Defining your ideal ad spend is a tough job.
If you underspend, you’ll leave money on the table.
If you overspend, you’ll burn right through breakeven.
Determining your ideal ad spend figure all starts with asking yourself the right question:
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When does my next dollar of advertising stop making me money?
There’s a logical way to know it, and the necessary steps can be found below.
It starts with defining your marketing efficiency ratio, also known as MER.
What is Marketing Efficiency Ratio?
This is the ratio between total revenue and total ad spend of your business.
The easiest way to think about MER is total revenue divided by the total paid ad spend from all marketing channels.
This is a more overarching way of viewing paid advertising’s impact on revenue instead of looking at channel-by-channel metrics.
This allows for more of a 30,000-foot look at marketing efficiency instead of focusing on the ROAS of individual ads (or overreacting when ROAS drops marginally).
$20,000 in revenue on $8,000 in spend equals an MER of 2.5.
Taking the MER one step further
Most of your ad spend aims at acquiring new customers.
Therefore, to have a better view of the results generated by your ad spend, you must separate the revenue generated by new customers from revenue generated by recurring customers.
Acquisition Marketing Efficiency Rating (aMER)
This is achieved by calculating the acquisition marketing efficiency rating, aka aMER.
aMER = new customer revenue ÷ total ad spend.
But the aMER still won’t tell you exactly when your ad spend stops being profitable.
For this, you need to break the aMER down into marginal aMER and blended aMER.
And then compare the marginal aMER with your breakeven point.
- Marginal aMER = Marginal acquired revenue ÷ Marginal ad spend. This measures the relative performance of each additional ad dollar.
- Blended aMER = Total acquired revenue ÷ Total ad spend.
You’re getting close.
When you compare the marginal aMER to the blended aMER, you’ll notice that the first drops way quicker than the second.
This happens because the efficiency of every additional dollar in ad spend is dropping.
Breakeven vs. Marginal aMER
When you compare your breakeven point with your marginal aMER, you understand at which point when you increase ad spend, you start losing money, even though your blended aMER is positive.