In 1986, the Direct Marketing Association (DMA) conducted a study on Advertising to Sales Ratio among its members. Although the data from that time might seem outdated, it still holds valuable insights. Since then, the landscape has evolved significantly due to technological advancements, inflation, and changes in media channels. For instance, in 1986, direct mail was a primary advertising channel, whereas today, direct mail is dramatically less and the Internet dominates the advertising space.
However, the critical takeaway lies in understanding the relationship between company size and the A to S ratio. Let’s delve into additional reasons why larger companies tend to exhibit a lower A to S ratio than smaller companies of the same type.
For example, among mail order type companies in table 2, the average A to S was 20%, but ranged from 5% A to S in the lowest quartile to 47% in the highest A to S.
1. Customer Base and List Size:
- Smaller Companies: When starting out or operating as a small business, your house list of customer base may be limited. Consequently, you must rely on more expensive mailing to rented lists, which also do not respond at rates as high as house list buyers. Further, in niche product categories the available circulation of outside rental lists may be small.
- Larger Companies: Established companies with larger customer lists have more opportunities for profitable communication. They can segment their customer lists based on factors like Recency, Frequency, and Monetary (RFM) scoring. This segmentation allows for more effective targeting, resulting in higher sales and lower A to S rates by segment.
2. Economies of Scale:
- Larger Companies: Economies of scale come into play for larger corporations. They can negotiate better rates with media outlets and printers due to their higher volume of advertising. This cost advantage translates directly to lower A to S rates.
- Smaller Companies: Smaller advertisers typically have lower circulation campaigns at higher costs per thousand. They also face limitations in accessing certain media channels, such as network television or cable. Those channels they can access at higher costs per thousand lead to a higher A to S ratio.
3. Product Differentiation:
- Smaller Companies: To compete effectively, smaller businesses often focus on niche markets or unique product offerings. Their distinctiveness can attract loyal customers willing to pay a premium, allowing them to allocate a higher proportion of their revenue to advertising.
- Larger Companies: Larger corporations may have a broader product portfolio, making differentiation more challenging. As a result, they may somewhat rely on cumulative brand recognition to maintain profitability at a lower A to S ratio.
In summary, the study is useful to show that mid-sized and smaller companies need to allocate a greater percentage of their sales revenue to advertising compared to their larger counterparts. It also indicates relatively how much more advertising needs to be spent between the different size companies. Excellent gross margins and innovative, unique products for niche markets are one way for smaller companies to achieve success in a competitive landscape.
