Marketing, including advertising and sales, is necessary for most businesses to earn a profit. How much marketing a company needs in order to earn revenue is common question with no clear answer.
Some companies may be highly profitable with a marketing budget set at a fraction of one percent, whereas others might need to spend a quarter of their revenue on sales and marketing.
Calculating this ratio and comparing it against your industry as a whole is a key measure of how efficiently you’re turning marketing spending into sales revenue.
Calculating the marketing to sales ratio is extremely easy.
What I do is just divide the total marketing spending by total revenue from sales. Exclude any revenue that’s not from sales activity, such as royalty earnings or interest on savings.
Marketing spending includes all costs of sales and marketing, including advertising, sales staff, marketing materials including your website, branding consultants and so on.
If my business relies heavily on sales staff I can subdivide the marketing to revenue ratio to get a more granular view.
For instance, if I know that with my current advertising budget my sales team gets 500 leads per month, and I make one sale per every 20 leads, I can see that my current marketing budget results in 25 sales per month.
Spending more on marketing does not guarantee more sales, but it does generally have a strong influence.
Since this correlation is hard to predict, using a marketing to revenue ratio to track the trends in my business over time is a critical means of setting my budget.
For example, if I know that £3,249 in marketing results in revenue of £32,497, but £6,499 only results in sales of £42,246 my current product line might not see a strong benefit from a budget over £3,249.
We can contrast the marketing to revenue ratio of a volume seller like a large retail store against a high value-added service business such as an IT consulting firm. The former might spend £1 million per year on marketing and advertising, resulting in a business of £50 million. Their ratio is 1 divided by 50, which is 2 percent.
Meanwhile the consulting firm spends the same $1 million per year on a direct sales team and marketing events, resulting in revenue of $£ million. Their ratio is a much higher 20 percent, but is appropriate for their industry.
High margin businesses usually spend a higher percentage of their revenues on marketing. This may partly because low margin businesses simply can’t afford to funnel funds away from producing their products in order to spend more on marketing.
More likely, it’s because higher profit margin products are typically those that are priced strategically according to how the customer values it, rather than priced according to the cost of production.
Marketing is key to communicating that value to the customer, and thus requires a high proportion of the budget.
I am hoping that you will be able to appreciate these tips to enhance your sales in your business. It’s not easy but we will just have to do our best!