comparing your commercial ratio
The purpose of the Commercial Ratio is to determine how well your commercial system is creating value for customers. How efficiently your company is investing its sales and marketing resources against revenue growth is expressed as a ratio.
Simply put, the Commercial Ratio helps gauge how well you’re doing and how you’re comparing against other companies in a like way.
If you think about Sales and Marketing as a value communications engine, you can rev your engine too high, or it can stall.
The ratio indicates how your engine is running.
Unsustainable
0 - .75
System: Wasteful, inefficient
Environment: Reactive
Activities: Maximum conflict
Balanced
.75 - 1.25
System: Optimized
Environment: Proactive
Activities: Minimum conflict
Too Safe
1.25 - 2.0
System: Under-invested
Environment: Lacking innovation
Activities: Lethargic
The ratio should tell you things about your business.
The green zone between 0.75 and 1.25 indicates the investment is performing well and the commercial system is balanced.
If like most companies your ratio is below 0.75, you are highly inefficient and the commercial system needs to be addressed.
If your ratio is 1.5 or higher, the belief is you're probably not investing enough in sales and marketing or capitalizing on opportunity.
Every business is different.
These ranges provide simple metrics to help investors and leadership align on what we should look at and where we should be focused.
Make sure your data is well aligned or you cannot perform "apples to apples" comparisons. Learn how to map your commercial system to the income statement.
The Impact of A Low Commercial Ratio
One of the more interesting side effects of a low Commercial Ratio over time is the compounding negative implication known as "The Snowball Effect." When a Commercial Ratio is less than one, the expense required to generate that new revenue growth must be recovered in future years of operation to meet investor expectations. This creates a debt. It might not be a financial debt, but it creates a gap. That gap works like a tax. When you spend too much each year on revenue acquisition, it puts more pressure on other parts of the business.
With each consecutive year that this happens, more and more debt is pushed to other operational elements of the business, creating more stress across the whole business. The only reliable lever to pull is for other functions is to cut costs, which creates a vicious cycle.
If you run your organization in the red (below .75 of the Commercial Ratio) you create an increasingly rigid and siloed organization unable to respond to changing market conditions.
Watch the webinar
Private equity firm TCV has already mandated Commercial Ratio across 57 companies in its portfolio. Learn how to move the needle using the Commercial Ratio to drive Sales and Marketing performance inside your organization.