How ratios are used in business and marketing (+6 important formulas)

Not all marketing management gurus are alike. 

Some are excellent at sending tweets, some can design an Instagram post like none other, while some very talented digital marketers can build a high converting email.

Most good marketing management professionals can do all this, and more.

Ratios are used in business to establish clarity on business projects.  Most often used by the accounting team, business ratios are often used by marketing for forecasting, to  allocate the marketing budget, set campaigns and establish prices.

In fact, the best marketing consultants are the ones that can do the micro details, too. That is, they know how to execute nitty gritty details that can trigger a customer response.  

But the elite marketers know how to take it one step further.

You see, the best marketers know when to step back before they develop marketing campaigns with the intent to scale up sales.

It is this ability to step back that gives the team the ability to say, “Hey, here’s what we are actually trying to accomplish.”

And that is the purpose of these business ratios. You probably won’t be using all 6 of these ratios when sitting with your next client. But chances are high that you might need one to help get clearer on a project.

6 Business Ratios used by the Best Marketing Consultants 

This may be especially important if you are a marketing consultant, or the marketing lead on a project where you are paid to produce a specific marketing result

With that, let’s now review these important ratios used by elite-level marketers.

While these ratios are commonly used by accountants, these business ratios are probably new to the hungry and talented digital marketer who is developing the advertising materials designed to win customers. 

So let’s get started with the …

Break - even analysis 

For any new business project, the break-even point is an extremely important topic. 

All necessary stakeholders will want to know the return, but they will also want to know the point when they will see a return. 

For this reason, the break-even point is an important part of any business project. And intimately tied to the success of the marketing strategy and the marketing tactics.

The break-even point is where the profit made from the sales quantity sold matches your costs.  This is the point where you are not losing money, but you are not making net profit either.

This is of course an important figure to know. And can help a seasoned marketing consultant make better strategic marketing decisions.

Here’s what you need and how you do a break-even analysis. You need to know these 4 items, which you can easily get from the accounting team: 

  • Your estimated fixed costs
  • Your selling price per unit
  • Your projected unit sales
  • Your estimated variable cost per unit

1. First, define your contribution margin 

The contribution margin is very simple. It’s the selling price per unit minus the variable cost per unit.

Here’s an example of a supplement company selling 1 bottle of their product:

Sales price per bottle = $40.00

Variable cost per bottle (COGS) = $10.00

Contribution per unit = $30.00

Contribution margin = $30.00 (Contribution) / $40.00 (sales price) = 75%

2. Unit sales needed to break even: fixed expenses / unit contribution margin

Now that we have the contribution margin covered, we can get into the break even calculations. 

Again, it's super simple. 

Start with your fixed expenses and divide them by the contribution of each product sold. In our example, this would be $30.00, which is the contribution per bottle sold in the above example.

In the case of this supplement company, their fixed expenses are $10,000.

$10,000 (fixed expenses) / $30 (unit contribution margin) = 

333 sales in order to break-even

3. Sales revenue needed to break even = fixed expenses / cm ratio 

With our unit sales quantity identified, we can easily determine the sales revenue needed to break even.

In the case of the supplement company example, the sales revenue needed to break even is:

$10,000 (fixed expenses) / .75 (contribution margin) = $13,333

Another simple way to do this is simply multiply the sales units by the retail price: 333 x $40 = 13,320.

Notice it’s slightly different because the sales quantity is rounded to the nearest unit.

4. Target profit analysis by unit sales: target profit + fixed expenses / unit cm

This is a fun business ratio and is not used as often by the marketing team. But this is an important formula to use to identify possible scenarios.

If we want to scale up sales after we have done marketing testing and found a winning advertising campaign, this is a great forecasting exercise. 

$10,000 (target profit) + $10.000 (fixed expenses) / .75 (contribution margin) = 

$20,000 / $30 = 667 bottles sold to earn a profit of $10,000

The company needs to sell 667 bottles to earn a profit of $10,000.

5. Target profit analysis by sales revenue: Target profit + fixed expenses / cm ratio

$10,000 (target profit) + $10.000 (fixed expenses) / .75 (contribution margin) = 

$20,000 / .75 = $26,667

The company needs to make $26,667 in sales revenue to earn a profit of $10,000.

6. Return on advertising investment (ROAI)

The return on advertising investment is a very important ratio. And it’s often how many marketing departments and marketing executives are measured.

Again, the ratio is very simple.

It is the number of dollars earned as a result of your advertising spend.

So, if the supplement company invested $1,000 into a Google Ads campaign and earned $3,000 in sales revenue, the ROAI is 3.

This represents $3 earned for every $1 spent. 

The ROAI is most often used as an aggregate measure of all the marketing campaigns collectively, but works just as well on a specific marketing campaign measurement.

Whether you are a new marketer or veteran marketing consultant, add these 6 business ratios to your tool belt and use them as you see the opportunity.

Over time, you’ll find that you are the one who is setting clear goals, has a clear picture of the landscape and will be able to develop marketing strategies that are super productive!

All because you decided to step back, look at the whole picture, make a strategic plan and then step on the gas.

You can do it! And if you need help along the way, Your Strategic Marketing Partner is happy to help!

Newsletter for Serious Marketers

Your Strategic Marketing Partner reveals insider secrets for gaining customers and building great brands.

Gain free marketing strategies in our email newsletter (always professional and never spam):

Please wait...

Thank you for enrolling!

Categories: