Mastering Marketing Efficiency Ratio (MER) for Improved Campaign Performance
Figuring out how well marketing works is more than just counting money from ads. Companies spend on personnel, content, events, and sponsorships, not just ads. This is where the Marketing Efficiency Ratio (MER) becomes valuable.
In this article, we'll explain why MER matters in today's marketing scene, how it’s different from ROAS (and why marketers sometimes confuse them), the advantages it offers to businesses, a simple step-by-step guide to calculating MER, and how to set a solid benchmark for a great Marketing Efficiency Ratio.
Demystifying Marketing Efficiency Ratio in Modern Marketing
Marketing Efficiency Ratio (MER), also known as the Media Efficiency Ratio, gives a broad view of how well your overall plan or campaign is performing. It shows how much money marketers spend to achieve results. In other words, it evaluates the profitability of all your marketing efforts collectively.
MER compares the total amount spent on advertising to the total revenue generated. A higher MER suggests that your marketing activities are yielding better results while using fewer marketing dollars.
What’s the Difference Between MER and ROAS?
Although it might seem similar to Return on Advertising Spend (ROAS), there's a difference. ROAS measures the revenue generated for every dollar spent on ads, attributing efficiency to specific ad campaigns or channels.
On the contrary, MER measures the impact of all marketing activities, considering the entire spectrum of ad spend. It evaluates the overall impact of your marketing strategies without singling out individual campaign elements. This holistic approach helps determine the overall efficiency of your marketing, providing a broader perspective and clarity when your marketing activities become less effective.
Why MER Matters in Today’s Marketing Landscape
Worldwide spending on digital advertising is expected to reach around $526 billion in 2024. Advertising across different platforms can work well, but it takes a lot of time to keep track of and make ads better on all those platforms. Using MER helps ensure your ads bring good results without digging into each platform's details.
This is extremely helpful, especially when some automated campaigns limit how much data marketers can see. MER isn't just for marketing goals; it's a way to show C-level executives and investors an accurate overview of overall marketing performance and demonstrate an effective budget allocation.
Uncovering the Advantages of Calculating MER for Businesses
Here are some significant benefits of using MER to measure marketing effectiveness:
- Independent data tracking. External data becomes more difficult to access, which makes advertising platform data less reliable. Whereas, data that you own gives a clearer idea of how well you're doing.
- A comprehensive view of paid media channels. Considering all your paid media channels together with MER provides a broader picture. You don't have to attribute success to a single platform. Different channels serve varied purposes – some create awareness, while others drive conversions, and MER accounts for these differences.
- Efficient budget allocation. Monitoring MER changes regularly helps assess if your marketing strategy remains efficient. A decrease in MER suggests it's time to examine where money is best used.
- Vital for small businesses. Small business owners often lack time to calculate specific metrics. MER, being a simple formula, can be tracked over time, helping smaller businesses optimize their marketing strategies without complex analysis.
Step-by-Step Guide to Calculating MER
Calculating MER is quite straightforward. Let's take a closer look at it:
Determining Total Revenue from Paid Media Channels
To figure out the Return on Investment (ROI), use this formula:
When you're using multiple marketing channels, start by adding up or combining the money earned from each channel. This total revenue amount from all the channels is what you put into the formula to see how well your marketing is doing compared to what you spent.
Applying the Marketing Efficiency Ratio Formula for Accurate Measurement
Let's take a look at a scenario where you've run Facebook and Instagram campaigns. Here's a breakdown of potential costs associated with these campaigns:
Facebook Campaign Costs:
- Ad creation and design
- Advertising platform fees
- Costs related to hiring a social media manager or agency
- Analytics and tracking tools subscription fees
Instagram Campaign Costs:
- Content creation expenses (visuals, videos)
- Sponsored post fees
- Influencer collaborations or partnership costs
- Ad management expenses
Let's assume you've spent $2,500 for the Facebook campaign, and for the Instagram campaign, the costs sum up to $1,800.
- Total Revenue from Facebook and Instagram campaigns = $8,000
- Total Cost of both campaigns = $2,500 (Facebook) + $1,800 (Instagram) = $4,300
So, in this example, MER for the combined Facebook and Instagram campaigns is approximately 1.86. Below, we'll explain whether this MER of around 1.86 is considered good or bad for your campaigns.
Determining a Strong Marketing Efficiency Ratio Benchmark
In our article about LTV:CAC, we wrote that a healthy ratio typically stands at 3:1. Similarly, with MER, benchmarks of 3.0 or higher often indicate a healthier advertising spend, suggesting that the revenue generated is 3 times the ad spend.
In our example, an MER of 1.86 means that for every dollar spent on ads, you're earning $1.86. Ideally, an MER above 3.0 is considered good, showing that your ads generate 3 times the revenue spent on them.
However, different industries have different benchmarks, so it's too early to say that this specific case indicates a poor MER. For e-commerce where making products might cost more, an MER of 5.0 is considered good. It means that only 20% or less of your total revenue is spent on ads.
The situation may vary for new businesses. An MER below 1.0 might seem worrying as you're earning less from ads than you're spending. However, this number is normal for startups as they're investing a lot of money in building brand awareness. As your business grows, tracking MER over time will give a clearer picture of ad effectiveness.
So, the benchmark for a good MER depends on your industry and business stage. It's important to keep an eye on this metric and compare it to industry standards to see if your ad spending is delivering the desired results.
