What is MER and how to use it as a North Star metric.
Friday, August 16, 2024
HC
Written by
Head of Client Strategy
There are numerous metrics designed to help you measure the return your business makes on its marketing investment, or how efficient your spend is. Whilst ROAS often dominates conversations and decision-making, there is another metric you should consider that can help you understand if your marketing is worth it.
That measure is MER.
What is MER?
Interestingly, MER has a few different definitions depending on what you read, but we’ve narrowed it down to two.
MER stands for Marketing Efficiency Ratio but is also known as the Media Efficiency Ratio.
The use case is largely the same. Unlike ROAS (return on ad spend), which looks at how efficient paid media campaigns are, MER is used to work out how efficient your marketing is in total.
MER works by taking into account the impact of your spend across your total revenue, looking at how your various marketing channels work together and contribute to performance as a whole. That’s why it’s often considered as a North Star metric.
The higher the MER, the more efficient your marketing is at driving revenue i.e. you generate more revenue for your marketing investment.
Marketing Efficiency Ratio v Media Efficiency Ratio
MER is calculated by dividing your total revenue by your total marketing investment.
What determines whether you’re looking at the marketing efficiency ratio or the media efficiency ratio is the definition of ‘marketing investment’ and what you include within that:
Media efficiency ratio: views marketing investment as your total campaign or media spend. Another name for this metric is Blended ROAS.
Marketing efficiency ratio: takes into account all associated marketing costs, such as platform fees, salaries and agency fees.
How to calculate MER:
The Media Efficiency Ratio is calculated by dividing your total revenue by your total ad spend:
MER = Total Revenue / Total Ad Spend
For example, if your total revenue was £100,000/month and you spent £20,000/month on Google, Bing and Meta Ads, your MER would be 5.0. In this case, you are spending 20% of your total revenue on advertising.
Marketing Efficiency Ratio is calculated by dividing your total revenue by your total marketing expenses:
MER = Total Marketing Revenue / Total Marketing Expenses
In this case, revenue takes into account all revenue generated that can be attributed to your marketing efforts, and all associated costs of doing so.
For example, if your total revenue was £300,000 and you spent £100,000 on marketing expenses, including fees, salaries and ad spend, your MER would be 3.0.
Why use MER?
MER is used to give a top level view of how efficient your marketing investment is without having to consider attribution.
This is useful when reviewing overall strategy.
Take top-of-funnel activity for example, which may not have any direct revenue attributed to it. Were you solely to make decisions based on ROAS, you might choose to pause this compared to direct revenue generating activity.
However, that top-of-funnel activity drives awareness and traffic as part of the buying journey that may be concluded by another channel converting the user, and therefore having the conversion attributed to it (assuming a last-click attribution model).
Were you to pause this activity based on ROAS, you might see your revenue from other channels decrease as a result.
However, by looking at MER, you’re measuring the impact and success of your marketing activity in totality, giving you a top-level view of how efficient your marketing spend actually is and the value of your strategic decisions.
What is a good MER?
A good MER is dependent on the business and its industry, and a range of factors including product margin. There isn’t a one-size-fits all solution and your target should be tailored to your business.
However, it is generally accepted that an MER of 3.0 or more is considered good. This means that for every £1 spent on ad spend, you’re generating £3 in revenue, or triple the investment.
For an ecommerce business, this rises to an MER of 5.0. This is higher largely because it takes gross profit into account. D2C sales will have a product cost attached to them.
MER can be affected by a number of different factors however, so it’s important to review and revise it over a period of time. Factors that can affect MER include:
Competition
Product demand
Seasonality
The economy
When to measure MER
Whilst MER can be calculated daily, weekly or monthly, we recommend you also measure it over a longer time period to take into account the length of time a lead takes to turn into a sale.
This is particularly important for a lead-gen business, when investment to generate a lead in month one may not translate into revenue until month 6, or when considering that top-of-funnel activity is only part of the customer journey and the conversion may come some weeks later.
A great example of this is in the run-up to Black Friday or a peak sale period, where you may increase advertising from September only to convert those users into customers in November, December or during January sales.
Equally, another consideration is a customer’s repeat purchases and lifetime value. Marketing activity that closes a customer in month one may well see further sales as the customer repeat purchases, particularly if you employ retention strategies via email or other methods. This is important when considering subscription-type businesses for example.
We’d advise taking a long term view of MER, where the length of time is likely to be determined by the type of business you operate and the products and services you offer.
Where not to use MER
MER is a measure of how efficient your marketing investment is, it gives you an indication of whether your marketing budget is being well spent. What it does not do is tell you where to invest or pull your marketing budget.
When it comes to making decisions on individual campaign efficiencies, we recommend using ROAS and Cost per Acquisition alongside other KPIs when making decisions.
The other thing to note is that MER is not necessarily an indication of profitability. A business with an MER of 3 could be more profitable than a business with an MER of 5.
Equally, if you increase spend and that subsequently increases revenue, then profit may increase but the MER - the relationship between spend and revenue - may remain static, so it’s important to consider other metrics when making decisions.
How to use MER and ROAS together
MER gives a top-level view of total marketing efficiency whereas ROAS gives you a granular view of return on a campaign-by-campaign basis. You can use MER to review strategic decisions, and ROAS to make optimisations or decisions on campaign performance.
You may have a business with a relatively high MER and still have campaigns with a relatively low ROAS. You may be satisfied with this, and therefore choose to not further optimise your campaigns. However, you may decide you want your marketing to be more efficient and use ROAS and other KPIs such as customer acquisition cost to take action on specific campaigns that aren’t performing, which in theory pushes up your MER.
Equally important, you may have campaigns that have a relatively healthy ROAS but your business has a middling MER. This can indicate a heavy reliance on paid ads in your marketing, and guide your efforts into pursuing other marketing channels that have less reliance on ad spend, such as organic, direct, referral and email. Improving revenue in these areas and redistributing your channel mix can help improve overall efficiencies which will be reflected in an improved MER.
Furthermore, if you have an MER that is above your target, this may indicate that you have headroom to invest more into your marketing or that you’re underinvesting.
MER and New Customer Acquisition
If you have a strong or renewed focus on acquiring new customers, then you may accept a lower MER compared to retaining or reconverting existing customers. It’s widely accepted that acquiring new customers is generally more costly than retaining them so if you’re employing this kind of strategy a lower MER in the short term isn’t necessarily a bad thing.
In theory, should your new customer strategy be successful, you will see revenue and associated profit increase. However, if your MER is too low it’s an indicator that you’re overinvesting or need to reevaluate which channels you are using.
3 Key Takeaways
MER is a metric you can use to evaluate whether your marketing investment is worth it, making it a great North Star to follow when reviewing performance.
It discounts attribution, allowing you to take a long term view of how your wider marketing efforts are doing.
Like any metric, it should not be used in isolation. It can guide you strategically, but we’d recommend using it alongside other metrics like ROAS or CAC when making tactical changes to your marketing.
If you would like any support in how to use MER with your business or evaluating the performance of your digital marketing, please get in touch with us.
