How to set your ad budget from your margin, not your revenue

Most of the brands I see come through the door think the same way. They tell themselves "I'll put 20% of my revenue into ads" or "I want a 4 ROAS", and off they go. Except they've never actually put their real margin down on paper. So they're flying blind on their budget. They can overinvest and quietly kill their profitability without realising it, or do the opposite, underinvest and leave money on the table.

The % of revenue is still the most common shortcut in eCommerce. And it's also one of the biggest steering mistakes I see.

How to set your ad budget without starting from revenue

The % of revenue tells you nothing about what's left at the end. You can run a cost of 20% (cost is just the ratio between your ad spend and your revenue, one line in your P&L) and end up at 1% net margin. That's not great. The number looks clean, but behind it there's nothing but desert.

I've seen accounts where everyone was happy because the cost held up, and when you walked the P&L line by line, there was almost nothing left. Revenue went up, profitability didn't follow.

ROAS is even worse. It gives you a platform-level view (what Meta or Google claim credit for) when what actually matters is what genuinely lands in your bank account. Steering on platform ROAS alone distorts everything. It overstates the contribution of ads and blinds you to the real result of your site.

Here's a take I'll stand behind: until you've mapped out your real margin, every budget decision you make is a bet, never an actual decision. That's why an ad budget isn't set before you've laid out your margin. It follows from it.

The P&L first, the budget second

Before spending a single euro on paid, you build (or rebuild with the brand) the P&L. And I mean a real P&L, exhaustive, not an estimate thrown together in a meeting.

You start from the top line, your digital revenue, and work your way down by stripping everything out. You take out COGS (the cost of your products), the shipping costs you pay and bill, packaging, shoots, internal team salaries, rent and fixed costs. And even the cost of leadership when you really want to go all the way.

This answers a question I get asked a lot, which cost lines to include in the calculation. The answer: everything, except ads. The idea is to get a crystal-clear snapshot of what's really left once everything has been accounted for. You leave one single variable aside, media spend. You deliberately set it to one side.

And for good reason: it's the one that's going to become your steering variable.

A worked example of an ad budget

An example. You strip everything out of your P&L except ads, and you're left with a 25% margin. Now you ask yourself one question, the one that really counts: how much net profitability do you want to keep at the end of the year?

Let's say you want to keep 10% net. The math becomes obvious. You've got 25% of margin available, you want to keep 10, so you can allocate 15% of your revenue to advertising.

That's your budget. It doesn't come from an industry average, or a % lifted from a competitor. This number comes straight out of your cost structure and your profitability target.

Without this work, you don't know whether to put 15, 20 or 25% into ads. You're winging it. And winging it on your single biggest spend line when you're running acquisition is exactly how you finish the year in the red without understanding what happened.

And if you're starting with a tight budget, the logic doesn't change. The available margin is just thinner, so the % you can allocate is lower. You put in less, but what you put in is profitable. Better to push a single channel cleanly than to sprinkle across three platforms and read nothing clearly anywhere.

Steering on cost, or how to become autonomous on your budget

Once you've got your ratio, say 15%, it becomes your day-to-day rule. This is what I call steering on cost.

The principle is simple. At 15%, we invest comfortably. If cost drops below that, we're profitable and we can push harder. If it climbs above, we ease off until we're back inside the lines.

What this really changes is autonomy. You no longer have to ask yourself every morning "can I spend more today". The ratio answers for you. If cost drops and things are running well, you scale up, scale up, scale up, knowing you'll never end up degrading your year-end profitability. And if it tightens, you ease off.

It's also your answer when a channel acts up or something unexpected hits you. You don't panic over one specific platform, you look at the overall cost. As long as it holds, you can reallocate. If it overflows, you cut first whatever is pulling the ratio up. The ratio is your continuous adjustment signal, not just a number you set once a year.

Two guardrails I always add. First, you look at cost across all your ad spend relative to your total revenue, not platform by platform. If you spend 20,000 euros across Meta and Google, you don't look at what each platform claims on its own, you take the global view of the site. That's the only way to get a number that means something.

Second, on revenue itself, you use net sales. That's gross sales minus discounts, minus returns. Because on those variables you still have levers, you can work your traffic, your conversions, your returns. Using gross would have you steering on revenue that's going to disappear.

Where this sits in our process

This P&L exercise is the very first thing we do, and it's the most important. It kicks off our audit phase, which runs 14 business days.

During that phase, we don't just do the margin. We also look at the eCommerce funnel in detail (from landing on the site to add-to-cart, to the checkout page, through to conversion), channel-by-channel performance, the whole acquisition side, and the customer base: what it's worth, how it behaves.

But everything starts with the margin. Because the funnel, acquisition, retention, all of it only makes sense if you know how much you can afford to spend to go land a customer. And only the P&L tells you that.

To give you a benchmark, in one of my past roles in publishing, average spend ran around 20% of revenue in paid. Take that as a reference point, definitely not as a rule. Your own margin might give you 12%, might give you 28%. Which is exactly why you calculate it yourself, instead of borrowing a number from next door.

What you can do this week

Margin trumps revenue. Full stop. A paid spend has to stay profitable.

Before your next budget increase, rebuild your P&L by stripping out every cost line except ads. Look at what's left, your available margin. Decide on the net profitability you want to keep. The difference is your max ad budget, expressed as a % of revenue. Then you steer on cost against your net sales, in a global view, not platform by platform.

Until you've done that, you're spending blind. You don't know where each euro is going.