Varos Glossary

Marketing Efficiency Ratio

What is the Marketing Efficiency Ratio?

Every single advertising dollar spent may be compared to the amount of money brought in by using the marketing efficiency ratio (MER). How much money did we earn relative to our expenditures? The effectiveness of your marketing may be gauged with the help of this handy North Star Metric.

How to Calculate the Marketing Efficiency Ratio

The math behind calculating MER is elementary. Overall income is a percentage of total advertising expenditures.

MER is also a ratio, much as ROAS. An MER of 5.0 indicates a profit of $10,000 when a budget of $2,000 is acquired.

Marketing Efficiency Ratio formula:

  • MER= Sales / Ad spend 

However, the market efficiency ratio is not the same as ROAS. It simply calculates the overall return on advertising investment (ROI) as a percentage of sales made. The formula makes no attempt to attribute sales to marketing efforts.

Since many marketing actions are not automatically recorded, MER is a vital indicator to monitor.

Money spent on advertising has a daily impact on income, whether it's used to increase site traffic (through Facebook and Google Shopping) or product sales (via Amazon).

There are, of course, other considerations.

Email marketing is a cheap and effective tool. A successful ecommerce campaign or flow generates income without increasing expenses.

  • If your MER is high because there is a large discrepancy between your revenues and expenditures, then you should invest more in paid advertising.

However, it is also somewhat cloudy. Especially attribution when iOS 14 was released and everything became harder to measure, from cost per impression (CPM) to cost per acquisition (CPA) on Facebook advertisements to all the other social media marketing channels.

The focus here is on the buyers themselves.

Revenue from email marketing comes from repeat buyers. From the budget for advertisements. We need to separate the two to see things more clearly.

Excluding the Google tax in brand terms, advertising expenditures should not correlate much with revenue from retained consumers.

The objective is to optimize profit margins, which may be achieved without resorting to excessive price cuts or other forms of wasteful expenditure.

It's more difficult to calculate the optimal expenditure on income gained from new customers. Unlike with retained consumers, you're not only reducing losses. Instead, marketing expenditures contribute significantly to the overall cost of client acquisition.

Being sure that every new dollar spent on acquisition is profitable is the most crucial aspect of the MER equation since this is where the vast majority of your budget is likely to be allocated.

What is a Good Marketing Efficiency Ratio?

There is no such thing as a universally "good" MER.

Although an MER of 3x is often mentioned as "excellent," what constitutes a good MER is really dependent on the size of your company, the products you sell, the approach you take, and your desired level of profitability.

As such, it is a subjective measurement.

A company with an MER of 5x may not be as successful as one with an MER of 3x, while a company with an MER of 1x may be doing rather well. Why is it the case?

Examining sales forecasts, advertising spending, gross margin, and profit margin will help you reach MER.

One must examine the following in order to grasp the function of MER inside a company:

  • Foresight into the Year's Sales
  • Budget for Advertising
  • Gross Profit or Gross Profit Ratio
  • Salient Factor

In conclusion, MER in marketing allows you to assess the efficacy of your marketing initiatives and adjust your approach accordingly.

As tracking limits on iOS devices and the removal of third-party cookies become effective, the sales and marketing efficiency ratio will become increasingly critical to many organizations. A marketing efficiency ratio is a useful tool for firms since it provides a holistic perspective on marketing's impact, from which they may draw important strategic conclusions for their future development.