Marketing efficiency ratio – explaining MER in marketing

As a digital marketing professional, you know some metrics matter, and some metrics miss the mark. Marketing efficiency ratio (or MER, for short) falls into the former category, and Funnel's been talking about it for a while now. In fact, our performance marketing manager Kathryn mentioned MER last fall.

Return on advertising spend (ROAS), which you probably already use, falls into the second category. We recommend using MER instead, in order to achieve a more holistic view of ad efficiency. 

But what is this metric? Why is it better than ROAS? When is MER not the best metric to track? We'll answer all of these questions below.

What is MER, or marketing efficiency ratio?

Marketing efficiency ratio (MER) — sometimes called media efficiency ratio — measures how well your marketing strategy or campaign performs holistically. It's used to work out how lucrative marketing efforts are as a whole. In other words, how much money a marketer or marketing department spends to get results. 

MER is a calculation that examines total ad spend and total revenue. The higher your marketing efficiency rate, the more results your marketing efforts generate with fewer marketing dollars. 

It might sound like ROAS, but there's a difference. ROAS measures how much money you make for every dollar spent on ads, helping you attribute efficiency to specific ad campaigns and channels. 

MER, on the other hand, considers the total effects of all your marketing efforts from ad spend, letting you determine the efficiency of your entire campaigns. 

The MER metric measures the total effects of your marketing and doesn't involve attributing success to different campaign components. That means it's more holistic, helping you decide whether your marketing is efficient as a whole. You get to see the bigger picture. And you know you have to act when your marketing becomes less effective.

Related reading: Driving results: Six tips on how to analyze your marketing data

Calculating MER

Working out MER involves a simple calculation. You divide total revenue by total ad spend. We can express this calculation in the following way:

MER = Total revenue / Total ad spend

As an example, say your last marketing campaign generated $10,000 in revenue from a $5,000 ad spend:

• You divide $10k by $5k (total revenue by total ad spend)
  
  
• That gives you an MER of 2 (10,000/5,000 = 2)
  
  
• We can express this total as a ratio, meaning MER in this example is 2.0

Note that we are looking into marketing efficiency, so we are considering ad spend in the calculation. But to take this data a step further, consider adding in other business costs such as salaries, subscriptions, and agency costs. This will really help you understand the value ads provide. 

What is a good marketing efficiency ratio benchmark?

In the above example, with ad spend, 2.0 is a low MER. Total revenue is just twice the amount of ad spend. (Or $2 in revenue earned for every ad dollar spent.) 

A good MER benchmark depends on the industry, but it is typically anything above 3.0. Meaning revenue is three times more than ad spend, or $3 in revenue earned for every ad dollar spent.

In e-commerce, there are likely to be more costs to producing goods. Therefore, a higher MER is expected — anything around 5.0 or above is considered good. That means ad spend equals 20 percent or less of total revenue. MER is also easy to calculate for different e-commerce periods — revenue generated in the last three months, last six months, etc. — and examining media spend from paid channels and revenue during those time frames.

In SaaS, questions arise about MER, and a good benchmark depends on the timeframe measured. For example, should you include ad money spent on prospecting new leads in month one and revenue generated in month one when it often takes more than a month to convert leads into customers?

For new businesses, MER is a little more complicated. Say you generate $5,000 in revenue from $10,000 ad spend in your first year as a start-up. That's a MER of 0.5, meaning you generated less revenue than you spent on ads. However, start-ups must spend money on ads to generate interest in their brands, increase visibility, and only generate revenue when customers learn about their offerings.

In this instance, MER might be meaningless until your start-up establishes itself. After developing a customer base, calculating MER in years two and three will provide more insights into the profitability of your ad spend

Tip: Why using your total ad spend is smart

MER is a holistic analysis so that you won't attribute revenue to specific ad channels and other campaign elements. That's why including all your ad dollars in your MER calculation makes sense. For example, you don't need to do separate calculations for separate channels or individual ads. As we said earlier, MER is all about the bigger picture.

Related reading: What is a channel strategy in marketing?

MER vs. ROAS

We think there can be lots of issues when relying solely on ROAS. This metric assumes perfect attribution when determining revenue from ad spend, rather than considering the entire customer journey. 

Say someone clicks on a PPC ad and visits your online store, but they only make a purchase from your store after hearing about your business in a radio ad a few weeks later. ROAS might assume the PPC ad was the touchpoint that resulted in the purchase without considering the radio ad.

MER forgets attribution and focuses on the overall efficiency of your marketing budget, helping you understand the impact of ad spend on revenue. You can also use MER for brand building and awareness rather than concentrating all your marketing assets on conversion-based ad campaigns.

ROAS is still a valuable metric, but there's more to marketing than just attributing revenue to specific campaign elements. You need to understand how all your marketing works in harmony to generate revenue.

We recommend:

• Using marketing efficiency ratio if you want to gauge the total efficiency of your marketing
  
  
• Using ROAS if you want to determine specific marketing elements and the profitability of particular ads and channels, but be careful determining the success of top-of-funnel activity with a metric like this
  
  
• Or just use both together to measure overall performance (MER) while looking at specific performance (ROAS)

Related reading: Five ways to solve the marketing data challenge

When not to use MER

Marketing efficiency ratio helps you measure the impact of your total marketing efforts, but this metric has limitations. It won't tell you where to invest your budget because it has little to do with attribution. Unlike ROAS, you can't determine which campaign elements generated the most revenue and learn which channels to invest more in.

Nor can MER tell you which campaign elements to cut if you need to reduce your overall ad spend. What MER can do is provide insights into when your marketing efforts and spend mix are at their best. A low MER reveals that your marketing isn't very effective and not generating the desired results based on the money you spend.

Also read: Complete guide to performance marketing.

MER is powerful for accurate oversight, but as it is a holistic metric, you need something more granular for those smaller tweaks, such as ad copy optimization or understanding individual campaign performance over time.

Final word about MER marketing

Marketing efficiency ratio is a metric we've championed for some time, and for good reason. Unlike ROAS, it reveals the bigger picture about your marketing campaigns rather than focusing on specific campaign factors, providing a more holistic and cumulative view of ad efficiency. You don't have to stop using ROAS for MER, but overreliance on this metric won't tell you what you need to know about your overall marketing budget and effectiveness. So start calculating MER today to measure your marketing as a whole.

Calculating MER in Funnel

The difficulty with MER is that you need data from all your ad platforms, as well as revenue figures (from an analytics or e-commerce platform), to calculate it. Which means a lot of numbers in a lot of different places, which need to be brought together.

The first step gathering your data is to connect each of these platforms in Funnel. Just select the relevant platform, add your credentials, and in a few clicks, your data will all be aggregated in one place. If you already have a Funnel account then great – you are one step ahead!

Next, you can use the pre-built “cost” metric, which aggregates the cost/spend from each ad platform.

Now, navigate to “create metric.”

A simple calculation with the “cost” metric from earlier, and your business specific revenue metric (HubSpot, GA4, Shopify, etc.), will create the MER metric.

Now you’ve created it, you can monitor MER in Funnel, Google Sheets, Looker Studio, or any destination of your choice. Plus it’s ready with the latest data and ready for your analysis.