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Marketing Efficiency Ratio (MER) | Definition, Calculation, Examples

marketing-efficiency-ratio-(mer)-|-definition,-calculation,-examples-[2022]

What’s old is new again. Brands are embracing Marketing Efficiency Ratio (MER) as a must-track metric to understand.

MER was traditionally used as a metric for retail brands to understand marketing efficiency before the rise of digital marketing and direct channel attribution. But now that consumer product brands are focusing more on omnichannel in 2022, MER is returning.

What is the Marketing Efficiency Ratio?

The marketing efficiency ratio measures the overall performance of your marketing campaigns: total revenue divided by total spend. It is also known as marketing efficiency rating, blended ROAS, or ecosystem ROAS.

But unlike ROAS, MER isn’t meant to guide advertising decisions at the ad or campaign level. Instead, MER helps you understand how efficient you need to be in your marketing in order to achieve your target profitability (full discussion on MER planning below).

In short, it shows how responsible you are with spending your marketing dollars.

How to Calculate MER

To calculate MER, divide your total sales revenue by your marketing spend across all channels (if you would rather express it as a percentage, multiply the result by 100):

For example, if your total sales in 2021 totaled $2.13m and your total marketing spend was $542,000, your MER for 2021 was 3.87 (or, expressed as a percentage, 387%).

How MER works in financial forecasting and planning

First things first: there is no such thing as a universally “good” MER

Although it’s common to see a 3x MER referenced as “good” (likely a carryover of the 3x benchmark for LTV to CAC Ratio), a good MER is entirely dependent on your business size, what you’re selling, your strategy, and your profitability goals.

In other words, it is an individualized metric.

One business that has a 5x MER might be much less profitable than another brand with a 3x MER, and another brand could have a much lower MER while still succeeding with flying colors. Let’s examine why.

Getting to MER: Looking at your sales projection, marketing budget, gross margin, and contribution margin

To understand how MER fits into a business, we need to look at:

  • Sales projection for the year
  • Marketing budget (likely, a particular % of your sales projections: including ad channel spends, vendor fees, and marketing team salaries)
  • Gross margin/gross margin percentage (the difference between your sales and your COGS)
  • Contribution margin (the difference between your gross margin and marketing budget)

(So this doesn’t turn into an accounting article, we’ll use contribution margin as a proxy for “Cash flow before subtracting your OPEX.” So, in this discussion, contribution margin is our “profitability” metric.)

We’ll give two simpler examples of how MER changes for brands with different levels of profitability, and then we’ll look at how MER and margins are highly contextual (especially when you consider another metric, such as LTV to CAC ratio).

Three example MER calculations

  1. Remaining Highly Profitable with a 3x (or lower) MER

Let’s say (the fictional) anti-indigestion supplement brand TummySoothe has 2023 sales projections of $30m and an expected gross margin of $24m (i.e., a gross margin percentage of 80%). The team is looking for exponential growth and sets their marketing budget at $10m, in the hopes of hitting $14m in contribution margin.

In order to hit these numbers, TummySoothe would have to hit a 3x MER across their entire catalog. However, they have a fairly comfortable cushion, given that they are a high margin business. Even if their marketing budget ends up much more expensive than expected, and TummySoothe ends up spending $17m on marketing in 2023 (and therefore a MER of 1.76x) in order to hit their sales projection, they will have substantial enough profit to continue to scale their brand, expand product offerings, and more.

  1. Lower profitability with a 5x MER

But what about (the also fictional) organic farming supply brand Green3r? Green3r has the same 2023 sales projection as TummySoothe, at $30m. However, their gross margin is much lower, because of the nature of what they sell (there’s a pun there somewhere): it’s $8m, which means a gross margin percentage of 26.6%. They set their marketing budget at $6m, in the hopes of hitting a $2m contribution margin.

In order to hit this $2m contribution margin, Green3r has to be significantly more efficient in their marketing: they must have a much higher marketing efficiency ratio, of 5x. If Green3r has an unexpected increase in marketing spend in order to hit their $30m sales projection (let’s take the same one as in our second scenario with TummySoothe), and their marketing spend comes in at $6.78m (and therefore a MER of 4.4x), they’ll be left with a contribution margin of $1.2m.

That $800k delta could be the difference between launching a new business line or sales channel this year.

  1. An example of low MER for a profitable company

In our third installment of a fictional brand, let’s consider a canned coffee brand called Büzz. Büzz has projected their 2023 sales to be $30m. They have a middle-of-the-road gross margin percentage, at about 50%, so they expect their gross margin to be $15m.

Büzz sets a 2023 marketing budget of $25m, which means that their 1-year MER is 1.25x. This also means that their 1-year contribution margin will be negative: -$10m.

Why would they do this?

Büzz uses an eCommerce analytics platform and understands that, after 2 years, customers will be 3x more profitable than their acquisition cost: Büzz’s 2-year LTV to CAC ratio is 3:1.

Although their 1-year contribution margin is negative, and their 1-year MER is very low, they know that their marketing investment will pay off over a 2-year time period. They are willing to be unprofitable on their first purchase in order to drive more growth now, because they have the cash flow and runway to be unprofitable today to match their ambitious growth goals.

