What is the Advertising to Sales Ratio?

What is the Advertising to Sales Ratio?

The advertising-to-sales ratio, also known as the “A to S,” is a measurement of the effectiveness of a company’s advertising campaign. It can be used to measure the effectiveness of a specific product launch or of a broader policy, rebranding, or new direction in business.

The advertising-to-sales ratio is a measure of how successful a corporation’s advertising strategies are.

The ratio is used to assess whether the company’s marketing and advertising resources are being used effectively to generate sales.

Although it can vary industry to industry, in general, a low ratio is considered to be best, as it suggests the campaign helped spark strong sales relative to the amount of money and resources used to advertise.

Essentially, the advertising sales ratio is the relationship between the quantities of resources invested in advertising campaigns in contrast to the amount of new business that is generated as a direct result of the campaign.

The advertising-to-sales ratio is intended to demonstrate whether a company’s money expended on an advertising campaign helped generate new sales and to what extent those sales were generated. It is important to remember that it depends on the industry and there is no perfect advertisement to sales ratio.

introduction of Advertising-To-Sales Ratio

The A to S is calculated by dividing total advertising expenses by sales revenue. The advertising-to-sales ratio is designed to show whether the resources a firm spends on an advertising campaign helped to generate new sales, and to what extent it generated those sales.

Results can vary dramatically from industry to industry. So when calculating the figure, it is necessary to compare it to others within the same sector or industry.

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A high advertising-to-sales ratio indicates that advertising expenses were high relative to the sales revenue generated; this could mean the campaign was not successful.

A low ratio indicates that the advertising campaign generated high sales relative to the advertising expense. As always, a variety of factors may affect the success of specific sales.

Formula for the Advertising to Sales Ratio

Advertising to sales ratio = Total advertising expenses / Net sales

Where:

  • Total advertising expenses are the amount of money spent on advertising – the number can be found on a company’s income statement
  • Sales revenue is the income generated by a business – the number can be found on a company’s income statement

How the Advertising-To-Sales Ratio Is Used

Businesses often run a variety of marketing campaigns on different mediums (social media, websites, newspapers, radio, etc.) at one time, which can make it difficult to determine which campaigns, if any, were responsible for new sales.

Close tracking of promotions can show which mediums perform better, and the advertising-to-sales ratio can show the effectiveness of the advertising spending.

How to Interpret the Advertising to Sales Ratio?

The denominator for the advertising sales ratio is a company’s sales. Therefore, the higher these sales are, the lower this ratio will be. Similarly, lower net sales mean the advertising to sales ratio will also be below. On the other hand, the numerator includes the total advertising expenses. The higher this figure is, the higher this ratio will be. If it is low, this ratio will be low as well.

Overall, the lower the advertising to sales ratio is, the more preferable it is. A lower figure implies that the company generated high revenues from its advertising campaigns. It also suggests that for every dollar spent on advertising expenses, the company made significantly higher sales. However, this interpretation is subject to some conditions.

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The advertising to sales ratio does not provide beneficial information about a company’s operations. Therefore, stakeholders must view this ratio comparatively to receive better information. This process may require comparing this ratio to competitors, industrial average or even historical performances. This way, stakeholders can understand how the company has fared when it comes to advertising campaigns.

Overall, interpreting the advertising to sales ratio is straightforward. This ratio represents the magnitude of sales that advertising expenses form. Therefore, the lower it is, the higher sales a company generates per unit of spending on advertisement.

However, it is crucial to view this ratio comparatively rather than interpret it on its own. This way, stakeholders can get better information.

Advertising to Sales Ratio by Industry

It is important to note that there is no ideal advertising to sales ratio – it depends on the industry. For example, for retail goods such as clothing or perfume, the ratio can be as high as 10%, while paper and paper products can show a ratio as low as 0%. Therefore, when determining whether a company’s advertising to sales ratio is high or low, it is important to compare the figure to the industry average.

For example, the following are the 2017 advertising to sales ratio for various industries (source):

  • Amusement parks: 6.2%
  • Cigarettes: 1.2%
  • Communication services: 4.9%
  • Computer and office equipment: 1%
  • Loan brokers: 17.3%
  • Watches, clocks, and parts: 9.7%

Advertising-To-Sales Ratio Example

Suppose hypothetical perfume manufacturer ScentU has run a fairly costly Internet and social media marketing campaign to introduce their new line of women’s body spray. The campaign seems to be effective, but the company is concerned that it may have overspent relative to the resources allocated.

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Management calculates the advertising-to-sales ratio and determines that the percentage was 19%. While that might be high relative to some industries, considering that the average A to S ratio for perfume manufacturers is 22%, 19% is not only acceptable, it likely suggests that the campaign was very effective.

Conclusion

Performance ratios measure how effectively and efficiently companies use their resources to generate sales. One of these ratios includes the advertising to sales ratio, which gauges advertising expenses against revenues.

Usually, stakeholders prefer this ratio to be lower. However, it may differ from one industry to another.