Sometimes it might feel like your marketing campaigns are firing on all cylinders, but sales still aren’t hitting the mark. This disconnect often happens because traditional metrics like ROAS might not capture the full picture.
That’s where the Marketing Efficiency Ratio (MER) comes in. MER goes beyond individual ad platform performance and provides an overview of your marketing spend as a revenue multiplier. In today’s competitive landscape, businesses need to stretch every marketing dollar further. By understanding how MER works, you can optimize your campaigns and achieve sustainable success.
How to calculate MER?
When looking online, you will find multiple ways of calculating MER, but the most common ways are:
MER = Total Revenue from Paid Media / Total Ad Spend
MER = Total Revenue / Total Ad Spend
The difference between the two is what type of revenue you consider in your calculation.
You can choose to include only the revenue generated by the paid channels you are using. This option resembles a ROAS calculation, but instead of being applied to individual channels, you are applying it to their totals.
In the end, you will get a mixed/blended ROAS for your paid traffic sources. But you still need to trust the platform’s conversion attribution to calculate the MER.
With the second MER formula, you are taking into account all the revenue, from all the channels (paid and unpaid). This is my preferred method as you know the numbers are accurate. And also, you spot some correlations between paid and organic channels.
What is a good MER?
A good MER depends on the industry and on the margins you have, but generally, a marketing efficiency ratio of 3 or above is considered good. This means that you are generating $3+ for every $1 you put into marketing.
But to check what MER is good for you take into account your business’s numbers. You can calculate it backward based on your financials.
For example, let’s say you have an ecommerce website.
- Your monthly revenue is $100,000
- Cost of Goods Sold (COGS) is $40,000
- Operating expenses are $10,000
In this case, for the revenue you are generating, you have costs of 50%. Now, you will have to answer the question: how much of the $50,000 am I willing to spend on advertising while keeping my business financials healthy?
If the answer is $25,000, then you can include that in your MER target calculation. And it will look something like this:
$100,000 / $25,000 = 4
Remember, you can change your target MER at any point. If your profit margins change, just redo the calculation with the new numbers.
MER vs ROAS
While MER and ROAS have similar formulas, they take into account different aspects of the business.
With ROAS you are looking at specific channels, their ad spend, and their converted value. However, this metric is running on the assumption that the conversion attribution is perfect.
And while there are tools out there that can help with better attribution, it will never be perfect. The customer’s buying journey is so complex nowadays that you cannot track it fully.
Let’s take the example below. Which platform do you think should get the conversion?
For this case, you can look in three places: Google Ads, Meta Ads, and Google Analytics.
- Meta will report this conversion because it tends to take credit for anything it touches.
- Google Analytics will use data-driven attribution to calculate the credit for each platform.
- And, if you’re importing Analytics conversions, you will not see the conversion in your Google Ads account. Because Analytics did not credit Paid Search for it.
If you’re using ROAS to track performance, you might be confused because you see the conversions in Meta, but nowhere else. So what should you do? Should you spend more, keep the same ad spend, or decrease it?
Why is MER important for businesses?
With the iOS 14 update, businesses have a rough time tracking conversions. This led to a lot of uncertainty when it came to individual channels’ performance because the ROAS was less reliable.
By using the marketing efficiency ratio, you can bypass this issue and focus on certain first-party numbers. You can look at how much you have spent on ads, and how much revenue the business made – money in, money out approach.
With this, you can consider the entire customer journey regardless of which platforms converted the user.
And with all the AI capabilities ad platforms inject into their campaigns, you lose granular control over your ad spend.
And you might be asking: ‘Hey, but it’s less work for me, right? The algorithms will focus on getting me more conversions.’
Well…these automated campaigns are built to focus on ROAS. And they can get the best ROAS from warm traffic which is very close to convert.
But to scale your business, you need to target more cold traffic. And that has a low ROAS, so the automated campaigns can’t prove their performance.
Think about it this way: if you want to have a high ROAS, who would you go for?
Option A: a customer who has put products in their cart and has visited 18 pages on your website.
Option B: someone who is just looking for the product category on Google and doesn’t know your business even exists.
How to improve your marketing efficiency ratio
To improve your marketing efficiency ratio, you should shift your perspective and stop looking at individual channels’ performance. Remember, it’s money in, money out.
And there are a few things you can look for.
Understand how the campaigns work
Learn how the automated campaigns target the customers and how they spend the budget. These insights will impact your budget allocation.
For example, PMax campaigns target users on all of Google’s channels like Search, YouTube, Display, Gmail, Discover, and Maps. And they will target both cold and warm traffic.
So if you put more money into a campaign like PMax, you might end up with more branded conversions which will boost the ROAS but will decrease the MER. This is because those users would have most likely converted through organic search.
Scale cold traffic campaigns
To properly scale your business, you need to find new customers. So you need to ask yourself: which campaigns target non-brand, cold traffic keywords, non-existing website visitors, and non-customers?
In Google’s case, you can go for non-brand standard Shopping or non-brand Dynamic Search Ad (DSA) campaigns. Not PMax. Because it has remarketing built-in, it will target past website visitors and that is not cold traffic.
Look for correlations between spend and revenue
Most likely your cold traffic campaigns will have a low/unprofitable ROAS and you might be thinking that you should scale them down. But you have a MER of, let’s say, 5.
Now, let’s say you push those campaigns more and increase their budget by 30%. That sounds crazy, right? Well, if your revenue increases by 30% as well, you still keep the MER at 5.
And you can do this with all your marketing platforms. Grow the ad spend, keep an eye on the MER, and see when the percentages are disproportionate. If you spend more and the revenue is not increasing, dial back your ad spend for that platform to find the sweet spot.
Focus on conversion rates
The most profitable way of increasing your revenue is not to spend more and acquire more traffic. But to convert the traffic you are getting.
You should always be testing and refining your product/landing pages, email messaging, visuals, or anything that you can think of.
Performing A/B tests and increasing your conversion rates will help you increase your MER. But that means you can also increase your ad spend, keep the same MER level, and increase your business revenue.
Diversify your traffic mix
At some point, you might end up finding your maximum ad spend level. Increasing it more that this would decrease your MER. But you still want to increase the business’s revenue.
Then, you should be looking at new advertising platforms. If you only use Google Ads for your business, look into Meta Ads. If you have an ecommerce shop, try looking into marketplaces. If you are in B2B, you are most likely using LinkedIn ads already. But you might be willing to try newsletter ads.
