How to Set Your Advertising Budget
Setting the right advertising budget is a balance between ambition and profitability. Too little and you can't gather meaningful data. Too much and you risk unprofitable spending.
The goal-based approach works backwards from your revenue target:
For example, if you want to grow from $30,000 to $50,000 monthly revenue with 4:1 ROAS, you need ($50,000 - $30,000) / 4 = $5,000 monthly ad budget.
This approach ties budget directly to business objectives, making it easier to justify and evaluate advertising investment.
Common Advertising Budgeting Methods
Percentage of Revenue
Many businesses allocate 5-20% of revenue to advertising. This scales with the business but may limit growth in early stages when revenue is low.
- Conservative: 5-10% of revenue
- Moderate: 10-15% of revenue
- Aggressive: 15-25% of revenue
Goal-Based Budgeting
Start with revenue goals and work backwards based on expected ROAS. This is the approach used in this calculator. It directly ties spending to business outcomes.
Competitive Parity
Match or exceed competitor ad spending. Useful for maintaining market share but requires competitive intelligence that can be difficult to obtain.
Profit-First Budgeting
Calculate maximum spend that maintains target profit margins. This ensures profitability but may limit growth opportunities.
Testing Budget vs Scaling Budget
Your budget allocation should differ based on whether you're testing new approaches or scaling proven campaigns.
Testing Budget
When testing new audiences, creative, or channels, you need enough budget to gather statistically significant data. A common rule is 50 conversions minimum per test variant.
If your CPA is $50 and you're testing 3 ad variants, you need roughly 3 x 50 x $50 = $7,500 for meaningful test results.
Scaling Budget
Once you've identified winning campaigns, increase budget gradually (15-20% per week) to maintain efficiency. Rapid budget increases often lead to performance drops as algorithms struggle to adapt.
Budget Split
A common split is 80% on proven performers and 20% on testing new approaches. This balances reliable returns with ongoing optimization and learning.
How to Allocate Budget Across Channels
Distribute budget based on channel performance, audience presence, and business goals.
Start Where Your Customers Are
Prioritize channels where your target audience spends time. For younger demographics, this might be TikTok and Instagram. For professionals, LinkedIn and Google Search.
Allocate by Funnel Stage
- Top of funnel (awareness): 20-30% on discovery channels
- Middle of funnel (consideration): 30-40% on retargeting
- Bottom of funnel (conversion): 30-50% on high-intent channels
Performance-Based Reallocation
Review channel performance monthly and shift budget toward best performers. Don't abandon channels too quickly though. Give each at least 2-3 months of optimized spending before making major cuts.
Common Ad Budgeting Mistakes
Starting Too Small
Budgets too small to generate meaningful data lead to poor optimization and false conclusions. If you can't afford enough spend for at least 10-15 conversions per week, you may need to focus budget on a single channel or wait until you have more resources.
Inconsistent Spending
Frequent budget changes confuse platform algorithms and hurt performance. Set budgets and maintain them for at least 1-2 weeks before making adjustments.
Ignoring Seasonality
Plan for seasonal fluctuations in CPMs and competition. Q4 costs are significantly higher for most eCommerce. Budget more for peak seasons when competition and costs increase.
Not Accounting for Testing
All budgets should include a testing component. Successful advertisers continuously test new creative, audiences, and approaches. Build this into your monthly budget.
Frequently Asked Questions
Most eCommerce businesses spend 5-20% of revenue on advertising. New brands often spend higher (15-25%) to acquire initial customers, while established brands with strong organic traffic may spend less (5-10%). The right percentage depends on your margins, growth goals, and competitive landscape.
A reasonable starting budget for Facebook Ads is $1,000-3,000 per month. This provides enough data for optimization while limiting risk. Ensure you can run at least 2 weeks continuously before evaluating performance. Smaller budgets can work but require more patience for data collection.
A common starting split is 60% Facebook (for discovery and brand building) and 40% Google (for capturing search intent). Adjust based on performance data. High-intent products often perform better on Google, while visually appealing or impulse-buy products may do better on Facebook.
Yes, but gradually. Increase budget by 15-20% per week when ROAS is strong. Rapid increases (doubling overnight) often hurt performance as algorithms struggle to adapt. Monitor closely after increases and be prepared to scale back if efficiency drops.
Consider cutting if ROAS falls below your break-even point for 2+ consecutive weeks, you're not seeing improvement from optimizations, or cash flow requires it. Before cutting entirely, try reducing spend and focusing on best-performing campaigns. Sometimes a smaller, more focused budget performs better than a larger spread one.
References
- Shopify - How to set and manage your marketing budget for eCommerce.
- Meta Business - Understanding Facebook ad costs and budgeting.
- Google Ads Help - Setting and managing advertising budgets in Google Ads.
