Success is hard to quantify in the discipline of advertising. Numerous KPIs and metrics compete for attention, and it’s difficult to understand what truly matters most. The answer always boils down to how two core factors intertwine: advertising and sales. The advertising-to-sales (A/S) ratio is the best way to understand this relationship, and it can be a powerful tool for assessing how effective your advertising strategies are.
In this article, we’ll explore what the advertising-to-sales ratio is, why it’s relevant to food industry marketing, as well as Amazon Advertising budget optimization and other seller advertising strategies to improve A/S ratios on the world’s largest ecommerce marketplace.
What Is Advertising-to-Sales Ratio?
The advertising-to-sales ratio (also known as the ad/sales ratio) is a metric used to measure the amount spent on advertising relative to total sales. It provides insight into how much of a company’s budget goes towards marketing and advertising efforts, as well as the effectiveness of those efforts in generating revenues.
Amazon Advertising-to-Sales Ratio Defined
An Amazon Advertising sales-to-sales ratio is the same thing as a regular advertising-to-sales ratio, only it looks at campaigns run exclusively through the Amazon platform. You might use this formula to gauge spending on Amazon campaigns relative to total sales. This metric can be a good indicator of how well your ads are performing and whether or not they’re generating the desired ROI.
Sellers in the kitchenware and appliance market are especially well suited to calculate and monitor their advertising to sales data on an ongoing basis. The ultra-competitive space requires an aggressive digital marketing strategy and this metric can be used to analyze how well it’s working.
Calculating the Amazon Advertising-to-Sales Ratio
Advertising-to-sales ratio is calculated by dividing a company’s total advertising expenses by its total sales for the same period. The result is expressed as a percentage or as the ratio of advertising dollars to sales dollars.
For example, if a company spends $20 million on advertising and has total sales for the period of $200 million, then its ad/sales ratio is 10%. That means 10% of the company’s total sales were generated by advertising.
The ad/sales ratio can help companies determine how much money to allocate towards marketing and advertising campaigns. Companies with high ratios may need to spend more on ads to increase sales, while those with low ratios may need to invest more in other areas of their business.
Factors That Influence Amazon Advertising to Sales Ratio
On the most basic level, there are two factors capable of influencing an Amazon advertising-to-sales ratio — and those are the two values you plug into the formula. Ad spending and sales both can increase or decrease a brand’s Amazon advertising-to-sales ratio.
When it comes to ad spending, the amount spent directly impacts a brand’s Amazon ad spend. The more money put into campaigns and sponsored ads, the higher cost per acquisition (CPA) a brand will likely see.
On the other hand, sales are directly affected by the performance of these ads. If campaigns and sponsored ads are not driving conversions at an acceptable rate, then fewer products will be sold — thus resulting in a lower Amazon advertising-to-sales ratio.
Moreover, there are other aspects to consider when it comes to increasing an Amazon advertising-to-sales ratio. For example, the type of ads used and the targeting techniques employed can have a huge impact on the success of campaigns.
You’ll also want to look at numbers in the context of…
Consumer Trends: Kitchenware and appliances are relatively stable categories on Amazon, but they’re still prone to fluctuate in sales based on prevailing economic conditions.
Seasonality: Many categories of products throughout the year, like BBQ grills for summertime grilling or winter treats for the holidays.
Competition: The more competition in a marketplace, the harder it is to cut through the noise and capture attention from potential buyers.
Determining Your Budget Sweet Spot
The ad/sales ratio is a generally effective way for companies to evaluate the effectiveness of their kitchenware advertising budget allocation strategies. But there are limits. Just like with every other KPI, it’s important to recognize the fact that every brand is different. Factors such as business size, product category, and customer base can all influence what a ‘good’ return on ad spend looks like.
Averages vary drastically by sector, too, with 2020 figures reported by Investopedia showing that loan brokers have a 27.44% ratio while perfume and cosmetic companies sit at 13.20%. Advertising ROI in the food industry is reported to be 2.6% as of 2019.
Ultimately, it’s up to each business to determine its own budget sweet spot — that is, the combination of budget allocation and measurement tactics that will generate maximum brand visibility and sales for what they have to offer.
Budget Allocation Strategies
Identifying the optimal balance between cost and return for your specific situation starts with understanding how those factors have impacted marketing campaign performance in the past.
Analyzing existing data can provide key insights into how much should be allocated to each marketing channel, as well as what next steps may be best.
For example, if profits tend to be higher with a lower ad/sales ratio (3%), you may want to focus more of your budget on creating high-quality ads and less on driving traffic. On the other hand, if higher ad/sales ratios (10%) tend to yield greater profits, then it’s worth allocating a larger portion of your budget to getting people to click and convert.
Also keep the advertising method in mind; Amazon Ads offers several different types of placements, each of which is best suited for a specific purpose.
For example, Sponsored Product Ads are intended to drive sales directly from Amazon search results, while Sponsored Display Ads appear on other websites to drive traffic back to your Amazon product pages.
Understanding how each type of ad works and what you can expect from it will help you allocate your budget more efficiently. Allocating too much of your budget to one type of ad may result in fewer conversions, or worse — a negative ROI.