Chapter 55
Advertising-To-Sales Ratio

Determining the return on the various programs marketing implements.

The advertising-to-sales ratioi describes the effect of advertising on a company’s total sales. The formula is:

Where

ASR = advertising-to-sales ratio

Ea = total advertising expenditures

St = total sales during time t

To illustrate:

Nikeii spent US$3.2 billion in advertising in 2016, with total global sales of $32.4 billion, so its advertising-to-sales ratio was:

Measuring how effective the advertising campaigns are at creating sales is a vital piece of information that marketers supply to support their marketing efforts. Advertising is used to build a company or product image, attract customers and, ultimately, generate, or certainly influence, an increase in sales. The amount spent on advertising will vary depending on the type of product, who the target audience is, the type of media used (online, print, broadcast), and the design and content of the message. Typically, a lower advertising-to-sales ratio is better than a higher one, since that implies the advertising was effective in convincing the target audience. As additional advertising-to-sales research shows, there are differences among industries, due to the unique competitive characteristics of each industry. The auto industry, particularly in the United States, spends 1% to 2% of sales on advertising. While that is obviously a low percentage, it is often in conjunction with aggressive promotional programs at the dealer level. This can include reduced financing, discounted pricing, and gift giveaways or special upgrades for same day purchases, each serving as an inducement to purchase. Business products, such as enterprise hardware, are not advertised as much as consumer products. Marketers focus more on relationship development, value-added services such as additional hours of engineering support, and even user-group seminars to promote their products. Interestingly, Starbucks, the global coffee brand, is rarely, if ever, advertised. Instead, their stores serve as their primary marketing vehicle. Yet few would argue that they have been quite successful despite the absence of conventional advertising approaches.

Total advertising expenditure and total sales will both be measured in the income statement. Sometimes income statements capture marketing expenses in one or two general categories. If so, then simply review the marketing department budget for the detail on total ad dollars spent. Updated industry ad-to-sales ratio data can be found in financial institution reports such as Dun & Bradstreet and ad industry reports from Ad Age.

iAdvertising Age, Advertising to Sales Ratios by Industry, July 11, 2017. Retrieved July 14, 2017 from http://adage.com/article/datacenter/advertising-sales-ratios-industry/106575/

iiSebastian Buck, Nike Spends Billions on Marketing, But Millennials Still Like Toms More, June 23, 2016. Fast Company Magazine. Retrieved May 14, 2017 from https://www.fastcompany.com/3061133/nike-spends-billions-on-marketing-but-millennials-still-like-toms-more; News.nike.com, Nike, Inc. Reports Fiscal 2016 Fourth Quarter and Full Year Results, June 28, 2016. Retrieved May 14, 2016 from http://news.nike.com/news/nike-inc-reports-fiscal-2016-fourth-quarter-and-full-year-results