Marketing Efficiency Ratio: Strategies for Smarter Spending

As the ecommerce industry evolves and the complexity of online marketing expands, a new metric has emerged as a leading indicator of brand success: Marketing Efficiency Ratio (MER). For ecommerce brands navigating the high-stakes terrain of digital advertising, understanding MER has never been more important. 

Today’s competitive landscape demands a methodical approach to financial analysis, one that accounts for the entire spectrum of marketing activities and their real impact on your bottom line. The Marketing Efficiency Ratio offers just that—a granular view into the effectiveness of every marketing dollar spent, aligning it directly with revenue and profit goals.

But understanding and optimizing MER isn’t easy. It requires a nuanced understanding of your business, a deep look into lifetime value (LTV) at the product level, and the ability to forecast with precision, especially when planning for high-stakes periods like Q4 or the upcoming fiscal year.

In this article, we discuss the intricacies of calculating MER and show you how, with the right approach and expertise, you can improve your data analysis, improve the precision of your forecasting, better address inventory needs, and ultimately, achieve your overall business goals.

Introduction to MER

Unlike traditional metrics like Return On Ad Spend (ROAS), which measure revenue reported from specific advertising platforms, MER evaluates the overall efficiency of your marketing efforts and gives ecommerce brands a deeper understanding of their financial performance by linking marketing spend directly to the actual revenue reflected in the bank account. This metric moves beyond platform-specific data, providing a holistic view of how marketing efforts contribute to overall success.

The increasing usage of MER by DTC brands represents a need for them to guide their market programs based on data that more closely correlates with the financial health of the business instead of signals provided by advertising platforms alone. They need to move beyond the confines of platform-reported figures, especially as we move toward a cookieless future, and understand the real impact of their marketing investments. This is where MER shines.

By focusing on MER, ecommerce brands can recalibrate their marketing strategies to ensure they align more closely with actual financial outcomes. MER serves as a ‘north star’ for ecommerce brands, guiding marketing strategies and investment decisions. By using MER as a key performance indicator, brands can ensure their marketing efforts are not only cost-effective but also directly contributing to the company’s bottom line. 

Calculating MER

The basic formula for calculating MER is as follows:

MER = Total Revenue ÷ Total Marketing Spend

If your brand spends $200,000 on marketing and generates $1 million in revenue, your MER would be calculated as:

MER = $1,000,000 ÷ $200,000 = 5

This result means you are generating five dollars in revenue for every dollar spent on marketing. A higher MER value indicates more efficient marketing performance, suggesting that your marketing efforts are generating significant revenue relative to the cost.

Using the same figures, your MER as a percentage would be:

MER = ($200,000 ÷ $1,000,000) × 100 = 20%

This indicates that 20% of your total revenue is being spent on marketing. The lower your marketing efficiency ratio is as a percentage, the better. 

Understanding Contribution Margin and MER in Strategic Planning

Contribution Margin: A Key Indicator of Profitability

The contribution margin is a key indicator of profitability. It represents the portion of revenue remaining after deducting variable costs, offering critical insights into the profitability of sales. This metric focuses on revenue minus variable costs, which allows you to highlight the funds available for covering fixed costs and contributing to profit.

Below is an example of using these figures to set targets and drive strategy.

Establishing Preliminary Figures

Revenue Target: $25 million.

COGS (30% of Revenue): Given the revenue target, the COGS amount to $7.5 million, representing 30% of the total revenue.

Gross Profit: Calculated as total sales minus COGS, it yields $17.5 million ($25 million – $7.5 million).

Other Variable Costs: In order to be more accurate, we need to factor in additional variable costs which include marketing expenses. For this example, we will use $5 million as our figure.

Contribution Margin: $17.5 million (Gross Profit) – $5 million (Other Variable Costs) = $12.5 million.

Contribution Margin Ratio: This is the contribution margin as a percentage of total revenue, which is calculated as $12.5 million ÷ $25 million = 50%.

This ratio underscores the proportion of revenue that remains after addressing variable costs, playing a pivotal role in covering fixed costs and generating profit.

Setting the MER Target

Focusing on controlling the MER allows us to strategically direct our marketing efforts to align with our financial goals. The MER is defined as the total revenue generated per dollar of marketing spend or the % of revenue invested in advertising. As you aim to achieve a specific contribution margin, your ability to control the MER becomes a crucial strategic lever for your business.

