The ecommerce ecosystem has drastically changed over the last couple of years. iOS 14, retail's return after Covid lockdown policies, and supply chain issues worldwide are just some problems that have disrupted the DTC space and caused uncertainty for thousands of brands. As we continue to move towards a more privacy-centric world, DTC companies need to stay up to date on how to calculate the success of their advertising efforts. Those who can stay at the forefront and implement new strategies will be in a great place to continue sustained growth in the long term—those who can't are in danger of disappearing.
Despite this, many companies have continued to measure their campaign performance through outdated metrics and systems, thus jeopardizing their efforts to achieve continued growth and accurately track their marketing campaign performance. As mentioned in our previous article on this topic, ROAS, in particular, has become a metric many marketers and DTC owners continue to stubbornly hold on to despite all the red flags. We're here to show you a new way forward. ROAS is dead. The time for a new metric has arrived.
What happened to ROAS?
Before we go over the new metric, it's important to understand what happened to ROAS. It all started with iOS 14. In 2020, as part of their updates, Apple introduced an opt-out for all data-tracking apps. For paid media, this meant that advertising platforms couldn't fully attribute the sales from your website to anyone who had opted out from app tracking.
These changes led to drops in ROAS across the board, as Facebook lost its ability to measure it effectively. Needless to say, the changes brought on by iOS 14 severely affected the DTC space, but it also led to a lot of innovation and reflections. The massive changes shed light on something in front of us all along. ROAS is an incomplete metric that doesn't fully reflect a brand's profitability as it focuses on revenue, not profit. That's where the Marketing Efficiency Ratio (MER) comes in.
What's Marketing Efficiency Ratio (MER)?
The marketing efficiency ratio (MER), also known as blended ROAS, measures the performance of your marketing efforts. The simplest way to think about it is as total revenue divided by total paid ad spend.
This metric offers a holistic view of all your paid advertising efforts, unlike ROAS, which provides a more granular view. This metric also differs from ROAS because its purpose isn't to guide decisions or optimizations for specific campaigns or channels but to understand how efficient your marketing efforts need to be to achieve your target profitability.
Lastly, it's important to note that there isn't necessarily a "good" MER out there you can refer back to in order to assess your brand's performance. A "good" MER depends entirely on your business goals, products, and strategy. With that said, a MER below 1 would imply you're not generating enough sales for each dollar you spend on marketing, so you should always target a MER of 1 and above.
How do I calculate MER?
As mentioned before, the easiest way to calculate MER is through its formula, total revenue divided by total marketing spend. However, these numbers will vary depending on your specific business, and different brands add different levels of complexity to their calculations.
The total marketing spend can also include other costs related to your business for a complete representation, generating more accurate numbers for your MER analysis. Some additional standard metrics include the Cost of Goods Sold (COGS), shipping costs, agency fees, and payment processor fees.
For example, if Company A spent $1000 in paid ad spend and generated $20,000 in revenue, with the simplified MER calculation their MER would equal 20.
When utilizing a more complex MER calculation, Company A could include other expenses, such as their COGS, equaling $200, $50 in shipping costs, $300 in agency fees, and $50 in payment processing fees. This would reduce their MER to 12.6, but also allow for the company to better estimate its profitability.
Why should I choose MER over ROAS?
With the ongoing trend in paid media towards increased privacy for users, of which iOS 14 is but one example, it's essential to utilize a reliable metric. Attributed revenue within paid media platforms, such as Facebook, has been affected by this trend, relying more and more on modeled metrics that don't always paint an accurate picture of a business' marketing efforts. MER, on the other hand, is a metric calculated entirely through your business' first-party data, allowing you to have complete control over the metric's calculation and make strategic decisions accordingly.
The DTC space has drastically changed over the last couple of years. The changing rules of the game have caused a lot of uncertainty and worry among business owners as they try to find new ways to determine the success of their paid media campaigns. This also represents an opportunity to innovate your business' success metrics and strategies and generate a competitive edge to take your brand to the next level.
If you're still unsure about calculating MER or determining a campaign's success, our knowledgeable Growth Partners are happy to answer any questions! Connect with us here to learn more about how we can help.