August 16, 2022

Tokenize This™ : prepaid services edition

Welcome to the Block & Mortar newsletter! Every week, we bring you the top stories and our analysis on where business meets web3: blockchain, cryptocurrencies, NFTs, and metaverse. Brought to you by Scott Robbin and Q McCallum.

Thankfully it's been a quiet week in the crypto space. Verrrrrry quiet.  Definitely no accusations of money laundering, coupled with arrests and concerns of regulatory overreach. That left us some space to pick up on an idea we mentioned a couple of weeks back:

Introducing: Tokenize This™

Our mission at Block & Mortar is to surface practical business use cases for web3 technologies. The first phase is this newsletter, where we curate and analyze recent web3 happenings to help business leaders such as yourself understand what's out there.  

The next phase is for us to work closely with companies that are planning their journey into metaverse properties, crypto tokens, and NFTs.  We practice how we would help a company spot opportunities to unlock new revenue streams, become more efficient, or stave off risk.  And we affectionately refer to those practice runs, those Gedankenexperiments, as Tokenize This™.  

This week we're sharing a scaled-down version of a recent Tokenize This™ session.  Someone asked us about applying crypto to their line of work, which led us to: what if your business were to issue its own tokens as prepaid vouchers for blocks of time or fixed-fee services? How would you set this in motion?  What would be the pros and cons of taking this route?

The backstory

In a real-world situation, we would not start with the technology. We'd first work closely with your executive team to learn about the business model, goals, and challenges, then develop a comprehensive strategy around web3 tools and techniques.  And that would include a risk assessment to explore where things might break down. 

But since this is a quick newsletter read, let's assume that we've already developed your multiverse marketing strategy and mapped out a sweepstakes promotion that uses tokens as in-game currency.  Next on our list is the tokens-as-service-vouchers idea.

Let's say you run a services company, such as a tech consultancy, law firm, or auto repair shop.  You provide consultations and project work at a fixed fee, plus ad-hoc implementations on a time-and-materials basis.  Your "inventory" is time, divvied into the mix of fixed-fee and hourly-rate work you can perform each month.  So your proverbial warehouse is full of what economists call perishable assets: you can't perform services in an hour that has passed, so any unused time has gone to waste.  (This is like empty seats on a flight: the airline can't sell them after the plane has taken off.)

The motivation

Your current arrangement works, but there's room for improvement:

  • You would like to fill gaps in your schedule.  Sometimes a client needs to reschedule at the last minute.  Life happens, sure.  But each shuffle leads you to lose revenue because you suddenly find yourself sitting idle when you'd planned to work.
  • Your clients would like certainty: They want to control their spend (by locking in today's prices) and also guarantee your availability (so they can plan around the work you'll perform).

The incumbent solution: prepayment

One existing, low-tech, tried-and-true solution is to offer prepayment.  Clients schedule fixed-fee services some weeks or months in advance, and they buy blocks of hours for upcoming time-and-materials work.  (Both approaches effectively amount to them applying a 100% deposit for upcoming work.)  Depending on your business, you may even wrap this up into a voucher that a client submits at the time of service. 

Prepayment usually requires additional terms around cancellation and rescheduling.  For example: 

  • Fixed-fee services: "We keep 75% of the fee if you cancel at least one month in advance; any later than that, and we keep everything."
  • Hourly services: "The prepaid hours are only good for some N days into the future, after which any unused time expires."

By reordering the payment/work sequence, you also move the risk: instead of the client being on the hook to pay you later, you're now on the hook to deliver.  It's up to you to manage your calendar to account for any disruptions on your end.

A crypto twist

What if you were to issue those prepaid service vouchers as crypto tokens?  That is, each token represents a digital twin of a service offering.  You mint one NFT, say, for each weekly Data Product Workshop on your calendar.  Or you mint (fungible) tokens that represent each hour you've set aside for time-and-materials work.  

So far, so good. But we don't apply crypto for crypto's sake.  We also need to ask: what improvements does this offer over the incumbent solution?

