What’s old is new again. Brands are embracing Marketing Efficiency Ratio (MER) as a must-track metric in 2022.
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 focus more on omnichannel in 2022, MER is coming back.
What is Marketing Efficiency Ratio?
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 thing’s 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
- 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.
- 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.
- 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.
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