How to Set Google Ads Budgets Commercially
"Spend 10% of revenue on marketing" sounds sensible until you realise it ignores margin, competition, and growth stage. Here's a better approach.
The Budget Problem
Common budget-setting approaches are fundamentally flawed:
- Percentage of revenue: Ignores that 10% of a high-margin sale is very different from 10% of a low-margin sale
- Last year plus growth: Assumes last year's spend was optimal, which it probably wasn't
- Competitor matching: Assumes competitors have figured it out, which they probably haven't
- Available cash: Leads to either overspending or underspending based on unrelated factors
The Right Question
Not "How much should we spend?" but "How much can we spend profitably?" and "How much more profit do we want to buy?"
Commercial Framework
Commercial budgeting starts with profit, not revenue:
- Determine break-even ROAS: What ROAS do you need to cover COGS, fulfilment, and overhead? This is your floor.
- Set profit targets: How much margin do you want from each sale after ad costs? This determines target ROAS.
- Estimate addressable market: How much conversion value is available at your target ROAS?
- Calculate budget: Target conversion value divided by target ROAS equals your budget.
Margin-First Budgeting
Different products have different margin profiles, which means different budget capacity:
- High-margin products can sustain lower ROAS and higher ad spend per sale
- Low-margin products need higher ROAS, limiting how much you can bid
- Blended budgets hide that you're overspending on low-margin and underspending on high-margin
The Margin Map
Calculate break-even ROAS by product category or margin tier. This shows where you have budget headroom and where you're already at the limit.
Scaling Logic
Budgets should increase when additional spend is profitable, not based on calendar or arbitrary targets:
- Increase budget when: Marginal ROAS exceeds your break-even threshold
- Hold budget when: Marginal ROAS equals target (optimal point)
- Decrease budget when: Marginal ROAS falls below break-even
The key is measuring marginal performance, not average performance. Average ROAS can look healthy while marginal spend is loss-making.
Practical Process
A quarterly budget review process:
- Calculate current marginal efficiency: What's the ROAS on the last 10-20% of spend?
- Compare to break-even: Are you above or below the profitability threshold?
- Adjust accordingly: Increase if above, decrease if below, hold if at target.
- Review by segment: Apply this logic separately to campaigns or product categories with different margins.
The Review Cadence
Monthly monitoring, quarterly adjustments. More frequent changes disrupt algorithm learning. Less frequent misses market shifts.
Next Steps
Calculate your break-even ROAS by product category. This gives you the foundation for commercial budgeting based on profit capacity rather than arbitrary percentages.