the higher chance you get of winning. Premium experiences are more akin to a unique product tier. For a large increase in ARPU you’ll get some form of premium experience: a one on one onboarding and walkthrough, data import or to spend time with a writer as they brainstorm and draft a plot line. It’s important to productize the premium experiences so that they’re sustainable, just like a premium product experience.

The same mechanisms work for increasing engagement with one important change. Since engagement might not translate directly into revenue, you can’t productize experiences that have a high cost associated with them.

How can tokens be used to grow
How can tokens be used to grow

As I wrote in part 2 about using tokens to grow your users via experiences:

Tokens here could be very interesting, both as a vetting mechanism — i.e ‘whoever has more than XX tokens (or own a specific NFT) is eligible’, as well as a very convenient way to collaborate with other artists and builders on cross promotion. The blockchain is a single database that everyone can use conveniently for a token gated experience, that otherwise would have required a lot of personal data synchronization. Imagine collaborating with 5 other musicians, anyone who has bought one of your music NFTs receives a backstage pass to any of the 5 concerts. All of a sudden the value proposition you can offer your fans increases.

The same is true here as well. Tokens are a great mechanism for both gating experiences as well as collaborating with other creators and builders.

Using tokens to grow as a creator and builder

Can tokens be used to grow your fan and user engagement? The clear answer we’ve showed is yes, but it matters how you go about it. Growing engagement with your fans and users is hard. You have to be conscious of the cost, time and effort you put into it and craft compelling offerings for your fans and users.

Tokens are a new tool that can simplify and streamline traditional loyalty point like systems in a way that allows solo builders and creators to implement business changing programs. The key benefits that crypto tokens bring to the table are:

  1. Ease of operation makes spinning up a loyalty points program simple for any creator. Creating an ERC-20 token is much simpler than running, maintaining and making sure your own database is operational globally.
  2. Interoperability between data silos makes collaborating and forming large groups with more compelling offers much easier. This means that offering experiences or joint product offerings much more compelling to your audience. Tokens power that collaboration. Before it was a challenge for a creator on Twitter to collaborate with someone on Instagram. Tokens are the interoperable database between different layers.
  3. User and fan ownership allows fans and users to feel more agency and trust in the brand and offerings. Ownership also means the right to ‘sell out’ and gift, trade or sell loyalty tokens to someone else. This can allow for more price discovery of what a loyalty token is actually worth as well as finding the right users and fans to hold long term — the ones who are bought into you.

Sample token growth playbook for creators

This playbook builds on the three strengths tokens bring to the table: ease of operation, interoperability and fan ownership.

  1. Determine value you can offer and what your user base is looking for based on the categories we’ve explored: affiliate fees, services and goods, experiences and social capital.
  2. Build a compelling tier of badges to offer that mark different levels of engagement.
  3. Find 5 builders and creators with a synergetic offering to you (products, concerts etc)
  4. Match your badge collection across the creators so that users receive a bundle when purchasing from you (for example: a free ticket, 3 months of a free trial). Be sure to market the offering to each others’ customers.
  5. Create an affiliate marketing program — now that you have a larger bundle to offer, you can afford to pay out more in affiliate marketing fees.
  6. Create a unique set of NFTs for elite affiliate marketers that lets them offer rare, unique experiences to their friends and colleagues — socially enhancing their position.

Can tokens be used for stimulating growth?

Using tokens to increase growth is one of the biggest questions in the industry, especially for solo builders and creators. However, like all business decisions, it’s not so simple. Creators have to have a good analysis of what they’re looking for and what they have to offer before creating a token.

Leveraging interoperability of tokens and the simplicity of use is by far the best use case that tokens bring. Mechanisms that leverage these two traits are where tokens shine for solo creators and builders, for example creating a bundle between creators that you can then use to grow your fans.

I design tokenomics for crypto protocols (all still in launch phase) and am putting everything I’m learning into a super in depth course on Tokenomics. If you’re interested in my free email course on tokenomics, sign up here! Also feel free to sign up to my designing tokenomics weekly web3 bits newsletter.

Designing Tokenomics by Yosh Zlotogorski