In this session we break apart Marketing Efficiency Ratio (MER) and explore how we can use incremental MER to determine how to scale a brand.
Separating Retained vs New Customer Revenue
Revenue from retained customers should have little association with ad spend. The goal is to maximize retained revenue without overspending and without compromising future pricing power by running deep discounts (meaning, we want to keep our existing customers but we want to do so without just sending promotions).
Determining ideal spend on acquired customer revenue is trickier.
Unlike retained customers, you aren’t just mitigating costs. Rather, ad costs are a significant part of acquiring a customer. Since this is where the lion’s share of spend goes, it’s the most important part of the MER equation — making sure that each new dollar you spend on acquisition is profitable.
Customer Acquisition (nMER)
New Customer Marketing Efficiency Ratio (nMER) is calculated by dividing New Customer revenue by total ad spend. You can calculate this by analysing new-customer, first-time orders via Shopify.
New Customer Revenue divided by Total Ad Spend equals nMER.
However, there is an important trade-off for getting new customers. More customers means generally less efficiency for most brands. This means that the more you spend on acquiring New Customers, the lower the nMER. Think of it this way, oftentimes your Conversion Rate will decrease as you capture more and more of your target audience (say in Facebook). This decrease in Conversion Rate means less efficiency with each dollar spent. However, the data hides an important caveat; it’s only showing us the mean average of the total ad spend.
Put differently, not every single dollar is effective in the same way. Some are more effective than others. Some audiences, campaigns, or platforms are more effective than others.
We call this a Blended nMER. (bnMER)
To break this number down further to understand the marginal impact of new ad dollars. Essentially, we need to know which of those dollars are the ones that are working the best.
This is why we look at Incremental nMER (inMER)
Understanding Incremental nMER:
Incremental nMER measures the performance of each additional ad dollar. You can think of increments as every extra little bit (or dollar, in our case). For the same example, rather than looking at total spend and examining its efficiency — blended nMER (light blue line) — we’ll add the Incremental inMER per incremental investment.
Blended bnMER = Total new revenue / Total ad spend
Incremental nMER = Incremental new revenue / Incremental ad spend