Should brands invest in NFTs?

There is a lot of buzz about NFTs, or non-fungible tokens, though many people talk about it but very few have actually done it. There are some big case studies. One involves the company behind the Bored Ape series of NFTs raising about $285m worth of cryptocurrency by selling tokens which represent land in a virtual world game it is building. Another case study is of Adidas selling limited edition items and clothing for the metaverse. There are also the billions in sales that have been generated by NFTs through marketplaces like OpenSea.

For marketers, the big question is whether NFTs are an important part of their future marketing mix.

Honest Chocolate, a small Cape Town-based brand that punches above its weight, launched an NFT campaign. The brand, which is known for bean-to-bar ethically sourced and manufactured vegan chocolates, has been featured in TV shows and even a Netflix series.

In 2016 the brand created an artist range as a way to bring art and artisanal chocolate together.  Honest Chocolate works with emerging artists and many have grown to be very successful, with their artworks fetching over R100,000. The company launched the NFT campaign both to help artists earn more from their artworks and to reward its loyal customers. On one level, there is the investment and appreciation of the art itself, and on the other it provides discounts and surprise rewards.

NFTs have subsequently become part of the brand’s community building and helps it create a chain of positivity.

While Honest Chocolate’s first NFT “drop” was small, it still generated just under R20,000 for the artist concerned.

NFTs create a community more than an object

Building a community is a key component of NFTs. When you research NFT launches online you see this coming up as a key success factor — with Discord and Twitter being the primary channels used to promote and interact with NFT owners. There is a big focus on pre-launch promotion and excitement, and then the initial sale (or drop).

Big NFT projects attract dedicated followers that meet online and receive special benefits from the community organisers. Adidas Originals gave the Bored Ape owners, plus a number of other communities, access to pre-purchase, building up the excitement about their NFTs.

In an interview with Vogue Business, Adidas senior director of digital growth, Tareq Nazlawy, says: “It’s a flip of the normal business model where we make stuff and hope people will buy it. You're not just buying the product. You're becoming a member of this community.”

Honest Chocolate used Instagram to promote the NFTs to its followers and -email to communicate with the NFT owners — so the campaign worked out to be cost effective.

Because this is such an early-adopter market, marketers need to carefully consider who will buy the NFT. Honest Chocolate didn’t want crypto investors but rather Honest Chocolate lovers, so the company chose to enable credit card purchases off its e-commerce site using an SA crypto marketplace, Momint.

The largest NFT marketplace globally is OpenSea, but even that platform has only 600,000 registered users, though they do represent billions of dollars in trading volume. Bear in mind that consumers of NFTs represent a tiny but wealthy market — and most of them are not anywhere near SA.

Total cost

Decide on which blockchain you want to mint your NFTs. There are costs associated with minting, as you need to pay for each of your NFTs to be added to the blockchain. The better adopted the chain, the more universal the NFT. But an NFT on Polygon has zero value on Ethereum and vice versa. Chains like Ethereum run an auction based on demand for adding the NFT to its blockchain, and this can be unexpectedly expensive. You also need to consider maintaining a community, and your full reward and value cycle. Momint charges $2 a mint on Polygon — so it doesn't have to be expensive.

The underlying benefit of the NFT is the smart contract, which provides additional functionality and rights that need to be considered carefully. Will there be an ongoing royalty that you take with each secondary sale of your NFT? Will you provide additional value that is unlocked only with purchase? Will you provide surprise additional value over time to increase the value of your NFT?

Creating value and pricing a NFT

To create value for customers beyond the benefits offered by the brand, consider rarity. Will you make a single image NFT that everyone gets and has inherent value, or create a large series of slightly differentiated images, each with  a unique value? In the case of Bored Apes, rarity is linked both to the image and to the unique items the ape may have — clothing, earrings and so on. The fewer of the images that have your items, the bigger the value.

Decide how to price the NFT and whether to charge in a crypto currency which restricts the number of purchasers, or in rand? Will it be based on an auction — useful if you are doing variations — or have a fixed price per NFT?

There are red flags to look out for. Not only is there a great deal of fraud in this space, but blockchains don't work with each other and there isn’t a common protocol for smart contracts.

Before entering the NFT market you need to have a clear understanding of what success actually means to your brand. Even though there is lots of hype, it is still early. There is no doubt that the technology will change and mature over time, and timing may be the most important factor to consider in this endeavour. Knowing everything we do today, the risks and complexities included, will Honest Chocolate continue with its NFT strategy? The short answer is yes.

• Nevo Hadas is a partner at DYDX Digital.