How to set your ad budget from your P&L, not your gut
Most founders set ad budgets based on what they spent last month, what competitors spend, or what feels right. Here’s how to derive it from your actual margin structure.
Jakob Sperber
Director
Marketing
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“How much should I spend on ads?”
It’s the most common question in ecommerce marketing, and the most common answers are useless: “10–15% of revenue,” “what you can afford,” or “test and see.”
These answers are useless because they’re disconnected from the only thing that actually determines how much you can spend: your margin structure. Your ad budget isn’t a percentage of revenue. It’s a derivative of your contribution margin, your fixed costs, and your profit target. Here’s how to calculate it properly.
The framework: P&L-derived ad budget
The logic is simple: start with what you keep from each sale, subtract what you need to cover fixed costs and profit, and what’s left is what you can spend on marketing.
Step 1: Know your CM2
CM2 is your margin per order after COGS and variable costs (shipping, processing, fulfilment). If you haven’t calculated this, read our post on the ecommerce unit economics stack first.
Let’s say your blended CM2 is 54% of revenue.
Step 2: Calculate your fixed cost percentage
Total fixed costs (rent, salaries, software subscriptions, insurance, accounting) as a percentage of revenue. At your current revenue run rate, let’s say this is 18%.
Step 3: Set your profit target
What net profit margin do you want to hit? This is a business decision. Growth-stage brands might target 5–10%. Established brands might target 12–18%. Let’s say 10%.
Step 4: Calculate your marketing budget
Marketing Budget (% of Revenue) = CM2% − Fixed Costs% − Profit Target%
54% − 18% − 10% = 26% of revenue
If you’re running at $100K/month revenue, your maximum marketing budget is $26,000. Not because of a rule of thumb — because your margin structure literally can’t sustain more while hitting your profit target.
Why this is better than “10–15% of revenue”
The percentage-of-revenue approach fails because it ignores margin. Consider two brands:
Brand A: CM2 of 65%, fixed costs of 15%, profit target of 10%.
Marketing budget: 65 − 15 − 10 = 40% of revenue
Brand B: CM2 of 40%, fixed costs of 22%, profit target of 10%.
Marketing budget: 40 − 22 − 10 = 8% of revenue
If both brands followed the “spend 15%” rule, Brand A would be dramatically underspending (leaving 25 points of growth on the table) and Brand B would be overspending by 7 points (losing money every month).
The right budget is unique to your margin structure. There is no universal percentage.
Allocating the budget across channels
Once you know your total marketing budget, allocate it based on efficiency and role:
Acquisition channels (60–70% of budget)
Meta prospecting, Google non-brand search, Google Shopping, TikTok. These channels acquire new customers. Evaluate them on new customer CAC relative to your CM2.
Retention channels (15–25% of budget)
Email (Klaviyo), SMS, loyalty programmes, post-purchase flows. These channels are cheap and drive high-margin repeat purchases. Under-investing here is one of the most common mistakes.
Brand and remarketing (10–20% of budget)
Brand search, retargeting, social remarketing. These channels capture existing demand and support the acquisition funnel. They’re not acquiring new customers — they’re converting warmer audiences.
Dynamic budgeting: adjusting month to month
Your marketing budget shouldn’t be static. It should flex based on:
Seasonal margin shifts
During BFCM or sale periods, your CM2% drops (discounts compress margin). Your marketing budget percentage drops with it. If your standard CM2 is 54% but drops to 40% during a 30%-off sale, your marketing budget shrinks from 26% to 12%.
This is why blanket “spend more during BFCM” advice is dangerous. Yes, CPMs drop and demand rises. But if your margin compresses faster than your CAC improves, you’re losing money faster too.
Growth vs profit mode
If you’re willing to accept lower profit temporarily to invest in growth, you can reduce your profit target and increase the marketing budget accordingly.
10% profit target → 26% marketing budget
5% profit target → 31% marketing budget
0% profit target (breakeven growth) → 36% marketing budget
This is a legitimate strategy — but it should be a conscious decision tied to a specific growth objective, not an accidental outcome of overspending.
Revenue scale changes
As revenue grows, fixed costs as a percentage of revenue usually decrease (you don’t double your rent when revenue doubles). This frees up more margin for marketing. Recalculate quarterly to capture this leverage.
The weekly check
Once your budget is set, monitor it weekly with one question: is MER above or below my allowable MER?
MER above allowable: You have room to scale. Increase spend incrementally (10–15% per week) and watch if MER holds.
MER at allowable: You’re at the ceiling. Optimise for efficiency (creative testing, audience refinement, conversion rate) before pushing more spend.
MER below allowable: You’re overspending. Either pull back spend or fix the underlying issue (poor creative, wrong targeting, conversion drop, or margin compression from product mix shift).
Common mistakes
Setting the budget and never recalculating. Costs change. Product mix shifts. New staff get hired. Your allowable marketing budget shifts with them.
Using revenue to calculate the budget instead of margin. Revenue doesn’t pay for ads — margin does. Two brands with the same revenue but different CM2 have very different ad budget ceilings.
Not separating acquisition from retention spend. If you lump everything together, you can’t tell whether your acquisition is efficient or your retention is subsidising overspend on paid channels.
Scaling spend without watching payback. A bigger budget is fine if CAC payback holds. But if payback stretches from 30 to 90 days as you scale, you’re financing growth out of cash reserves — and that has a limit.
The bottom line
Your ad budget should be a calculation, not a guess. Start with CM2, subtract fixed costs and profit target, and what’s left is what you can spend. Track it weekly against allowable MER. Adjust monthly as costs and margins shift.
The brands that grow sustainably aren’t the ones spending the most. They’re the ones spending the right amount — derived from their actual numbers, not someone else’s rule of thumb.
