Anyone who monitors (online) advertising spending is bombarded with metrics to optimize those campaigns. How do you choose between MER, ROAS and CAC to determine ROI? Or is the search for a single ROI metric actually a hopeless task? In this article you will discover why each (type of) organization deserves its own marketing metric – and which metric best suits your goals.
Different metrics explained
First, let’s take a look at the different metrics:
1. Marketing Efficiency Ratio (MER)
MER stands for Marketing Efficiency Ratio and is attractive to marketers because of its simplicity. MER is calculated by dividing revenue by advertising spend. However, there is a perverse incentive in this metric. Cutting back on advertising spend increases MER, but can actually halt growth momentum.
There is another important reason why the MER can give a distorted picture. Sales can increase for several reasons:
- A company benefits from word of mouth
- A product sells better in a certain season
- A competitor launches a TV campaign that benefits the entire product category.
In this case, growth and advertising budget are clearly not related.
2. Customer acquisition cost (CAC)
The customer acquisition cost (CAC) is calculated by dividing the total sales and marketing costs in a certain period by the number of new customers in that same period. It gives an impression of the total return on marketing efforts, but makes it difficult to determine which channel/campaign generates new turnover.
3. Return On Ad Spend (ROAS)
Return On Ad Spend (ROAS) shows how effective an individual campaign would be, by comparing the costs of a campaign with the growth in revenue. In theory, this would allow you to spend marketing euros more effectively. In practice, it is difficult to track the precise impact of channels and budgets. It is almost impossible to give a single channel full responsibility for a new customer. This makes ROAS less effective.
Accepting complexity
If you look past these metrics and abbreviations and zoom out, you will see that there is an underlying value behind the search for a single metric. There is a need for clarity and, more importantly, simplicity. I think that this need for simplicity can be explained by the rapidly changing landscape in which marketers have to survive.
Marketing has become difficult
The funny thing is, that landscape has been changing so fast for so long that it has become a cliché. And yet it is good to remember that the work of marketing departments has become exponentially more difficult over the past twenty years.
Offline campaign channels were disrupted by social media, new platforms disrupted traditional parties in no time, AI tools democratized creativity and data analysis, and legislation happily followed suit to make everything even more complicated.
Last van FOMO
Marketers are dealing with more and more different channels, which creates an explosion of data. It also creates more and more opportunities to optimize these channels. This in turn leads to a certain FOMO: the chance that one of your ten channels is not performing optimally is greater than that your only channel is not running smoothly.
This FOMO makes us tempted to steer on a single metric, such as ROAS, because it would show at a glance which channels are bringing in new customers. In our desire for clarity (and more importantly: simplicity) we do not sufficiently consider how imperfect many metrics are.
I think there is something much more important than a metric. We don’t need a single metric, we need a different mindset.
Mindset > metric
We need to accept that companies are different, have different goals and their campaigns need to be judged differently. Let’s take a startup as an example.
When a company has just been founded and has received a lot of growth money, shareholders expect the money to be used to make as much growth as possible as quickly as possible. The CAC is a metric that comes in handy. The overhead costs are zero at this stage, which also has to do with the nature of the company: tech companies are by definition more scalable than traditional companies. This quickly shows the impact of marketing euros.
Striving for profitability
A trend now is that many startups are aiming for profitability, rather than huge growth figures. Fast-growing scale-ups, such as Shypple in vintage, recently turned into profitable scale-ups. Those who want to tighten their belts and pursue a healthier balance sheet can use ROAS for this. This metric provides insight into how effective individual campaigns are. This makes marketing more effective, as the costs for a campaign are compared to the growth in turnover. In theory, this would allow you to spend marketing euros more effectively.
Combine this data with add spend, such as CPM and CPC, so that it is more certain that a particular campaign is contributing to revenue growth. If a company ever finds itself in a bad situation, needs to consolidate and cut back on advertising, then ROAS is also the preferred metric.
The EIA is also useful
If you are looking for a way to reduce turnover, make future growth more difficult or make your marketing department redundant, the MER is a great solution. After all, the MER is calculated by dividing turnover by advertising expenditure. So there is a simple way to increase the MER: by cutting back on advertising.
Fewer customers, turnover and growth
If the MER increases, then in theory the company should do great. As we all know: in practice the difference between theory and practice turns out to be greater than in theory. In practice, turnover decreases, because fewer new customers are coming in.
Growth will also become much more difficult in the long term. You should also not be surprised if (marketing) colleagues are sitting behind their desks twiddling their thumbs. Anyone who hates their security of existence or employer, implements the MER today.
Don’t get hung up on 1 metric
Above all, I would encourage marketers not to get hung up on just one metric. The need for simplicity is understandable given the rapidly changing landscape. But our work is too complex to be captured by just one metric. A marketing team that uses four different metrics and can explain why will outperform a marketing team that uses just one metric and has no idea what that metric represents.
Source: www.frankwatching.com
