Solved: Realistic Profit Margin Before Ads Needed for Success

Hi there,

Thanks for reaching out. I've had a look at your situation and I can see why you're frustrated. It’s a common problem, feeling like you’re just throwing money into a black hole with ads, especially when you're looking at your margins and seeing a number like £26.

But I'm going to be brutally honest with you from the start: you're looking at this problem completely the wrong way. Your pre-ad profit margin is almost irrelevant. The fact you're focused on that, and on surface-level metrics like CPC and CPM, is the real reason you feel like it's impossible. It's not. You just need to change the entire way you think about the numbers. The answer isn't about how small your costs are, it's about how big your return is, and understanding what a customer is actually worth to you over the long term. I'll walk you through how we get clients to profitability, even with what seems like tight margins.

You probably should stop focusing on pre-ad margins...

Right, let's get this out of the way first. That £26 pre-ad profit figure you're fixated on? It's a distraction. It's causing you to make decisions based on fear and a misunderstanding of how paid advertising actually works when it's done properly. You see a high CPC, you look at your £26, and you panic. It's a natural reaction, but it's the wrong one.

Thinking about pre-ad profit is like a shop owner worrying about the cost of the electricity bill for their lights, without considering how many customers those lights are attracting into the store to buy things. The cost is only one half of the equation, and frankly, it's the less important half.

The real question you need to be asking isnt "Is my £26 margin enough?". The real question is "How much can I afford to spend to acquire a customer who will make me profitable in the long run?". These are two completely different questions. The first one leads to paralysis and cutting ad spend. The second one leads to intelligent, scalable growth.

High CPCs and CPMs are often just a reality of the market, especially in competitive ecommerce niches. You can't control the auction prices directly. What you *can* control is who you show your ads to, what you say to them, and how much value you extract from them once they become a customer. When we run campaigns, we sometimes see very high CPCs, but the campaigns are wildly profitable. I remember one client selling cleaning products, their CPCs weren't the lowest we'd ever seen, but we generated a 633% return for them. Why? Because we focused on the return, not the initial cost.

You're playing a game of defence, trying to protect your little £26 margin. You need to switch to a game of offense. Your goal is not to spend as little as possible. Your goal is to acquire customers profitably. If you could spend £50 to acquire a customer who, over their lifetime, would generate £200 in profit for you, would you do it? Of course you would. You'd do it all day long. In that scenario, your initial £26 margin doesn't even enter the conversation. You've got to shift your mindset from cost-cutting to value-generation.

We'll need to look at your Customer Lifetime Value (LTV)...

This is where things get serious. If you dont know this number, you are flying completely blind and you will almost certainly crash. Forget CPC, forget CPM for a minute. The single most important metric you need to understand is your Customer Lifetime Value (LTV). This number tells you what a customer is actually worth to your business, not just from their first purchase, but over the entire time they shop with you.

Once you know your LTV, you know how much you can afford to spend to get a customer (your Customer Acquisition Cost, or CAC). Without it, you're just guessing. Most businesses that fail with paid ads fail right here.

Let's do a bit of maths. It's simpler than it sounds, and you absolutly have to do this. There are three bits you need:

1. Average Revenue Per Account (ARPA): This is just the average amount a customer spends with you in a given period, let's say a month. If you sell one-off products, you can calculate the average order value and then estimate how many times a customer might buy from you in a year.

2. Gross Margin %: You already have a handle on this. If your product sells for, say, £55 and your pre-ad profit is £26, then your gross margin is about 47% (£26 / £55). We'll use this.

3. Monthly Churn Rate: This is the percentage of customers you lose each month. For a one-off purchase business, this is a bit trickier, but you can think of it as the inverse of your repeat purchase rate. If 20% of your customers buy again within a year, your annual churn is 80%. Let's say for this example your monthly churn is 5% (meaning a customer sticks around on average for 20 months).

Now, the formula looks like this:

LTV = (ARPA * Gross Margin %) / Monthly Churn Rate

Let's plug in some hypothetical numbers based on your situation. Let's assume your average customer spends £55 a month (or equivalent over the year).

LTV = (£55 * 0.47) / 0.05

LTV = £25.85 / 0.05

LTV = £517

Suddenly, things look very different, dont they? In this hypothetical scenario, each customer you acquire is worth £517 in gross margin to your business over their lifetime. This is your war chest. This is the number that tells you how much firepower you have for advertising.

A healthy business model often aims for a LTV:CAC ratio of at least 3:1. This means you have a buffer for other business costs and still make a healthy profit. So, with an LTV of £517, you can afford to spend up to £172 (£517 / 3) to acquire a single new customer.

Now think about your high CPCs again. Let's say it takes 50 clicks at a CPC of £2.50 to get one sale. That's a CAC of £125. Looking at your initial £26 margin, that looks like a disaster. You've spent £125 to make £26. But looking at your LTV, it's a huge win. You've spent £125 to acquire an asset worth £517. You would be mad *not* to make that trade.

This calculation is the absolute foundation of any successful ad strategy. You must work out your own numbers. Guess if you have to at first, but get a number down. It will change everything.

I'd say you need to switch your focus from costs to returns...

Now that you understand that you can potentially afford to spend much more than £26 to acquire a customer, let's talk about the metric that actually measures the performance of your ad spend: Return On Ad Spend (ROAS).

