A practical rule of thumb is to set ad spend as a percentage of gross profit, not revenue.
Simple starting point
For many businesses:
Monthly ad budget ≈ 10–20% of monthly revenue
…but adjust that based on your gross margin:
| Gross margin | Reasonable starting ad spend |
|---|
| 20–30% | 3–8% of revenue |
| 30–50% | 5–12% |
| 50–70% | 10–20% |
| 70%+ | 15–30%+ |
The key question is whether your contribution margin after advertising is attractive.
A better way to calculate it
Suppose you have:
- Revenue: $100,000/month
- Gross margin: 60%
- Gross profit: $60,000
- Operating expenses before advertising: $40,000
If you spend $10,000 on ads, you're effectively spending 16.7% of gross profit to acquire that revenue.
I'd generally increase spend when:
Incremental gross profit from additional customers > ad spend + variable fulfillment costs + required overhead.
For a subscription business, use LTV:CAC rather than a simple revenue percentage. A common target is roughly 3:1 LTV:CAC, with CAC payback ideally within 6–12 months, depending on your cash position and growth objectives.
My rule of thumb
If you don't have enough data yet, start around 10% of revenue, measure CAC and contribution margin carefully, then increase the budget in 20–30% increments as long as the incremental economics remain healthy.
Don't ask, "Can we afford 10% of revenue on ads?" Ask, "What does the next $1 of advertising generate in contribution profit?" That's the number that ultimately determines how far you should scale.
