Marketing Expense-To-Sales Analysis Explained
The marketing expense-to-sales analysis is one of four tools in the marketing annual control plan. As discussed in the article, The Marketing Control Process for your Business, the analysis is partly responsible for ensuring that a company reaches its financial goals. The ratio helps monitor marketing expenses, ensuring that a firm does not overspend on marketing to achieve its sales goals.
Many business leaders and marketing advisors tie marketing spending to industry benchmarks. However, the expense-to-sales analysis tool is a marketing control analysis tool and not a benchmarking tool because marketing drives sales and sales do not drive marketing spending.
When determining if a company is overspending on marketing to achieve its sales goal, the key metric to measure is the marketing expense-to-sales ratio. Other metrics a company uses and that make up the marketing to sales metric are:
- Salesforce-to-sales ratio
- Advertising-to-sales ratio
- Sales promotion-to-sales ratio
- Marketing research-to-sales ratio
- Sales administration-to-sales ratio
Marketing Expense-To-Sales Analysis Scenario Example
We’ll take a look at an example of how the marketing sales-to-expense analysis may impact marketing decision-makers.
A fictional manufacturing company’s marketing sales-to-expense ratio is 40 percent. That is, the firm’s marketing expenses are 40 percent of its sales revenue. Five other metrics make up the total marketing expense-to-sales ratio. The ratios are:
- Salesforce to sales (20 percent)
- advertising to sales (6 percent)
- sales promotion to sales (9 percent)
- marketing research to sales (1 percent)
- sales administration to sales (4 percent)
A benchmark for each ratio helps marketers monitor fluctuations in expenses. If expenses fall outside of the “normal” range in any of the sales ratios, there could be cause for concern. For example, if costs are rising, the firm may still have good control over expenses, and the occurrence is considered an anomaly or one-off event. On the other hand, the marketing team may have lost control over the expense, and further investigation into its cause is warranted.
To better monitor expense ratios, marketing managers need to monitor each ratios expenses using a control chart. For example, let’s explore the advertising-to-sales ratio for our manufacturing company example.
The advertising-to-sales ratio, as noted in the manufacturing company example earlier, is 6 percent. Taking a look at the control chart for this ratio, we observe expenses fluctuate between the upper limit and lower limits, with an observation that expenses steadily increased beginning in the 8th period. Marketing managers should have noted the unusual pattern and rise in expenses. An investigation into the costs should have occurred before the 14th period when expenses rose beyond the upper limit.
Marketing-to-Sales Expense Calculation/Formula
The marketing-to-sales expense ratio, along with the other ratios, is relatively simple to calculate. To calculate, divide the total marketing spending by the total sales revenue and multiply the results by 100 to get a percentage. Exclude any revenue that is not associated with the sales activity. These revenues may include royalty earnings or interest and savings. The same calculation method applies to sales-to-advertising spending and the rest of the marketing expense-to-sales ratio components.
For example, if a company’s marketing expense for a particular product is $40,000 and the company generates a total of $100,000 in sales revenue, the marketing expense-to-sales revenue is 40%.
Marketing to Sales Ratio: $40,000 / $100,000 (sales revenue) = .4 x 100 = 40%.
Using the marketing-to-expense sales ratio provides marketing managers with financial insights into how their marketing budgets perform in relation to the sales revenue. With lower ratios, the company has a higher profit-earning potential. However, marketers need to monitor the ratios using a control chart with upper and lower limits to ensure that marketing expenses do not get out of control. At the first sign of heightened costs, marketers need to investigate the causes in the rise of marketing spend.
The better the financial data supplied, the better the analysis and ability to decide a marketing campaigns’ effectiveness.