Büzz’s 2-year MER and 2-year contribution margin will eventually be positive, as the amount of gross margin they bring in from retaining customers will more than offset their acquisition marketing costs today, so the brand will be able to continue to grow rapidly.

Track Metrics with Ease

We’re Daasity, the eCommerce data and analytics platform for the fastest-growing consumer product brands. Our customers leverage Daasity to centralize all their data, which gives them a headstart in planning for economic headwinds and privacy trends.

Daasity is at the forefront of data analytics, and we provide a single, unified view of your most important data. We collect data from your whole tech stack, empowering you to make data-driven decisions and push important data into relevant marketing channels.

The Importance of Omnichannel in MER

In today’s digital age, the importance of an omnichannel approach cannot be understated. Omnichannel marketing refers to a seamless integration of different communication channels that a company uses to interact with its customers. This approach ensures that customers have a consistent experience, whether they’re shopping online, through a mobile app, or in a physical store. When calculating MER, it’s crucial to consider the omnichannel approach. By doing so, brands can get a more holistic view of their marketing efficiency, taking into account all touchpoints a customer interacts with.

The Role of Digital Marketing in MER

Digital marketing has revolutionized the way brands reach out to their customers. From social media campaigns to email marketing, digital channels offer a plethora of opportunities for brands to engage with their audience. However, with the rise of digital marketing, it’s essential to factor in these channels when calculating MER. Digital marketing campaigns can often provide a higher return on investment (ROI) than traditional marketing methods, making them a vital component of a brand’s overall marketing strategy and, consequently, its MER.

The Evolution of MER in the Digital Age

As the digital landscape continues to evolve, so does the way brands measure their marketing efficiency. With the advent of advanced analytics tools and platforms, brands can now track their marketing efforts in real-time, allowing for more accurate MER calculations. This evolution means that brands can quickly adapt their strategies based on real-time data, ensuring that they’re always maximizing their marketing efficiency. The digital age has provided brands with the tools they need to be more agile and responsive, making the calculation and interpretation of MER more dynamic than ever before.

The Future of MER

With the continuous advancements in technology and the ever-changing digital landscape, the future of MER looks promising. As brands gain access to more sophisticated analytics tools and platforms, the accuracy and relevance of MER as a metric will only increase. Furthermore, as brands continue to adopt an omnichannel approach and integrate more digital marketing strategies into their overall marketing mix, MER will become an even more critical metric for brands to track and optimize.

The Challenges of Tracking MER

While MER is a valuable metric for brands, it’s not without its challenges. One of the primary challenges brands face when tracking MER is the integration of multiple data sources. With so many different marketing channels available, consolidating data from each of these sources can be a daunting task. Additionally, with the rise of privacy concerns and the phasing out of third-party cookies, tracking MER accurately will become even more challenging. Brands will need to find innovative ways to track their marketing efficiency in this new digital landscape.

Summary

The article delves into the resurgence of the Marketing Efficiency Ratio (MER) as a pivotal metric for brands, especially in the context of omnichannel marketing in 2022. Traditionally, MER was a staple for retail brands before the digital marketing boom. It offers a comprehensive measure of a brand’s marketing campaign performance by comparing total revenue to total spend. Unlike ROAS, MER provides a broader perspective, not just guiding ad decisions but illuminating the overall efficiency required to hit profitability targets. The piece also elucidates the calculation of MER and its significance in financial forecasting, supplemented by illustrative examples. Furthermore, the article introduces Daasity, a cutting-edge eCommerce data analytics platform. The additional content emphasizes the role of omnichannel strategies, the impact of digital marketing on MER, its evolution in the digital era, future prospects, and the challenges in tracking MER.

Frequently Asked Questions

What is the primary purpose of the Marketing Efficiency Ratio (MER)?
The Marketing Efficiency Ratio (MER) measures the overall performance of marketing campaigns by comparing total revenue to total spend.

How does MER differ from ROAS?
While both metrics evaluate marketing performance, MER provides a broader view of efficiency across all channels, whereas ROAS focuses on returns from specific ad campaigns.

Why is MER becoming more relevant in today’s digital age?
With the rise of omnichannel marketing and the need for a holistic view of marketing performance, MER is gaining traction as a comprehensive metric.

How can brands improve their MER?
Brands can enhance their MER by optimizing their marketing strategies, focusing on high-performing channels, and leveraging data analytics for informed decision-making.

Is there a universally accepted “good” MER value?
No, a “good” MER varies based on business size, product type, strategy, and profitability goals.

How does omnichannel marketing impact MER calculations?
Omnichannel marketing ensures a consistent customer experience across all touchpoints, making it essential to factor in when calculating MER for a holistic view.

Why is digital marketing crucial for MER?
Digital marketing offers various channels with potentially higher ROI than traditional methods, making it a vital component of a brand’s MER.

How has MER evolved with advancements in technology?
With modern analytics tools, brands can track marketing efforts in real time, making MER calculations more dynamic and accurate.

What challenges do brands face when tracking MER?
Integrating multiple data sources and addressing privacy concerns, especially with the decline of third-party cookies, are significant challenges in tracking MER.

How can brands overcome the challenges of tracking MER?
Brands can leverage innovative tracking solutions, prioritize first-party data, and adopt an integrated approach to data consolidation.

Special thanks to our friends at Daasity for their insights on this topic.
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