The marketing expense ratio calculates the ratio of total marketing expenses to total sales revenue. It measures what percentage of revenue is spent on marketing efforts. For example, if a company spent $100,000 on marketing last year and had total sales revenue of $1 million, their MER would be 10% ($100,000 marketing spend divided by $1 million in sales).
The formula for calculating marketing expense ratio is:
MER = Total Annual Marketing Expenses / Total Annual Sales Revenue
The marketing expense ratio provides companies with some key insights:
- Efficiency of marketing spend - The MER shows how much money is invested into marketing to generate sales. A low MER indicates marketing spend is efficient in generating revenue. A high MER means too much money could be going to marketing compared to revenue generated.
- Benchmarking - Companies can use their MER to benchmark against their own historical performance or compare to industry averages. For example, an MER of 20% may be typical for some direct-to-consumer ecommerce companies but too high for a business-to-business company.
- Areas needing improvement - If the MER is too high, it may indicate excessive spending on certain activities or the need for better targeting to improve results. Looking at different marketing channels can help identify less efficient areas.
In summary, the marketing expense ratio is a simple but useful metric for gauging the productivity and efficiency of marketing investments. Tracking it over time and comparing to benchmarks allows companies to hone their marketing approach and spending levels. A “good” ratio depends largely on the industry and growth aims at a company. But maintaining an MER within reasonable parameters helps ensure marketing dollars are effectively supporting sales.
