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Definition: Advertising to Sales Ratio
The ratio calculated by dividing total advertising expenses by the revenue generated from sales is termed as Advertising to Sales ratio. This ratio essentially measures the effectiveness of an advertising campaign.
Advertising to Sales ratio=Total advertising expenses/ Sales revenue
It is desirable that this ratio be as less as possible for it means that small amount of expense on advertising resulted in greater sales. High ratio is an indication that the advertising campaign was not successful and resulted in low sales revenue.
Advertising to sales ratio of the industry as a whole can help a new company determine how much it should spend on marketing and advertising. Industry experts suggest that a company should aim to spend 3-6% of their sales on advertising.
This ratio also helps an organization to track the trends in your market segment over time and acts as a critical means of setting the budget.
But, businesses run a variety of marketing and advertising campaigns on different mediums at one time such as newspapers, TVC, websites, radio, etc. This makes it difficult to determine which particular campaign was responsible for generating new sales. A close tracking of each promotion is required to calculate the effectiveness of the advertising spending.
The ratio may differ if a company is built to leverage volume or to leverage margin. Volume driven company like WalMart spend a meager 0.4% of sales on advertising while on the other hand, high-margin Company like Target (TGT) spends close to 2% of sales on advertising.
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