If we’re striving to establish a contribution margin of 40%, we need to adjust our marketing strategy to ensure that marketing spend is optimized to achieve this goal. With COGS at 30% and a goal of keeping the total variable costs (including marketing) to 60% of revenue (aligning with a 40% contribution margin), the calculation shifts focus towards controlling the MER to meet these targets.

Target Contribution Margin: 40% of $25 million = $10 million.

Required Variable Costs (to achieve 40% Contribution Margin): 60% of $25 million = $15 million, including the COGS.

Given COGS: $7.5 million is the remainder for other variable costs, primarily marketing, which is also $7.5 million.

To maintain a 40% contribution margin, we need to ensure that our MER, reflecting the efficiency of marketing spend against generated revenue, is set appropriately.

Setting the MER Target: With an MER target that requires marketing spend to be 20% of total revenue, the marketing spend is $5 million ($25 million * 20%).

Calculating MER: The targeted MER becomes the revenue generated for every dollar of marketing spend. In order to hit our revenue and contribution margin goals with a $5 million marketing spend, the MER must be optimized to reflect this strategic intent.

MER as a Strategic Tool

In this scenario detailed above, you should now understand that controlling the MER isn’t just about managing marketing expenses; it’s about aligning marketing efficiency with broader financial objectives. The goal is to achieve a balance where marketing spend contributes effectively to both the top-line growth and bottom-line profitability, which allows you to achieve the desired 40% contribution margin. This approach allows you to view the MER not only as a metric of marketing performance, but as a central component of your overall strategic financial planning. Ultimately allow you to ensure that every marketing dollar spent is a step towards the targeted financial health of the business.

Benchmarking MER

For an ecommerce store, understanding what constitutes a ‘good’ Marketing Efficiency Ratio involves several factors and recognizes that benchmarks can vary significantly across different industries. Here are the main factors that influence a good MER and how these benchmarks may differ:

Historical Performance and Industry Benchmarks

A ‘good’ MER should be based on a thorough analysis of your ecommerce store’s historical performance. This involves reviewing past sales, marketing expenditures, and overall profitability to establish a baseline.

Benchmarks vary across industries due to differences in average order values, profit margins, customer acquisition costs, and typical buying cycles. For instance, luxury goods might have a higher MER due to higher price points for goods, while everyday consumer goods may offer lower price points and thus have a lower MER.

Calibration with Business Goals and Financial Health

Your MER should align with your ecommerce store’s broader financial goals. A good MER for your store maintains a balance between spending on marketing and achieving profitable sales.

Consider your business’s current financial health, including cash flow and profitability, when determining what MER is sustainable. Industries with higher overheads or costs may require a more aggressive MER to cover these expenses and remain profitable.

Action Plan Based on Efficiency and Scale

Improving efficiency through strategies like optimizing ad campaigns, refining the media mix, and improving the customer journey to increase conversion rates can positively influence your MER. 

Some strategies may require rapid scaling, despite a temporary dip in MER, while in others, steady growth may be preferable. However it all depends on the strategy and goals of the business.

Alignment with Financial Realities and Profit Margins

A ‘good’ MER considers the specific cost structure and profit margins of your ecommerce business. High-margin industries can sustain a lower MER, as each sale contributes more to the bottom line, whereas low-margin industries need a higher MER to be sustainable.

Adjust your MER expectations based on your ecommerce store’s financial realities, including fixed and variable costs, to ensure that marketing spending contributes effectively to net profits.

A ‘good’ MER is not a one-size-fits-all figure, but by understanding these factors and continuously adapting your strategies, your ecommerce store can establish and maintain an MER that supports sustainable growth and profitability.

Strategies for Improving MER

Improving your Marketing Efficiency Ratio can significantly enhance your ecommerce brand’s profitability and growth. Here are effective strategies that have been successful:

Creative Optimization

Evaluate and enhance your creative assets based on key performance metrics such as engagement rates, conversion rates, and thumb-stop rates. Implement A/B testing for different types of creative content, such as user-generated content (UGC) vs. professionally shot product videos. 

If data shows that having UGC leads to a higher conversion rate compared to standard product images, pivot your strategy to incorporate more UGC in your marketing campaigns. Tailor your content to meet the preferences of your target audience.

