How much of each order can I spend on ads?

"How much should I spend on ads?" is the question that decides whether your ads grow the shop or drain it. The answer should not come from what feels comfortable or from what a friend spends. It should come from what each order actually leaves behind.

Start with contribution per order

Contribution is the money left from one order after the costs that come with that order: product cost, packing, shipping, payment fees and any discount. It is what is available to pay for ads, your rent and your own time.

Say a skincare set sells for Rs 899 and, after all those costs, Rs 300 is left. That Rs 300 is your contribution per order.

Decide what share ads may take

You do not want ads to eat all of it. If they do, nothing is left for overheads, tools, returns or yourself. A simple rule is to let ads take at most half of the contribution, and keep the rest.

• Contribution per order is Rs 300.
• Half is Rs 150.
• So your cap on ad spend per order is Rs 150.

That means every new order you get from ads should cost you no more than Rs 150 in ad money. If the cost per order from ads creeps above that, you are paying more than your rule allows.

You can choose a different share. A new shop building awareness might allow 70 percent for a few months. A shop with a lot of repeat buyers might allow it too, because later orders cost nothing. A shop with thin margins and little repeat business should go lower. The point is to choose the share on purpose.

Work backwards to a monthly budget

Now suppose you want to set aside Rs 15,000 a month for ads. With a cap of Rs 150 per order, that budget needs at least 100 orders from ads to make sense.

• Rs 15,000 divided by Rs 150 is 100 orders.

If your ads bring only 60 orders for that money, the real cost per order is Rs 250, well above your Rs 150 cap. You are spending beyond your rule, so you should either lower the budget, improve the ad, or raise prices. If they bring 120 orders, the cost is Rs 125 per order and you are inside the rule.

So the budget is not a number you pick first. It follows from contribution, share and the number of orders you can realistically get.

Be careful with the inputs

Your contribution figure is only as honest as the costs you include. Leave out returns, packaging or payment fees and your cap will be too generous. contribution-margin-per-order-worked-example shows how to build the number properly. If COD refusals are common in your orders, count them too, as cost-of-one-refused-cod-order explains.

Where this leads

Once you know the cap per order, ads become easier to judge. Look at your cost per order once a week. If it is under the cap, you can consider spending more. If it is over, pause the weakest ad, do not just trim everything.

For a related question, how many orders you need before ads break even, see break-even-orders-including-ad-spend.

Quick recap

1. Contribution per order: Rs 300 in our example.
2. Share ads may use: half.
3. Ad cap per order: Rs 150.
4. Monthly budget divided by cap gives the orders needed: 100 for Rs 15,000.

Four lines of arithmetic, and your ad budget stops being a guess.