July 20, 2016

Ad To Sales Ratio

Ad-To-Sales Ratio is a thoroughly misunderstood metric, folks.

Here's a typical profit and loss statement for a business that is slogging through a tepid 2016.

Tell me what you observe?

This is a typical business ... 5% pre-tax profit, a whopper of an ad-to-sales ratio.

Let's assume this is a typical catalog brand ... where 75% of ad-dollars are paper-centric ad-dollars. Let's also assume that paper/printing/postage expenses are about equal. What happens?
  • Paper folks earn $7,500,000 cash from the operations of your business.
  • Printers earn $7,500,000 cash from the operations of your business.
  • The USPS earns $7,500,000 cash from the operations of your business.
  • You earn $5,000,000 from the operations of your business.
I know, I know, those folks have overhead too, so they'll say this is a biased analysis.

But the analysis is designed to point out why your vendor partners are so eager to grow their relationship with you. They get paid more from the operations of your business than you get paid.

And that's just not acceptable.

So when your vendor partner tells you to ignore various blog posts or says my modeling approach isn't aligned with industry "best practices" or tells you to mail more in response to an analysis where I show you can be more profitable by mailing less ... refer to the p&l above and ask yourself if your vendor partners generate more cash from the operations of your business than profit that you generate from your business?