Your marketing dollars should be accountable. It is your job to make sure your marketing dollars are providing a profitable return, and to make adjustments when things aren’t going as planned.
Here are two simple metrics you can use to determine the effectiveness of your marketing spend.
* Advertising to Sales Ratio (A to S): This shows marketing dollars (total spend) as a percentage of net revenue (gross sales less returns, allowances, and discounts). You can calculate this by product, campaign, or any other dimension you wish. Also, you can look at this either as a rolling sum (good for determining annual A to S ratio) or a point in time.
Formula: (Total Marketing Spend/Net Revenue)
Example:
- 2008 Markting Spend for Widget A: $30,000
- 2008 Net Revenue for Widget A: $100,000
- A to S ratio = 30%
This means that 30% of your net revenue went toward advertising.
* Media Ratio: You can also use the reciprocal of the A to S ratio as a rough gauge of marketing ROI.
Formula: (Net Revenue/Total Marketing Spend)
Example:
- 2008 Markting Spend for Widget A: $30,000
- 2008 Net Revenue for Widget A: $100,000
- Media Ratio = 3.33
This means you spend $1, and get $3.33 back. Not bad.
There is no single A to S or Media ratio figure that is the "golden" number. A ratio goal should be determined based on profitability and forecast objectives. Also, you can tweak these formulas to fit your industry or company needs.
Expect very high A to S ratios (or low media ratios) when you first begin your marketing campaign, as your sales will not exceed your spend. Hopefully the ratio flips and you begin making money! Refer to these ratios often, preferably once a week or more. You should become religiously involved with these numbers, for they are the lifeblood of your marketing efforts.
