In Finance, what is Power Ratio?

A power ratio is a business ratio used by media companies, such as television or radio stations, to benchmark company performance in terms of revenue. The greater a company’s power ratio is, the greater is that company’s ability to generate revenue relative to its market percentage of audience members. Company executives use power ratios to track and report trends in sales, to compare company operation with other companies in the same venue, and to appraise the company for a potential buyout. In order to calculate a power ratio, the company must first determine its audience share, the percentage of viewers, listeners, or users who tune in or who use that company’s services. Once the audience share is known, executives compare the company income to the total market revenue to determine whether the company is generating the expected amount of income, given its share of the audience.

When a company obtains a power ratio of 1.0, the company is producing the amount of income that one would expect for its share of the audience. A power ratio above 1.0 signifies that the company is producing income at a level that exceeds expectations. For example, a company with a power ratio of 1.5 is generating 50 percent more income than expected based on its market share. Power ratios below 1.0 signal lagging sales and lackluster income potential.

Media companies calculate a power ratio by dividing the company revenue by the product of the audience share and the overall market revenue. For example, WLST radio station determines that it attracts 30 percent of the listeners of rock music. The revenue for WLST in the last quarter was $400,000 US Dollars (USD), with the total market revenue for the rock venue at $1 Million USD. In accordance with the power ratio method, the company multiplies the audience share by the market revenue, yielding a value of $300 Thousand USD. Dividing the $400,000 USD in company revenue by the $300,000 USD yields a power ratio of 1.33.

Marketing research firms generate power ratio and market share reports for entire formats across the industry. These reports indicate the relative strength of individual market segments. Research companies can calculate audience share through surveys, diaries, and polls. The companies also collect data electronically and through software programs. One company that monitors television audiences globally is AGB Nielsen Media Research, which uses a microphone to pick up barely audible, embedded tones in broadcasts to track television viewing.