Profit-first ad budget calculator

A profit-first ad budget starts with the profit you want to keep. Take expected sales, remove what you'll lose to discounts and returns, subtract the costs of fulfilling orders, then your fixed costs and your profit target. What's left is the most you can spend on ads, and it sets the return those ads must bring.

Most to spend on ads: $16,763
Sales you keep: $57,750
Contribution before ads: $31,763
Return needed on kept sales: 3.45x

Connect your store and Tera Ads shows your real profit after ads and returnsFree for one business, no card needed.

The formula

Sales you keep = expected sales × (1 − share lost to discounts, returns and refunds)
Contribution before ads = sales you keep × (1 − product, shipping, fees and packaging share)
Most to spend on ads = contribution before ads − fixed costs − profit to keep
Return needed = sales you keep ÷ most to spend on ads

Rates are shares between 0 and 1: 30% is 0.3.

Worked example

You expect $75,000 of sales next month and lose about 23% to discounts, returns and refunds.

Product, shipping, fees and packaging take 45% of the sales you keep.

Fixed costs are $7,500 and you want to keep $7,500 of profit.

You keep $57,750 of sales and $31,762.50 after costs, so the most to spend on ads is $16,762.50. Those ads need to bring back at least 3.45 of kept sales for each unit spent.

Questions

Why not spend a fixed share of revenue?

A rule like 20% of revenue ignores your margins and returns. Two brands with the same sales can afford very different ad budgets if one keeps 60% of each order and the other 35%.

What if the budget comes out at zero or below?

Then the profit target can't be reached at these sales and costs. Lower the target, cut fixed costs, or improve margins and returns before spending more on ads.

How do I check the ads are on track?

Each week, divide the sales you keep by ad spend and compare it with the return needed here. If it falls short, spend less or find the campaigns that lose money after returns.

The full guide

Profit-First Ad Budget: Set Spend From the Profit You Want to KeepInstead of setting ad spend as a share of revenue, start from the profit you need and work back to the most you can spend. A simple method, with returns included.