Best Practices for Optimizing Campaigns with MER
You already know how to calculate MER and check if it meets the standard. But using MER effectively means managing resources better, improving strategies, and getting more from your activities. Let's see how to make MER more than just a calculation and use it effectively within your marketing funnel:
- Detailed expense tracking. Keep a close eye on costs at every step of your marketing journey. Understand where your money goes and which parts of your strategy are the most cost-effective.
- Understanding channel impact. Take a closer look at which marketing channels bring the most revenue. Understanding your top-performing channels helps you put money where they'll make the biggest impact.
- Boosting conversion rates. Analyze how changes in your strategies affect the overall efficiency. These may include changes in messaging, design elements, targeting, or offers in your marketing campaigns. By monitoring them, you can see which strategies are most effective in bringing up conversion rates.
- Smart budget management. Distribute your budget across various marketing phases. If social media ads consistently bring in high returns, investing more in that area can maintain a good ratio and lead to better results overall.
- Continuous review and adaptation. Keep an eye on your MER regularly and adapt your strategies based on what the ratio tells you.
Real-World Applications of Marketing Efficiency Ratio
To understand MER's role in a business, look at:
- Expected sales for the year
- The marketing budget, usually a percentage of the sales forecast covering ad spends, vendor fees, and marketing team costs
- Gross margin (sales minus production costs)
- Contribution margin (what's left from the gross margin after covering the marketing budget)
Enhancing Financial Forecasting and Planning with MER Insights
Now, let's look at the fictional example of a supplement brand, HealthPlus, expecting sales of $15 million with a gross margin of $12 million (that's an 80% margin). They set aside $6 million for marketing, aiming for a $9 million contribution margin.
Let's calculate the MER based on the given figures:
Given:
- Expected sales: $15 million
- Gross margin: $12 million
- Marketing budget: $6 million
- Desired contribution margin: $9 million
It means that for HealthPlus to hit these targets, they'll need an MER of 2.5x across their products.
If HealthPlus decides to spend $8 million on marketing, the new MER would be:
So, if HealthPlus spends $8 million on marketing, their resulting MER would be around 1.88x, which is below the initially aimed 2.5x. This might impact profitability, but given their high-margin business, they could still generate profits to expand their brand and introduce new products, although at a lower efficiency level.
Evaluating Paid Campaigns' Success Through MER Analysis
While MER offers valuable insights, it should be considered alongside other metrics and factors to evaluate the success of paid campaigns. Return on Investment (ROI), customer acquisition cost, and conversion rates should also be taken into account for a more comprehensive view of campaign performance.
Maximizing Profitability and Efficiency Using MER (with practical examples)
Example 1: Using MER to Maximize Profitability
Imagine you're leading a startup eager for rapid growth. Here's what you're aiming for:
- Sales: $8 million
- Expected gross margin (%): $4.8 million (60%)
- Marketing budget: $2.4 million
- Profitability margin goal: $2.4 million
With an estimated ad spend of $2.4 million and sales targeted at $8 million, you might achieve an MER of 3.33. But to improve profitability, you might consider increasing your marketing spend (say, to $3.2 million), aiming to increase sales to $9.6 million. This shift might slightly lower your MER to 3 but could boost your profitability margin by $800,000.
Example 2: Using MER for Improved Efficiency
Not every business enjoys broad profit margins for extensive marketing budgets. Here's a scenario for a company with similar sales goals but smaller margins:
- Sales: $6 million
- Expected gross margin (%): $1.2 million (20%)
- Marketing budget: $600,000
- Profitability margin goal: $600,000
For this company, the MER calculates to 10x. But smaller profit margins mean they need to be strict with budgets. They must ensure all their paid campaigns generate high returns for every dollar spent to make their marketing more effective.
Understanding the Limitations of MER in Marketing Analysis
Marketing Efficiency Ratio (MER) helps measure overall marketing impact, but it has limits. Unlike ROAS, it can't specify which parts of a campaign bring in the most money or where to invest more. It also doesn't highlight what to cut if you need to reduce spending.
However, it does show when your marketing mix is performing best. While MER gives a broad view, it lacks details for smaller adjustments like ad tweaks or tracking individual campaign success.
Avoiding Common Pitfalls in MER Calculations
Mistake 1: Messing up costs
Fix: Don't miss any spending – count everything, not just ads. Include salaries, software, and all marketing expenses.
Mistake 2: Skipping important expenses
Fix: Check twice for hidden costs like research or agency fees. Missing these can mess up your MER.
Mistake 3: Getting revenue wrong
Fix: Keep revenue tracking consistent. Make sure each campaign's money is measured accurately for a good MER.
Mistake 4: Messing up cost-sharing
Fix: Split costs accurately among different ads or campaigns. Wrongly dividing costs gives you a wrong MER.
The tricky part often comes when essential data gets lost among many sources. But there's a solution: using analytics software to gather all your data in one spot, making it easier to handle and understand.
Empower Your Paid Marketing Data Analysis with OWOX BI
OWOX BI transforms paid marketing data analysis and makes your life easier by offering seamless integration across different platforms (like Google Analytics, Google Ads, and others). It provides comprehensive data unification and helps merge data sources for a holistic view.
OWOX BI's advanced tools offer detailed insights, so you can track performance, improve campaigns, and manage budgets better. It's simple to use and helps marketers make smart choices, boost ROI, and make your paid marketing strategies work better.
FAQ
