Forget Rewards: Give Loyal Consumers Stock in the Company

Loyal3 Plans to Create a Class of Owners Working for the Brands They Love

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Brands go to great lengths to forge deeper relationships with their customers through points, miles, coupons, offers, badges, loyalty cards and the like. If entrepreneur Barry Schneider has his way, quite a few will soon be offering something more valuable: company stock.

Loyal3 launched last spring with a pretty simple, if revolutionary, proposition: enable brands to sell their own stock directly to consumers -- in $10 increments via Facebook, or directly via their own sites, without a broker or financial institution.

A handful of brands now plan to either directly sell or offer shares as a reward for their best customers, through a mechanism that Loyal3 calls CSOP, or customer stock ownership plan. Direct-stock-purchase plans have been around since the 1970s, but corporations haven't used them much because the cost of compliance and administering millions of tiny shareholders wasn't worth the expense.

Loyal3 has built a scaled platform to make it inexpensive for a brand to sell -- or give away -- stock in small increments. Theoretically, stock ownership at even a small level would build a class of owners who are then invested in the brand's success.

"The truth is people care more about things that they own than things they don't," Mr. Schneider said. "We set out to modernize a system to make it cost effective for brands and made it as easy for consumers as buying a book on Amazon."

In addition, Loyal3 has spent the past year consulting with the Securities and Exchange Commission to apply the concept to IPOs in the hope of creating what Mr. Schneider likes to call the world's first "social IPO." While anyone can buy stock, anyone can't buy IPO shares, which brokers offer to their best and wealthiest customers. While that serves banks and their clients, it doesn't necessarily help the company long-term.

"Imagine a consumer company going public. Do you think it helps that company for a very small percent of rich people who are not users to buy the stock and flip it?" Mr. Schneider asked. "It doesn't help them at all. They want people to participate who help make the brand great."

Given that former Facebook Chief Privacy Officer Chris Kelly is the largest outside investor in Loyal3, as well as a board member, Facebook's upcoming IPO would be a logical candidate for such a sale. Think of it: We've seen that social services can fall faster than they rise (MySpace, Friendster), but what if Facebook offered its users the chance to own part of the service by buying shares first?

Messrs. Kelly and Schneider won't comment on Facebook or any other potential issuer of the stock. They do say that several brands will launch programs in the coming months, and they expect to have 20 million fans-owners on the system in 2013.

"There is an incredible potential for brands to move their social-media likes and other expressions of affinity into actual ownership," Mr. Kelly said. "This is the next evolution of the "like' button in a lot of ways.'"

During the past year, as the executives been evangelizing the concept, they've received some strong support from ad agencies, an important constituency. Agencies, after all, are designing the loyalty programs and spending energy trying to identify and motivate a brand's most loyal consumers. A consumer who invests $25 or $50 a month in a company -- and also provides their name and contact information -- would be incredibly valuable for any brand.

"You've created a loyalty currency; that 's the bottom line," said Gregg Hamilton, senior VP of Wunderman, a unit of WPP, whose clients include Burger King, Best Buy, Citibank and Nokia.

Brands have spent the past several years building their fans and followings on electronic platforms such as Facebook and Twitter. What next? Another free soda? A T-shirt? How about rewarding them with a piece of the company?

"A lot of clients have points programs, miles programs, T-shirts, logo crap," Mr. Hamilton said. "There's only so much stuff you can give somebody."

An airline might offer its most frequent fliers the option of converting some of their accumulated miles into company shares -- good for the company because it cancels a liability and creates a shareholder with an added incentive to remain a customer.

"One of the big challenges for loyalty companies are the points they have that are unclaimed," said Forrester VP Dave Frankland. "If there is an opportunity to encourage people to flip those into shares, it's a smaller liability."

(At least one other startup, New York-based LoyaltyShares, is attempting to solve that problem.)

Creating a new class of fans-slash-owners has its share of potential pitfalls, which is one reason it has taken Loyal3 so long to get brands onboard. While a company like Starbucks has a lot of control over customer experience, it has no control over its share price. Brands have to prepare for backlash if the stock doesn't perform. The same network effects they enjoy when a consumer buys stock and broadcasts that on Facebook could go the other way if an investment goes bad.

"People have to understand they are investing in a business, and there is risk involved no matter how much they happen to like the product," said Robert Heim, a partner at securities law firm Meyers & Heim.

Loyal3 has designed the program not to appeal to professionals or day traders. Investments are capped at $2,400 a month, and while owners can sell at any time, transactions aren't immediate. Mr. Schneider cites a raft of statistics on the desire of the public to own stock and how owners behave as consumers. For example: Customer-owners buy 54% more and refer twice as many new customers as nonowners, according to research from Opinion Research and Bain & Co.

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