What Should My MER Goal Be & Why?

Question

Accepted Answer

Can You Remind Me What MER Is?

It’s essentially a business’ overall ROI from its media spend. (Media spend is usually synonymous with ad spend in the world of small eCommerce businesses, unless you print flyers or have other promotional expense that will scale as the business scales).

It stands for “Media Efficiency Ratio” and it divides the business’ total, gross revenue by its total media costs.

What Should My MER Goal Be?

The simple, two-step answer is this:

Step 1:

How many times does your profit margin go into 100? That’s your break-even MER.

By the way, we're using this calculation for profit margin = (Net revenue - Costs) / Net Revenue

Costs should include anything that will scale with each additional sale (i.e. COGs, fulfillment costs, & taxes)

Step 2:

Want to make more than just break-even so you can pay your bills? Tack on an extra 10%-30% and that’s your MER goal!

But Why?

The best way to understand why is with an example.

Let’s say an eComm business has an average profit margin of 30%. This means one third of the revenue is kept while two thirds of the revenue goes towards paying for COGs & fulfillment.

So, step 1:

Thirty goes into one hundred 3.33 times. So the break-even MER for this business would be 333%. Meaning this business needs to make 3.33X more revenue than what is spent on ad spend in order to break even.

When this business spends $10 on ad spend and breaks even, it means they made $33.30 in revenue (which is a 3.33X return). But remember, this company’s profit margin averages 30%. That means they only get to keep 30% of the $33.30 they made, or $9.99.

They are breaking even at about $10 spent and $10 made.

Now, step 2:

Let’s say they want 20% more than that to cover their bills. Then they’d go for a 353% MER (a 3.53X return).

So when they spend $10 on ads and make $35.30 in revenue (which is a 3.53X return), they get to keep $10.59 (aka 30% of $35.30).

Now they’re breaking even plus making an additional 59 cents each time they bring in $35.30 in revenue, which they can use to cover overhead and salaries.

Why Don't I Want My Goal To Be Higher Than That?

The higher the return you want to make on each sale, the less of the market you'll be able to capture.

This happens because, if you want a higher return, then you need to spend less and make more. The problem with this is that Google Ads is an auction system, and the cost per click is pretty "set." Meaning, whatever your competitors can afford to pay for a click, is what you need to also be able to afford to pay for a click. But if you want a return that's significantly higher than what your competitors are going for, then you won't be able to pay for a click that costs as much as they can.

Sales funnels always have folks at the "bottom of the funnel" who have their wallet-in-hand, and folks at the "top of the funnel" who aren't ready to buy yet. And so the people who aren't ready to buy are going to be more expensive. They'll need to click on 2 or 3 ads before converting. Some of them won't ever convert, etc. There's also people who will have a lower average cart value than other people. So, if you tell the algorithm "I only want the ones who are cheap to acquire and who spend a lot of money with me" then you're cutting out part of your market.

This is why a high goal will limit your ad spend & stop the account from growing. You won't be able to scale sales & the business will stay small.

Shouldn't I Factor In Repeat Purchases (Returning Customers)?

If you have returning customers making repeat purchases, it makes it easier for you to hit your MER goal.

But it doesn’t change your MER goal.

Keep in mind: Those customers will come back after some amount of time, so the MER will go up when that happens. This makes the MER goal an easier target for a business only after it’s able to get those repeat purchases in.

The positive consequence of this is that you get to grow your ad account (increase budget) & grow your business (increase sales/revenue) more quickly (and, eventually, more vastly than your competitors can). Have a higher repeat purchase rate than your competitors? You win the game! You have more power to win in the bidding/auction system that is digital ads, because you can afford to pay more to acquire a new customer (higher CPC) since you’ll get more revenue later from each of them.