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Korea's Buyer Bonus: Getting to Know You

In April, Song Mi Sook bought a book, saw a movie, downloaded a new ringtone for her cell phone, and purchased music for her Internet homepage -- all without having to spend any of her own money. How is that? The 28-year-old Korean civil servant used bonus points, called OKCashbag, that she had accumulated while shopping and dining in the past several months. "I like it not just because I can save money," she says. "It's also a very convenient way to pay when you buy stuff online."

Korean consumers like Song have helped turn OKCashbag into a Korean marketing sensation. Since its launch seven years ago, nearly 25 million Koreans -- or more than half of the population -- have signed up for the service. Among economically active adults, more than 80% are members, figures SK Corp., the energy and chemicals arm of Korea's fourth-largest conglomerate, which runs the program. At the end of 2005, Koreans were sitting on some $230 million in points -- one point equals one won, or about 1/10 of a cent -- compared with $68.4 million in 2000.

This is a loyalty program with unique twists. Under most such programs, customers who want to redeem points are limited in their choice of products, typically to those from just one or a handful of companies. In Korea, though, OKCashbag points are almost as good as cash, with a total of 46,000 retail stores, restaurants, gas stations, hotels, and online retailers participating in the program. Affiliated merchants include Korea's largest discount store, E-Mart, the largest gas station chain, and the largest mobile carrier, both units of SK Group, and eatery franchises such as KFC (YUM), T.G.I. Friday's, and Burger King.

LOW PROFITS. Customers accumulate points equal to anywhere between 0.5% and 5% of the value of the transaction. A total of nine credit card companies also offer points whenever OKCashbag clients make purchases through their cards. Once a customer racks up 50,000 points or more -- requiring purchases of $1,000 to $10,000 -- they can be converted into real cash.

OKCashbag is not a huge moneymaker for parent SK Corp. The company charges users a minimum of 25% of points in the form of service fees. Pre-tax profit from the program amounted to $30.6 million last year -- a 50% increase from 2004 -- on revenues of $105 million. That's just a fraction of the $2.2 billion overall pre-tax profit SK Corp. logged last year.

Yet OKCashbag is extremely valuable in other ways. Thanks to the program's massive takeup, SK Corp now boasts a powerful marketing tool. Upon first signing up, customers must provide various personal data. Then, as users accrue and redeem points, a detailed picture of their shopping, dining, and other habits begins to take shape. "It's a great asset for effectively communicating with consumers," says Park Jin Soo, a marketing professor at Seoul National University.

DO I KNOW YOU? SK Corp. shares its data trove with the companies taking part in the loyalty program. "As we [learn] buying patterns and tendencies of different consumer segments, we can help partner companies promote sales and retain their customers," says John Song, SK's senior manager in charge of planning at OKCashbag.

For instance, a woman might buy gas from an SK station. After filling up her tank, she swipes her OKCashbag card through a magnetic reader to get her bonus points. A computer at SK sends out a message that the woman's favorite department store nearby is offering special discounts on a new line of spring dresses. The information is printed at the bottom of the receipt. The woman drives over to the department store and picks up a couple of new outfits, racking up more reward points on her OKCashbag account.

SK and its partners sometimes undertake joint marketing blitzes. For the soccer World Cup, for instance, SK has supplied partner companies with red T-shirts worn by supporters of Korea's national team. "Our customers feel that they get extra services if we are an OKCashbag member," says Kim Yi Jung, a shopkeeper at Myungdong Kyoja dumpling restaurant in central Seoul. Similarly, T.G.I. Friday's frequently hooks up with other OKCashbag partners on promotional blitzes targeting the same segment of customers.

ONLINE EASE. Earlier this year, a T.G.I.F. restaurant in southern Seoul and a nearby movie theater jointly offered a 15% discount for OKCashbag members who visited both venues. "Our target customers are young women in their 20s and 30s, and OKCashbag helps us retain our frequent clients," says T.G.I.F. marketing manager Lim Ha Young.

OKCashbag is also helping drive e-commerce in Korea. Want to download some new tunes or get videos on demand? Just enter your Cashbag membership number and password, and presto! -- the sum is deducted from your point balance. Each month, Koreans redeem an average of $1.3 million in OKCashbag points towards purchases of digital doodads such as virtual furniture and art used to personalize home pages on social-networking Web sites, SK says.

SIGHTS ON CHINA. Now that it has Korea firmly hooked on OKCashbag, SK Corp. is hoping to reel in a much bigger market: China. The company is targeting $5 billion in sales in China by 2010 and hopes to use data garnered by a loyalty program modelled on OKCashbag to help it reach that goal. "China has strategic importance for our company's future and the key will be who will have more data on end customers in the market," says senior manager Song.

SK is in the process of negotiating with China's major association of banks and a leading mobile carrier for an alliance aimed at setting up a similar scheme. Given SK's lack of experience in China -- and the fact that it doesn't have ready-made distribution in its chain of gas stations -- that certainly won't be easy. But if it pulls it off, SK could have one heck of a cashbag in hand.

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