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.
How the Advertising-To-Sales Ratio Works
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.
A high advertising-to-sales ratio indicates that advertising expenses were high relative to sales revenue; this could mean the campaign was not successful. A low ratio indicates that the advertising campaign generated high sales relative to the advertising expense.
Understanding the Advertising-To-Sales Ratio
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.
The average A to S ratio varies widely for different industries. 2019 figures show that for loan brokers, it's 28.8%, for perfume and cosmetic companies, it's 22%, for amusement parks, it's 6.3%, for department stores, it's 4%, and for commercial banks, the ratio is 1%.
Some companies do not require as much advertising, such as utility companies, certain bank and financial companies and other select industries. Meanwhile, loan brokers typically see a 28.8% A to S ratio, on average. As such, comparisons should be made between similar companies. Some advertising campaigns are designed to foster long-term support, so a low advertising-to-sales ratio might not reflect the long-term benefits.
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. The 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.