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Combining Intent With Ability: What Is Income-Based Marketing?

June 5, 2018 at 9:17 AM

Positioning is one of the most powerful marketing concepts a brand has at its disposal. (Click to Tweet!) Whether you’re a luxury vehicle designer or a value-based grocery store chain, you’ve likely spent a lot of resources perfecting and cementing your positioning, on your way to success.

You'd also have pivoted to digital, to keep your marketing up to date and to reach your consumers on the channels they prefer, spending more resources on further digitally cementing your positioning.

But your display ad campaigns aren’t playing along. You’re advertising based on behaviour, but by using behavioural ad targeting, positioning goes out the window. Are you talking to your demographic group or just to anyone who has recently visited any grocery store? Or, even worse, any food-related website?

Stop doing that. Start bringing your positioning back into your ad strategy with income-based marketing. (Click to Tweet!)

What is Income-Based Marketing?

Definition: Income-Based Marketing enables brands to create a pro-active marketing strategy, centred around a combination of the consumer’s intent and ability to purchase. Brands can turn brand-awareness campaigns into revenue-generating campaigns, by supplementing behavioural targeting with data insights on your consumers' income and household and optimising ad targeting.

With Income-Based Marketing, brands can strategically connect with consumers who not only have an interest in their products or services but demographically aligns with the brands market position, to successfully complete the journey to customer. (Click to Tweet!)

Understanding Income-Based Marketing

Income-Based Marketing is a highly targeted type of behavioural marketing, combining behavioural data with income data. Whereas behavioural marketing is passive in that advertising includes anyone who has shown an interest or completed a set of actions, Income-Based Marketing eliminates those demographic groups that are unlikely to respond to the product or service or do not fall within the target demographic sector of the brand. The elimination of income-groups not aligned with brand strategy, and the focusing of a target audience, provides brands with an optimised audience, improving response rates and lowering wasted spend by consumers who are unlikely to transition to a customer, due to misalignment of consumer and brand target demographic.

An example of Income-Based Marketing in action

A South African grocery store chain, well known by the population for savings and the best deals, run display ads based on behavioural data. Their target audience falls between LSM groups 4 to 7, and all stores are within South-African borders. Bidding is on CPM, and with ads promising great deals, they get high impressions, a healthy click-through rate, but low conversion rate.

What's happening?

Ads are shown across LSM groups; thus consumers falling in groups below the chain's target are also receiving advertisements that promise great deals. Upon clicking through and viewing prices, these LSM groups discover that they are unable to complete a purchase. Similarly, LSM groups above the chain's target audience are also being shown the ads, thus accounting for the high impressions – and pushing up the costs. These groups don't respond to ads announcing savings and the best deals; thus this ad spend is wasted.

How to optimise this campaign?

Utilise Income-Based Marketing by combining the behavioural data with data on income groups, thus eliminating the additional LSM groups. Ads are displayed to consumers who fall within LSM group 4 to 7 and have shown the same behavioural traits as in the initial campaign. Now, costs will be reduced due to less wasted impressions, and click-throughs have a higher chance of leading to conversions.

Considering Income-Based Marketing for your brand? Find out more about MarketWise – the leading Income-Based Marketing tool in South Africa.

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The 7 types of credit risk in SME lending

