Your entire success with digital marketing is gauged by your marketing efficiency ratio. Total revenue divided by total ad spend
The MER is not intended to serve as a roadmap for selecting media for individual ads or campaigns. Instead, it aids in your comprehension of marketing expenses as a factor in revenue growth. For instance, if you invest $1,000 across all paid channels and make $5,000 in total sales, your return on investment (MER) would be 5.0, or 5x spend.
Why is MER important for your business and ROAS is not enough anymore?
To understand why MER is important, The question you need to ask yourself is
When will advertising stop earning me money for my next investment?
The marketing efficiency ratio can be calculated by dividing total revenue by total ad spend across all marketing channels. With the aid of MER, you can effectively step back and assess the long-term results of your marketing initiatives. This statistic also equips you to think strategically about your business decisions rather than simply reacting to perceived flaws in your marketing strategy (such as your ROAS falling 10% current month freaking out the whole team).
As Facebook and Apple implement monitoring limitations for businesses, such as the elimination of third-party cookies, MER will become even more crucial. Since analysts will only have access to a partial data set as a result of these changes, ROAS will become much more challenging to evaluate than it already is. However, notwithstanding any gaps in the data, the marketing efficiency ratio’s comprehensive approach to asset performance will assist firms in determining the overall effectiveness of their advertising strategies.
ROAS is a helpful metric, but it can cause one to “miss the big gold mine for a single stone.” In contrast, MER will give you a more thorough, long-term perspective of your marketing initiatives and assist you in formulating important strategic decisions for your company’s future.
Consider a scenario in which a client sees a digital advertisement but takes a few months to decide finally to buy it. In many circumstances, your ROAS calculation wouldn’t take the purchase into account. It eventually materialized after a few months. Even so, it was a direct result of your advertising efforts.
How should the Marketing Efficiency Ratio (MER) be used?
- Establish the ideal budget and objective for your marketing efforts
- Allocate marketing budgets based on past MER.
- Analyze the overall effect of marketing efforts.
Establish the ideal budget and objective for your marketing efforts
Suppose you have a target of $5 million in sales for this month. Let’s also imagine your historical MER has been 3.2. By knowing these two pieces of data, you can unlock the marketing budget you need to achieve your sales target.
This means that in order to reach the sales target, you would require a budget of $1.5 million.
This metric assists you in determining a rough budget that you should propose in order to meet the sales target.
Allocate your marketing budget between performance and brand building campaigns based on past MER.
If your average order value (AOV) is $50, you’ll need 100,000 purchases to reach your $5 million sales goal. Let’s assume each customer will purchase once. This means you need 100,000 customers.
Finally if your Customer Acquisition Cost (CAC) is $12 this means you need to invest $1.2M to hit your sales target, which means you can spend rest of your $300K to brand building campaigns or in another word you cant go over $15 COC to hit the target with in your gross margin.
Analyze the overall effect of marketing efforts
We are aware that attribution solutions are far from ideal and that marketing teams find it difficult to demonstrate the effect of their brand-building efforts. Even if you are unable to determine the precise number of sales generated by your marketing efforts, the MER measure still enables you to gain a more comprehensive understanding of their overall impact.
Look at months with low marketing spend versus those with higher marketing spend; if the MER is in the same range, you can tell that your marketing spends are having a topline impact on revenues. This is a good way to confirm that your marketing activities are increasing sales even if they cannot be attributed.
Acquisition Marketing Efficiency Rating (aMER)
Finally, if you want to go into further deep down to understand the impact of new user acquisitions then you can calculate your revenue only coming from newly acquired users which is called aMER.
On top of your aMER, if you have decided a 90-day LTV is optimal for your business you can even calculate 90-Day aMER which will give you further understanding on your growth efforts
To sum up, the Marketing Efficiency Ratio is a crucial tool for marketing experts to assess and enhance the efficacy of their marketing initiatives. The return on investment for a marketing campaign may be calculated using the MER, and marketers can use this information to optimise their resources for the greatest possible impact. Marketers may boost the effectiveness of their marketing initiatives and eventually provide better business results by consistently tracking and enhancing the MER.