MER (Margin Efficiency Ratio) and ROAS (Return on Ad Spend) are commonly used metrics for evaluating marketing effectiveness, but they are severely flawed. Here are the 4 things you absolutely need to know and the one metric no one is talking about, that will help you unlock growth and scale for years!
Firstly, customer journeys are unique, and no two people make purchasing decisions in the same way.
Secondly, business goals change periodically, which affects how much weight different factors such as costs, lifetime value, revenue floor, and customer journey have in the overall picture.
Thirdly, MER and ROAS do not take into account all the necessary data points, such as product cost, shipping, taxes, and overhead expenses.
Finally, they do not address the changing needs of a business, which may focus on maximizing profits, revenue, customer growth, or saving money at different times.
What you NEED TO FOCUS ON is PSM (Profitable Scaling Margin), which is a comprehensively more powerful way to evaluate marketing efficiency.
MER (Marketing Efficiency Ratio) and ROAS (Return on Advertising Spend) are popular performance metrics used by marketers to evaluate the effectiveness of their advertising campaigns. However, these metrics have limitations and do not provide a comprehensive view of a company's marketing performance.
One of the major limitations of MER and ROAS is that they lack actionability, meaning they don't provide enough information for marketers to make meaningful decisions and improvements. This is because these metrics only provide a narrow view of the marketing performance, and do not take into account important factors that influence the success of a marketing campaign.
For example, MER and ROAS do not take into account costs, which are an essential part of determining the profitability of a marketing campaign. These costs can include things like product production, personnel costs, and other overhead expenses. Without considering these costs, it's difficult to determine if a marketing campaign is actually profitable.
Another important factor that MER and ROAS do not take into account is the revenue floor, which is the amount of revenue a company makes without marketing. A high MER or ROAS does not necessarily mean a marketing campaign is profitable, and marketers need to take into account the revenue floor to determine if a marketing campaign is actually generating a positive ROAS.
Lifetime value (LTV) is another important factor that MER and ROAS do not consider. LTV is a measure of the total amount of revenue a customer will generate for a company over the course of their relationship with the company. This is an important factor to consider when evaluating the long-term impact of a marketing campaign.
Finally, MER and ROAS do not take into account changing business objectives, which can impact the success of a marketing campaign. For example, if a company changes its target audience or shifts its focus to a different product line, the impact of a marketing campaign may change, and MER and ROAS may no longer provide an accurate picture of the marketing performance.
Profitable Scaling Margin (PSM) is a metric that aims to provide a more complete picture of the profitability of a business by considering key factors such as costs, lifetime value (LTV), and acquisition costs. It is designed to address the limitations of MER (Marketing Efficiency Ratio) and ROAS (Return on Ad Spend), which can be limited in their ability to provide actionable insights into a business's financial performance.
PSM is calculated as the ratio of lifetime value (LTV) to the sum of cost of goods sold (COGS) and cost per acquisition (CPA). LTV represents the total value a customer is expected to bring to the business over the course of their lifetime as a customer, while COGS and CPA are expenses associated with acquiring and serving each transaction with that customer.
By taking into account the costs associated with acquiring and serving customers, PSM provides a more accurate picture of the profitability of a business. It helps businesses to understand the impact of their marketing and sales efforts on the bottom line, and to make more informed decisions about how to allocate their resources.
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