  It is common knowledge in the industry that the credit risk assessment of a consumer applying for credit is far less complex than that of a business that is applying for credit. Why is this the case? Simply put, consumers are usually very similar in their requirements and risks (homogenous) whilst businesses have far more varying risk elements (heterogenous). In this blog we will look at all the different risk elements within a business (here SME) credit application. These are: Risk of proprietors Risk of business Reason for loan Financial ratios Size of loan Risk industry Risk of region Before we delve into this list, it is worth noting that all of these factors need to be deployable as assessment tools within your originations system so it is key that you ensure your system can manage them. If you are on the look out for a loans origination system, then look no further than Principa’s AppSmart. If you are looking for a decision engine to manage your scorecards, policy rules and terms of business then take a look at our DecisionSmart business rules engine. AppSmart and DecisionSmart are part of Principa’s FinSmart Universe allowing for effective credit management across the customer life-cycle.  The different risk elements within a business credit application 1) Risk of proprietors For smaller organisations the risk of the business is inextricably linked to the financial well-being of the proprietors. How small is small? The rule of thumb is companies with up to two to three proprietors should have their proprietors assessed for risk too. This fits in with the SME segment. What data should be looked at? Generally in countries with mature credit bureaux, credit data is looked at including the score (there is normally a score cut-off) and then negative information such as the existence of judgements or defaults; these are typically used within policy rules. Those businesses with proprietors with excessive numbers of “negatives” may be disqualified from the loan application. Some credit bureaux offer a score of an individual based on the performance of all the businesses with which they are associated. This can also be useful in the credit risk assessment process. Another innovation being adopted internationally is the use of psychometrics in credit evaluation of the proprietors. To find out more about adopting credit scoring, read our blog on how to adopt credit scoring.   2) Risk of business The risk of the business should be managed through both scores and policy rules. Lenders will look at information such as the age of company, the experience of directors and the size of company etc. within a score. Alternatively, many lenders utilise the business score offered by credit bureaux. These scores are typically not as strong as consumer scores as the underlying data is limited and sometimes problematic. For example, large successful organisations may have judgements registered against their name which, unlike for consumers, is not necessarily a direct indication of the inability to service debt.   3) Reason for loan The reason for a loan is used more widely in business lending as opposed to unsecured consumer lending. Venture capital, working capital, invoice discounting and bridging finance are just some of many types of loan/facilities available and lenders need to equip themselves with the ability to manage each of these customer types whether it is within originations or collections. Prudent lenders venturing into the SME space for the first time often focus on one or two of these loan types and then expand later – as the operational implication for each type of loan is complex. 4) Financial ratios Financial ratios are core to commercial credit risk assessment. The main challenge here is to ensure that reliable financials are available from the customer. Small businesses may not be audited and thus the financials may be less trustworthy.   Financial ratios can be divided into four categories: Profitability Leverage Coverage Liquidity Profitability can be further divided into margin ratios and return ratios. Lenders are frequently interested in gross profit margins; this is normally explicit on the income statement. The EBIDTA margin and operating profit margins are also used as well as return ratios such as return on assets, return on equity and risk-adjusted-returns. Leverage ratios are useful to lenders as they reflect the portion of the business that is financed by debt. Lower leverage ratios indicate stability. Leverage ratios assessed often incorporate debt-to-asset, debt-to-equity and asset-to-equity. Coverage ratios indicate the coverage that income or assets provide for the servicing of debt or interest expenses. The higher the coverage ratio the better it is for the lender. Coverage ratios are worked out considering the loan/facility that is being applied for. Finally, liquidity ratios indicate the ability for a company to convert its assets into cash. There are a variety of ratios used here. The current ratio is simply the ratio of assets to liabilities. The quick ratio is the ability for the business to pay its current debts off with readily available assets. The higher the liquidity ratios the better. Ratios are used both within credit scorecards as well as within policy rules. You can read more about these ratios here. 5) Size of loan When assessing credit risk for a consumer, the risk of the consumer does not normally change with the change of loan amount or facility (subject to the consumer passing affordability criteria). With business loans, loan amounts can range quite dramatically, and the risk of the applicant is normally tied to the loan amount requested. The loan/facility amount will of course change the ratios (mentioned in the last section) which could affect a positive/negative outcome. The outcome of the loan application is usually directly linked to a loan amount and any marked change to this loan amount would change the risk profile of the application.   6) Risk of industry The risk of an industry in which the SME operates can have a strong deterministic relationship with the entity being able to service the debt. Some lenders use this and those who do not normally identify this as a missing element in their risk assessment process. The identification of industry is always important. If you are in manufacturing, but your clients are the mines, then you are perhaps better identified as operating in mining as opposed to manufacturing. Most lenders who assess industry, will periodically rule out certain industries and perhaps also incorporate industry within their scorecard. Others take a more scientific approach. In the graph below the performance of an industry is tracked for two years and then projected over the next 6 months; this is then compared to the country’s GDP. As the industry appears to track above the projected GDP, a positive outlook is given to this applicant and this may affect them favourably in the credit application.                   7) Risk of Region   The last area of assessment is risk of region. Of the seven, this one is used the least. Here businesses,  either on book or on the bureau, are assessed against their geo-code. Each geo-code is clustered, and the projected outlook is given as positive, static or negative. As with industry this can be used within the assessment process as a policy rule or within a scorecard.   Bringing the seven risk categories together in a risk assessment These seven risk assessment categories are all important in the risk assessment process. How you bring it all together is critical. If you would like to discuss your SME evaluation challenges or find out more about what we offer in credit management software (like AppSmart and DecisionSmart), get in touch with us here.

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