Holistic Marketing Strategy Review

Conduct a comprehensive review of every component of your marketing strategy, covering everything from ad spend allocation across platforms to conversion rate optimization and target audience analysis.

If the analysis reveals that certain platforms yield lower CPA and higher ROI, reallocate the budget to these platforms while reducing spend on underperforming channels.

Similarly, analyze your sales funnel to identify drop-off points. If you notice a significant drop-off at the checkout stage, consider implementing a one-click checkout process to reduce cart abandonment and increase MER.

Cross-selling and Upselling

Leverage data to identify opportunities for cross-selling and upselling to increase average order value (AOV) and overall revenue. For example, you can implement automated product recommendations on your website and in post-purchase emails to encourage additional purchases.

Email Marketing Optimization

Enhance your email marketing strategy to improve follow-up with customers and increase LTV. Segment your email list based on purchase history and browsing behavior to send personalized and targeted offers that are more likely to convert.

Campaign Structure Efficiency

Ensure your marketing campaigns are targeted, straightforward, and efficient. Simplify your campaign structure by merging similar ad sets or targeting groups. By consolidating overlapping ad campaigns and focusing on high-performing keywords or audiences, you can lower your ad spend while maintaining sales levels and increasing MER.

Product Profitability Analysis

Analyze the profitability of different products to prioritize marketing spend on high-margin or popular items. For instance, shift marketing focus to products with a 50% margin rather than items with a 15% margin, enhancing overall profitability.

Customer Segmentation and Retargeting

Segment your customer base and implement retargeting campaigns to improve conversion rates and reduce acquisition costs. For example, create dynamic retargeting ads specifically for customers who viewed products without making a purchase, offering a discount to encourage conversion. 

Testing and Investment

Conduct incrementality tests to identify the actual impact of marketing spend on revenue and adjust investment accordingly. By running A/B tests for different ad creatives, targeting, and channels, you can determine the most effective combinations for driving sales.

Developing A Plan

Develop a clear, actionable plan to address identified issues and leverage opportunities to improve MER. For example, create a quarterly marketing plan that focuses on high ROI activities identified from past analyses. 

You may be able to identify opportunities to encourage consistent repeat purchases over time. 

By implementing these strategies, ecommerce stores can enhance their marketing efficiency, leading to better resource allocation, higher sales, and improved profitability.

Tracking MER Over Time

Tracking MER allows businesses to see the direct impact of creative changes, campaign restructuring, or audience targeting adjustments on overall marketing efficiency. But doing so for the long term yields even deeper insights. 

Continuous tracking of MER helps set benchmarks for marketing performance. By understanding what MER values correspond to successful campaigns, a brand can set realistic performance targets for future campaigns.

Long-term MER data provides insights into which marketing strategies yield the best return on investment. This allows businesses to allocate their marketing budget more efficiently, focusing on strategies that enhance their overall marketing efficiency.

Over time, MER tracking can help establish correlations between marketing spend and customer LTV. This insight is invaluable for fine-tuning customer acquisition and retention strategies.

Furthermore, tracking MER data over time helps brands understand how external market factors, such as seasonal trends or economic shifts, affect their marketing efficiency. 

But at its core, MER analysis can reveal which products or customer segments are most profitable. Long-term tracking allows brands to identify trends and patterns, such as increased efficiency from targeting specific customer segments or promoting certain products.

MER And Your Ecommerce Brand

The introduction of the Marketing Efficiency Ratio as a more holistic metric represents a pivotal shift from traditional, less comprehensive models. Embracing MER enables brands to align their marketing efforts more closely with their overall business and financial goals, ensuring that every marketing dollar spent is an investment toward profitable growth. While the intricacies of MER may seem daunting, they offer an opportunity for brands to refine their approach to marketing with an eye on long-term growth and profitability.

About the Author: Jeremy Fenderson is the Sr. Director, Client Partnerships at adQuadrant. He has over 10 years of experience marketing technology, products and services globally. Obsessed with all things digital, he has a passion for connecting people with products and services that improve their lives. He received his BA in Business from Valdosta State University in Georgia. Originally from Lakewood, CA, Jeremy has lived around the world in Georgia, Las Vegas, and even England.