Why MER Is a Flawed Measure of Success and What to Do Instead

Why MER Is a Flawed Measure of Success and What to Do Instead

Ned Gorges, Senior Director, Sales

Published 09/05/2023

If your paid advertising partners haven’t already pitched the Marketing Efficiency Ratio (MER) as a viable program success metric, they probably will soon. 

To prepare you, let's start by outlining how this flawed metric is being calculated and promoted by some players within our industry. Then, we'll break down the approach's shortcomings and suggest what you might consider doing instead if you want to understand success at a holistic program level, as MER intends.

How Is MER Calculated?

The calculation for MER is simple: top-line revenue divided by paid media spend = MER. For example, say we had total sales of $1 million last month, and we spent $200,000 on ads in the same month—that would equal 5 MER. Proponents of this metric urge marketers to use the ratio to understand how efficient their total ad spend (or total marketing budget) is for a given period. The higher the MER, the better. So, if we only spent $100,000 on ads and still recognized $1 million in sales, then we were more efficient with a MER of 10.  

Cue the record scratch.

Read that calculation again. MER is simply the marketing or ad spend to total sales percentage by another name and metric. Listen to any publicly traded consumer company earnings call, and you'll likely hear about what percentage of revenue they commit to marketing or ads. That's all MER is, but it's now being expressed to us as a ratio rather than a percent and presented as a conclusion rather than the premise or proposition it really is.

It’s like a circular argument…

“Where is the bank?”

“It’s behind town hall.”

“Okay, and where is town hall?”

“In front of the bank!”

We haven’t gotten anywhere with MER, and we’re still at a premise because it makes the assumption that every dollar spent was effective and correlated to sales. Given that logic, if I were to take over all paid media for McDonald’s and buy a single classified ad in a local Idaho newspaper for $50, I bet my MER would come out to roughly 40 million, give-or-take. (I’d like a raise, please.) Maybe that’s an extreme example, but it illustrates a larger flaw: what can look like a fantastic MER is more likely to be attributed to a tremendous baseline of organic or earned sales that paid is gobbling up credit for.

Not all ads are created equal. MER is a starting point, and no more than that. The question is, how impactful were we with the percentage of revenue allocated to us?

Reading through all of the literature on MER, there seem to be two main themes supporting the cause: 1) Attribution or ROAS at channel level and below doesn’t work, so MER is your best bet, and 2) ROAS is flawed because ads do more than produce one-time or immediate sales (i.e., lag effects of brand awareness). 

To the first point, attribution (done correctly) absolutely works. Please be wary of any entity encouraging you to analyze your investments less. If you’re willing to do so, you can test attribution yourself today—turn off an entire channel, platform, or tactic for the next month and analyze what happened to your sales to understand the true impact of that spend better. 

Of course, you can derive the same takeaway with a much less extreme approach while accounting for external variables to boot, but the point remains: it is, in fact, very possible to understand which channels, platforms, and tactics are yielding the best results for your business.

Secondly, many rigorous studies suggest we don't need to worry about accounting for the lag impact of ads nearly as much as previously thought. It's clear that if your ads drive results and sales in the short term, they'll also perform over time. So, if you concern yourself with getting the former right, the rest will take care of itself. 

So, if MER is mistakenly correlating all the ad spend with causing all the sales, what should we do instead?

It’s table-stakes to adjust the performance of your ad spend by its incremental contribution to top-line sales. You need to know which channels, platforms, tactics, and campaigns are causing customers to take an action they would not otherwise have taken were it not for that ad. While getting to incrementality was previously slow, difficult, expensive, and static, it’s now readily accessible, affordable, and dynamic. 

Once you understand your incrementality down to a campaign level, you’ll know the true sales impact of your total program spend.

You can then apply a similar calculation as MER, albeit with a very important difference. Rather than dividing the entire media spend into all sales, you divide it by just the sales we know would not have occurred without the ads.

A Real-life Example of MER Gone Wrong 

Here’s a real but anonymized illustration of how MER can lead you astray.  

A new Measured client came to us, having invested roughly $2.5 million YTD on paid media. The business has done approximately $15 million in sales YTD. MER, therefore, currently stands at 6, which, given the consensus that 3+ MER is good, means these guys are knocking the stuffing off the ball. 

Unfortunately, when we apply incrementality logic to the program, we can see that the media is currently only responsible for delivering about $3 million of the $15 million in top-line sales. So, an adjusted ROAS of 1.2 is not great. Were they guiding media buying behavior simply by what percentage of revenue they commit to advertising (MER), you'd have to presume the program is doing quite well and would be hesitant to change. 

However, it's clear in the data that they're under-tapping Affiliate as a channel while over-investing in some social media tactics, along with a few other very fixable items.

Start Measuring the Right Way

MER is neither an actionable data point nor should it be used as a conclusion to guide behavior. There is no reason privacy changes in the ecosystem should reduce your ability to measure ad impact—don't let anyone tell you otherwise. Your competition isn't settling for that, and neither should you.

Schedule a demo with Measured today to learn how we can help you adjust the performance of your ad spend by its incremental contribution to top-line sales.