What Is the Commercial Ratio?
A Measure of Productivity
The Commercial Ratio is a simple metric that measures the productivity of a company’s investment in sales and marketing. The underlying assumption is that the purpose of both Sales and Marketing is to drive Revenue Growth. How much they are spending is Sales and Marketing Expense. How well or efficiently they are communicating value, managing costs, or investing sales and marketing resources against the goal to grow revenue is expressed as a ratio.
How to calculate commercial ratio
Calculate Revenue Growth by subtracting the previous period’s revenue from the current period’s revenue.
Divide Revenue Growth by the current period’s Sales & Marketing Expense.
Periods can be any unit of time as long as they are the same (month, quarter, etc.). We prefer to use year and annual periods in our calculations.
Why Is the Commercial Ratio Important?
We need a new metric for a new economy. As we’ve moved from an analog economy to a digital economy, the operating models and the ways that we work haven’t kept up.
The Commercial Ratio helps companies understand the commercial waste created by poorly managed organizational silos and an incessant focus on activity. It opens up a dialog to discover new strategies to align sales and marketing (at the highest level).
Sales and Marketing Alignment at Last
The Commercial Ratio is a holistic measure that looks at Sales and Marketing as two sides of the same coin. By realizing both Sales and Marketing are focused on driving revenue growth, the Commercial Ratio provides a single metric to measure how well your commercial system is performing.
The purpose of the Commercial Ratio is to focus on measuring how well your commercial system is performing by realizing both Sales and Marketing are the biggest drivers of revenue growth. By realizing Sales and Marketing are two sides of the same coin, companies are forced to align activities and resources across silos to reach goals.
A Simple Metric for Investors
The Commercial Ratio is important as a metric for investors who are gauging the return on their sales and marketing investment. Investors are interested in productivity, effectiveness, efficiency of costs, profit. They want to know how well you’re doing and how you compare to other companies in the same way.
If you don’t know how efficiently your Sales and Marketing spending is driving revenue growth -- or worse yet, you have a low Commercial Ratio -- you’re essentially gambling with investor dollars.
Frequently Asked Questions
Can I calculate my Commercial Ratio for 2020 now?
Where do I find Sales & Marketing Expense? I don't see it on the Income Statement.