For startup founders, investors, and marketing leaders, the alphabet soup of marketing metrics can be overwhelming. Two terms often come up in the quest to measure advertising effectiveness are MER vs ROAS. But figuring out which is better is what some of the best and most thoughtful minds struggle to understand.
This article provides clarity on Marketing Efficiency Ratio (MER) and Return on Ad Spend (ROAS). You’ll learn their strengths and weaknesses, and which one paints a clearer picture of how to build success for your marketing spend. Many big brands leverage these concepts, and you’ll discover why it matters.
Table Of Contents:
- Understanding Key Marketing Metrics
- What is MER?
- The Next Steps: Incrementality Testing and MMM
- Moving Forward with Comprehensive Metrics
- Conclusion
Understanding Key Marketing Metrics
Choosing the correct metrics for marketing campaigns can have big results. It may guide, or completely ruin, entire departments of marketing specialists. This can harm a brand from the bottom-up.
Many marketers for years viewed Return on Ad Spend (ROAS) as a primary metric. They used it to determine marketing success and shape budget allocation for their ad campaigns. But as the marketing world shifts, the limitations of solely measuring a campaign’s success off of ROAS has become clear.
MER vs ROAS continues to be at the forefront of this discussion. It is even becoming relevant for everyday conversations around clothes, with topics around what a steamer vs iron will best accomplish.
What is ROAS?
Return on Ad Spend (ROAS) measures the total revenue generated for every dollar spent on advertising. A ROAS of 6x means that for every ad dollar spent, six dollars were generated in revenue.
This seems useful. But this metric has shortcomings. It could cause leaders to go the wrong direction.
The Pitfalls of Relying on ROAS
Here are some reasons to re-evaluate how helpful ROAS is to evaluate ads and allocate marketing resources.
One of the biggest problems with ROAS is its reliance on accurate attribution. As privacy rules change and third-party cookies go away, it’s harder to link revenue to specific advertising.
Platforms like Google and Facebook may misrepresent data on sales. This can show campaigns that perform better than they really are.
Short-Term Focus of ROAS
ROAS often looks at individual campaigns. This focus encourages chasing quick wins rather than planning on long-term expansion.
For example, digital marketing brand awareness campaigns may have a lower ROAS initially because their effects happen later. Too much emphasis on ROAS can discourage investments in such crucial top-of-funnel activities.
ROAS Doesn’t Account for Customer Lifetime Value
ROAS doesn’t consider the customer’s long-term value. A campaign with lower ROAS might be more beneficial by bringing in customers with greater overall revenue than a higher ROAS campaign with single purchases.
Focusing on ROAS might cause companies to miss opportunities to cultivate long-term customer connections. These relationships eventually bring more income.
What is MER?
The Marketing Efficiency Ratio (MER) offers a different strategy for finding true marketing effectiveness. MER gives a holistic view across all channels.
MER looks at the whole business rather than separate campaigns and the revenue from ads spent. This method gives a view in complex, multi-channel marketing strategies.
How MER is calculated?
MER is a ratio of the company’s total revenue to its total ad spend. It looks at all efforts, including all sources of sales and marketing costs.
MER = Total Revenue / Total Marketing Spend
A high MER means efficient spending. A low MER means review what you are doing to potentially change direction.
Benefits of Tracking MER
MER provides a comprehensive view. One of the biggest benefits of using MER is its all-encompassing method. By measuring the ratio of total income to total marketing spend, MER promotes macro-optimizations.
This wider vision motivates marketers to avoid the traps of thinking channel-specific. It also pushes for assessment on how well marketing initiatives perform collectively. It’s also about sustainable growth instead of the opposite.
MER and Long-Term Growth
MER accounts for all revenue, leading companies towards stable marketing strategies. This perspective better aligns with wider organizational goals that put constant expansion and customer keeping ahead of immediate wins.
It also allows marketers to make confident investment in initiatives for brands. Activities like these don’t give results now but lay the foundation for customer future reach.
MER vs ROAS: A Practical Look
Say a company has different marketing channel. Campaign A returns a ROAS of 4, bringing $4 per $1, while Campaign B shows 8.
At first glance, Campaign B seems great. But a full MER review might reveal something else.
| Campaign | ROAS | Revenue | Spend |
|---|---|---|---|
| Campaign A | 4 | $40,000 | $10,000 |
| Campaign B | 8 | $8,000 | $1,000 |
| Total | – | $48,000 | $11,000 |
In this scenario, even if campaign A shows better direct ad spend results, it could lift overall sales a lot. Maybe campaign B boosts brand awareness by engaging people.
This method can attract fresh customers who potentially bring customer lifetime value.
Combining Metrics
To use these two together gives a balance. MER offers information on strategy and overall health.
ROAS focuses closer at channels and campaigns. Thinking on metrics that fit both help businesses tune efforts. This creates long-term business wins by getting the most ROI.
Why Correlation Isn’t Enough
Tracking MER offers advantages. Still, measuring true contribution for continued development is required.
MER only says your spends and incomes are related without showing it is related. Additional analysis for making the proper actions on plans, budgets and marketing shifts must occur.
The Next Steps: Incrementality Testing and MMM
Businesses ought to explore causation-centered metrics such as incrementality testing, and also use marketing mix modeling (MMM) for this process. These practices and measurements are necessary for marketers, executives, and founders to learn from each ad.
Incrementality Testing is crucial. This measures real growth accurately, and can help improve results when done in partnership with MER evaluations.
What does Incrementality Testing help to discover?
Incrementality testing compares outcomes from exposure to marketing messages vs. not.
This shows you marketing impact from natural sales boosts, separating influence. Looking into testing makes marketing budget useful and allows for proper resource allocation.
What does Marketing Mix Modeling help to discover?
Marketing Mix Modeling or MMM gives more views. It finds channel factors to the entire sales effort.
It evaluates actions and helps optimization efforts. This improves MER scores overall because of knowing campaign performance by channel. It’s helpful for optimizing different marketing mix areas for results that reach overall goals that your organization defines.
Moving Forward with Comprehensive Metrics
ROAS had usage. But alone it creates blindspots because advertising complexities grew in our markets. Relying on it is no longer advised.
Businesses can not depend just on fast evaluations with things evolving quickly. The all inclusive picture that MER covers gets past this, and allows plans and strategic thinking. Looking into customer activity shows how a marketing campaign worked.
MER with MMM looks deeper than typical reports from dashboards can capture to get more precise analysis about spending in relation to long term views, goals, and actual income.
Conclusion
Choosing between MER vs ROAS is difficult for some. By switching MER helps businesses make decisions with thorough indicators, and improve marketing efficiency with campaigns.
Comprehensive and advanced analytics allows optimization on what your company values more overall for its marketing investments and media efficiency. The more precise approach helps avoid pitfalls from solely concentrating on a single marketing metric.
Thinking strategically about marketing measurements enables plans, resources, and budget-work that fits your wider business views better for growth.
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