Media Efficiency Ratio (MER) & Return on Ad Spend (ROAS): What are They & What’s the Difference?

A Definitive Guide with Northbeam

In the ever-evolving landscape of digital marketing, metrics are the compasses that guide marketers toward success. Two of these crucial metrics are Media Efficiency Ratio (MER) and Return on Ad Spend (ROAS). While both metrics aim to assess the Return on Investment (ROI) of marketing efforts, they offer distinct insights and serve different purposes in a marketing strategy. This blog post will delve into the differences between MER and ROAS, how they are calculated, and when to use each to benchmark success.

What is Media Efficiency Ratio (MER)?

MER stands for Media Efficiency Ratio. It is a broad measure that looks at the total revenue generated versus the total advertising spend over a specific period. Simply put, MER is calculated as:

MER = Total Advertising ÷ Spend Total Revenue​ 

MER provides a macro view of advertising performance, primarily focusing on cash flow—money in versus money out. It does not take into account the time it takes for a customer to convert after seeing an ad, known as conversion lag. Therefore, MER is often used in scenarios where understanding immediate cash flow impact is crucial, such as in cash accounting frameworks where revenues and expenses are recognized when they are received or paid. Brands like HexClad are using Northbeam to scale their ad spend by 100%, and improving their MER substantially in the process.

What is Return on Ad Spend (ROAS)?

ROAS stands for Return on Ad Spend. Unlike MER, ROAS provides a more granular look at the efficiency of specific marketing campaigns. It measures the amount of revenue each dollar of ad spend brings in, regardless of the time horizon. ROAS is often calculated at a cohort level, tracking the revenue attributed to a campaign over time. Here's a typical example of how ROAS might evolve:

1. Day 1 (Campaign launch): $100,000 spent, $0 revenue = 0 ROAS
2. Day 2: $75,000 revenue earned, ROAS = 0.75
3. One week later: $150,000 revenue, ROAS = 1.5

This metric is particularly useful in accrual performance accounting, where revenues and expenses are recognized when they are incurred, regardless of when the money is exchanged. ROAS includes considerations of conversion lag and is seen as a dynamic, ongoing measure of campaign performance.

Key Differences Between MER and ROAS

• Scope of Measurement: MER measures the overall efficiency of all media spending against total revenue, providing a high-level view of financial health. ROAS, however, measures the efficiency of specific campaigns and is more precise in determining the effectiveness of individual marketing initiatives.
• Accounting Frameworks: MER is more aligned with cash accounting principles, where the focus is on immediate financial impact. ROAS fits well within accrual accounting, allowing businesses to assess the long-term value of their advertising efforts.
• Incorporation of Conversion Lag: MER does not consider conversion lag, making it a straightforward, albeit less nuanced, metric. ROAS accounts for conversion lag, offering a more detailed and accurate portrayal of how ad spend converts into revenue over time.

Practical Application of MER and ROAS

When it comes to practical applications, the choice between MER and ROAS often depends on the business context:

• Short-Term Financial Planning: Businesses looking for immediate insights into cash flow may prefer MER. It helps in quick assessment and is beneficial for companies managing tight cash flows.
• Long-Term Strategic Planning: Companies focused on long-term growth and the effectiveness of specific marketing strategies should lean towards ROAS. It helps in understanding which campaigns are truly profitable over time.

Where to Find MER and ROAS in the Northbeam Dashboard

For businesses using Northbeam for their marketing analytics, both MER and ROAS can be found on the Overview Page under different accounting modes:

• MER: Located under the Cash Accounting section, reflecting advertising ROI in real-time cash flow terms.
• ROAS: Found under Accrual Performance, showing advertising ROI over time with conversion lags considered.

So, which metric do I choose?

Choosing between MER and ROAS depends significantly on your business needs and the specific financial and strategic insights you require. While MER offers a quick snapshot of financial health, ROAS provides a deeper dive into the effectiveness of your marketing investments over time. By understanding and utilizing both metrics appropriately, marketers can optimize their campaigns to achieve the best possible ROI, aligning their strategies with both immediate financial realities and long-term business goals.

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