ROAS is simply the amount of revenue you generate for every pound you spend on advertising. It's calculated as:

ROAS = (Revenue from Ads / Ad Spend)

If you spend £100 on ads and generate £500 in sales, your ROAS is 5x (or 500%). This is the number that matters. A high CPC is irrelevant if your ROAS is high. A low CPC is useless if your ROAS is low. You could have a CPC of £0.10, but if none of those cheap clicks ever convert into a sale, your ROAS is 0 and you're just burning money slowly.

Your job isn't to get the lowest CPC. It's to get the highest ROAS. This means finding the people most likely to buy, and buy repeatedly, even if it costs a bit more to reach them.

This isn't just theory. We see this with our clients all the time.
-> We worked with a women's apparel brand and drove a 691% return.
-> For a subscription box client, which is all about LTV, we hit a 1000% ROAS on Meta Ads.
-> Another ecommerce client selling maps generated $71k in revenue from their ads, an 8x return.

None of these campaigns were won by obsessing over CPMs. They were won by understanding the customer, crafting the right message, and relentlessly optimising for the return. The initial ad cost is an investment, not an expense. You invest £1 to get £6 back. That's how you need to see it.

To be profitable, your ROAS needs to be above your break-even point. With your 47% gross margin, your break-even ROAS is about 2.13x (1 / 0.47). This means for every £1 you spend on ads, you need to generate at least £2.13 in revenue just to cover the cost of the goods and the ads. Anything above that is profit. So your target should be a ROAS of 3x, 4x, 5x or higher. That's the goal. That's the number to put on your wall, not your CPC.

You'll need a better way to find your customers...

Okay, so how do you actually achieve a high ROAS, especially when you feel like you're facing high costs? You do it with a structured, methodical approach to targeting and messaging. Throwing a single ad out there to a broad audience is a recipe for disaster. You need a funnel.

Most amatuers make the mistake of running one type of ad to everyone. This is incredibly inefficient. You need to speak to people differently depending on how familiar they are with your brand. We usually structure this in three stages for our ecommerce clients, mainly on platforms like Meta (Facebook/Instagram).

1. Top of Funnel (ToFu) - The Strangers:
These are people who have never heard of you. Your goal here isn't necessarily an instant sale, but to introduce them to your brand and products and get them to your website.
-> Targeting: This is where you test interests and behaviours. But you have to be clever. If you sell high-end dog collars, don't just target 'dogs'. That's massive. Target people who like specific boutique pet brands, follow famous dog influencers, or have interests in 'luxury goods' AND 'dog lovers'. Get specific. You need to define your customer by their pain or passion, not just a vague demographic. What problem are they trying to solve? Who are they trying to be? Target that.
-> The Ad: You need a message that can't be ignored. Show your product in a compelling way. Use video. Use high-quality images. Don't sell the features, sell the outcome. For the dog collar, don't sell "hand-stitched leather"; sell "the pride of having the best-dressed dog in the park".

2. Middle of Funnel (MoFu) - The Visitors:
These people have visited your website, maybe looked at a product, but didn't buy. They are interested but not convinced. Your goal is to bring them back and handle their objections.
-> Targeting: This is retargeting. You'll create custom audiences of 'All Website Visitors (last 30 days)', 'Viewed a Product Page (last 14 days)', or people who 'Watched 50% of your video ad'. These audiences are gold dust because they've already shown interest.
-> The Ad: Speak to them like you know them (because you do). Show them testimonials from happy customers. Offer a small discount or free shipping to nudge them over the edge. Show them different products from the one they looked at. Answer common questions in your ad copy (e.g., "Yes, we offer free returns!").

3. Bottom of Funnel (BoFu) - The Almost-Customers:
These people are so close. They added a product to their cart but abandoned it. They are the hottest leads you have.
-> Targeting: Create a custom audience for 'Added to Cart (last 7 days)' and EXCLUDE 'Purchased'. This is your most valuable audience.
-> The Ad: Be direct. "Did you forget something?" Show them the exact product they left in their cart using a dynamic product ad. Create a sense of urgency. "Stock is running low" or "Your cart expires soon". This is where you convert that hesitation into a sale.

By structuring your campaigns this way, you spend your money much more efficiently. You use the more expensive, broader ToFu campaigns to feed your highly-profitable MoFu and BoFu retargeting campaigns. And critically, you MUST set your campaign objective to 'Conversions' or 'Sales'. Do not use 'Reach' or 'Brand Awareness'. You're telling the algorithm to find you buyers, not just cheap eyeballs. This alone can make a huge difference to your costs and results.

This is the main advice I have for you:

I know this is a lot to take in. It's a fundamental shift from what you've been doing. To make it clearer, I've put the entire strategy into a simple table. This is the roadmap. If you follow this, you'll stop worrying about your £26 margin and start building a genuinely profitable business with paid ads.

Executing this strategy correctly takes work, experience, and constant testing. You need to get the numbers right, build the audiences correctly, write compelling copy, and analyse the data to know which ads to scale and which to kill. It's very easy to make small, costly mistakes along the way.

This is where professional help can make a huge difference. An expert can implement this kind of robust strategy far quicker and more effectively, avoiding the expensive trial-and-error phase that sinks so many businesses. We've done this for dozens of ecommerce companies, taking them from a place of frustration just like yours to achieving returns of 600%, 800%, or even 1000%.

If you'd like to get on a quick, no-obligation call, we can offer a free consultation where we can look at your specific numbers and ads and give you some concrete advice on how to turn things around. It might be the most valuable 20 minutes you spend on your business this year.

Regards,

Team @ Lukas Holschuh