Clients get the option to transfer (sell) those tokens to someone else.  Because, hey, sometimes those funding rounds get delayed or a key executive has a family emergency.  It's possible that they'd have to sell those tokens at a discount in order to move the deal along, but they could write off the loss of ten or twenty percent of the token's value as the premium they paid to lock in your price and availability. 

You, the service provider, get to capture some of that resale value on that secondary market.  In the same way that artists can take a cut whenever someone resells their NFTs, you can collect some small percentage whenever the voucher changes hands.

And compared to paper vouchers, the blockchain approach eliminates counterfeits.  You can verify the provenance of those token-vouchers by tracing the purchase back to their date of issue.  And so long as you keep your wallet credentials safe, only you can generate new tokens.

Where the crypto approach breaks down

It's easy to get caught up in the excitement of applying a new technology to an old problem.  That's why it's important to remember that no plan is perfect.  So let's take a step back and review our plan for holes.

(Note that some of these challenges have workarounds or solutions, but others are simply inherent to the crypto approach.)

Getting prospects to buy tokens: Buying cryptocurrency tokens is still a relatively new idea for the mainstream market.  Similar to the early days of e-commerce, people are understandably skeptical of getting involved in crypto.  Asking a prospective client to buy crypto tokens may introduce needless friction to your sales process.   (Especially since crypto keeps appearing in the news for all the wrong reasons: price crashes, hacks, scams, and torching the environment.)

This may be easier if you and your clients are early adopters of new technology.  You can also hedge your bets by first introducing prepayments without crypto, then easing into it over time by offering a portion of your slots via tokens.

Jump-starting the market:  The greatest benefit to your clients – that they can resell the tokens on the secondary market if their plans change – doesn't exist at the beginning.  (Not unless your services are already quite popular.)  

You can reward these early adopters by reducing their risk.  Offer to buy the token back from them, at a discounted rate, if they need to reschedule.  This is a twist on the "cancellation fee" or "forfeit some portion of the deposit" that they'd experience in a traditional, non-crypto prepayment arrangement.

Accounting ramifications: When do you recognize the revenue from the token sale, since it could be weeks or months away from when the service is provided?  There are already standards for this, yes, but how many of those apply to crypto?  This space is still sorting itself out.  You'd do well to meet with a knowledgeable tax advisor to explore your options.

Adding fine print: You'll want to make sure that all token buyers are bound by some terms of service (TOS) agreement.  For example, if your services fall under export restrictions, a buyer would need to provide proof that they hail from a friendly country.  Or maybe you'd want the right to refuse service under certain circumstances.  This is where an experienced attorney could draft that contract language.  And a solid web developer could confirm that everyone who buys the tokens actually sees and agrees to those terms.

So … is it worth it?

Let's remember that this was just a brief thought experiment. A deeper exploration, plus some road-testing, would expose even more gotchas than those we've listed above. 

But based on what we've already found, do we think that token-vouchers are a worthwhile solution?  

For now, and for our friend's company, we'd say no.  And we'd say the same for most small to mid-sized companies out there.

There will certainly be trailblazers who will map out the legal and accounting terrain, and whose equally adventurous clients will help them to road-test this idea.   And over time we expect that buying and selling crypto tokens will become more mainstream and therefore less of a hurdle for most sales prospects.

But for a business that doesn't want to be a pioneer, we'd stick to plain old, non-token-gated prepayment.

(We're still bullish on the promotional game with crypto tokens as prizes, though.  That has a different target market and represents a pretty strong return on investment.)

What's next?

As mentioned earlier, this week's newsletter is a scaled-down version of the full exploration.  We may release this, and others, in their expanded form some time in the future.

In the meantime, what should we explore next?  Tell us about your business challenges.  Maybe your company will become our next Tokenize This™ study?

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Note: We’d like to thank Shane Glynn for reviewing early newsletter drafts. Any mistakes that remain are ours.