The marketing efficiency ratio (MER) is a key metric for tracking the effectiveness of marketing spending. MER measures your total sales revenue divided by total marketing spend for a given time period. It shows how efficiently your marketing budget is being used to generate sales.

While a higher MER is typically better, no universal benchmark exists for a “good” MER. The ideal MER depends on your profitability goals, margins, industry, and business model. This guide will explain everything you need to know about calculating, benchmarking, and optimizing your MER, providing a comprehensive understanding that extends beyond traditional retail metrics to encompass the evolving needs of omnichannel brands.

How to Calculate MER

The formula to calculate MER is straightforward:

MER = Total Sales Revenue / Total Marketing Spend

For instance, if your sales revenue for Q1 was $1 million and you spent $300,000 on marketing, your MER would be:

$1,000,000 / $300,000 = 3.33

To express MER as a percentage, multiply the decimal result by 100. So in this example, the MER percentage would be 333%.

What Impacts Your MER Benchmark

While 3x or 300% is sometimes referenced as a “good” MER, your ideal ratio depends on several factors:

• Business Model – MER benchmarks can vary greatly depending on whether you sell products or services, have an e-commerce or brick-and-mortar model, rely on subscriptions vs one-time purchases, etc.
• Gross Margins – Higher margin products and services can sustain a lower MER, while lower margins require greater marketing efficiency to remain profitable.
• Marketing Strategy – If you invest more heavily in long-term brand building vs direct response, your short-term MER may be lower.
• Industry Benchmarks – Research MER averages for your specific industry to contextualize your ratio.
• Growth Stage – Early stage companies may strategically sacrifice short-term MER to drive growth, while mature companies need higher efficiency.
• LTV – If you have a high customer lifetime value, you can accept a lower MER in the short term while still being profitable long-term.

How to Improve Your MER

If your MER is lower than your target ratio, here are some strategies to improve it:

• Evaluate campaign and channel performance to identify and double down on your most efficient marketing tactics.
• Experiment with new channels and creatives to find higher converting approaches.
• Optimize landing pages and sales funnels for higher conversion rates.
• Consider cutting ineffective marketing spends that are dragging down ROI.
• Shift budgets to higher intent channels like paid search vs lower-converting brand advertising.
• Improve retention marketing to increase lifetime customer value.
• Raise prices or reduce COGS to improve unit margins.

Integrating MER into Your Business Strategy

Understanding how MER fits into a business requires looking at:

• Sales projection for the year
• Marketing budget (a percentage of your sales projections)
• Gross margin/gross margin percentage (the difference between your sales and your COGS)
• Contribution margin (the difference between your gross margin and marketing budget)

These factors help you integrate MER into your overall business planning and financial forecasting.

Choosing MER Over ROAS for Strategic Insights

The marketing efficiency ratio (MER) can be used instead of return on ad spend (ROAS) in specific scenarios where the focus is not solely on direct conversions. While ROAS measures the effectiveness of individual paid channels in driving immediate conversions, MER provides a more comprehensive understanding of the overall impact and value of different marketing initiatives.

MER becomes particularly valuable when running brand-building and awareness campaigns that may not have immediate conversion goals. In such cases, attributing specific channel performance might not fully capture the contribution of these campaigns to the business’s growth. MER takes into account the entire customer journey and considers the combined efforts of various channels in scaling the business.

A typical example where MER proves useful is when a user is exposed to a radio advertisement, later conducts a search, clicks through a pay-per-click (PPC) ad, and ultimately converts into a member a month later after subscribing to a newsletter. This conversion would not be attributed to either the radio ad or PPC in direct attribution models like ROAS. However, using MER, these conversions are still accounted for as attributable to paid channels, even as they fall outside the direct attribution window.

By understanding the value of each channel in contributing to revenue and considering the holistic impact of marketing efforts, MER facilitates a more robust assessment of campaigns aimed at building brand awareness and customer engagement. While attributing specific channel performance remains important, MER complements ROAS by providing insights into how various marketing channels work together to drive business growth.

Navigating Data Privacy: The Challenge of Calculating ROAS

Facebook’s data restrictions and lookback windows, which were announced in the summer of 2020, have a significant impact on the calculation of Return on Ad Spend (ROAS). As a result of these restrictions, obtaining an accurate and complete data set for calculating ROAS becomes increasingly challenging.

Specifically, with the implementation of iOS 14, Facebook has limited the access advertisers have to user data, which directly affects their ability to attribute conversions to specific ads. The introduction of lookback windows further complicates the calculation of ROAS. Lookback windows determine the period during which a user’s action can be attributed to a specific ad campaign. With the restrictions, Facebook now offers limited lookback windows, making it difficult to determine the actual impact of ads on conversions accurately.

Consequently, ROAS, which is a metric used to evaluate the effectiveness of advertising campaigns, becomes an elusive number in the face of incomplete and restricted data. Advertisers may struggle to accurately measure the return on their ad spend due to the limitations imposed by these data restrictions and lookback windows.

To mitigate these challenges and assess the overall impact of paid advertising as a partner to organic channels, PR efforts, and conversion optimization, advertisers are advised to emphasize other metrics, such as the Marketing Efficiency Ratio (MER). By examining the overall impact of paid advertising in conjunction with these other factors, advertisers can gain a more comprehensive understanding of the effectiveness of their campaigns, rather than relying solely on ROAS as an independent measure.

Track Over Time as a High-Level Metric

While MER is useful for periodic benchmarking, it is most valuable when tracked over time as a high-level metric. Look at trends in your MER to evaluate the overall efficiency of your marketing, and correlate it to other key metrics like revenue growth and profitability.

Rather than overly optimizing for MER alone, find the right balance between growth, efficiency, and profitability for your unique business goals and constraints. Consider leveraging tools and software that provide a unified view of your data, helping you track and analyze your MER effectively.