How to Set Ad Budgets That Actually Drive Profitability for Shopify eCommerce Brands
One of the most common questions we hear from eCommerce founders and operators is:
“How do we know what to spend on ads?”
Most eCommerce brands think they know the answer. In reality, they’re usually just flying blind - basing decisions on intuition, vanity metrics, incomplete dashboards, or flat out guessing. If you want to run a profitable Shopify business, you need a clear, math-driven framework for setting ad budgets.
This guide walks you step-by-step through how to calculate your ad spend using your fixed expenses, variable margin, and contribution profit. By the end, you’ll see exactly why most brands get this wrong, and how to fix it with the right analytics.
Step 1: Get Clear on Your Financial Picture
Before you can determine the right ad budget, you need to understand the two building blocks of your P&L:
- Fixed Expenses – Costs that don’t change with revenue, like rent, payroll, and insurance.
- Variable Expenses – Costs that scale with sales, like cost of goods sold (COGS), payment processing fees, shipping, and fulfillment.
From here, calculate your Variable Margin:
Variable Margin = (Revenue – Variable Expenses [excluding ad spend]) / Revenue
👉 Note: Yes, ad spend is technically a variable expense. But for the purposes of profit analytics, it’s better to treat it as its own bucket.
Step 2: Calculate Break-Even Ad Spend
Now let’s answer the real question:
“Where does my ad budget need to be to break even?”
The short answer: it depends on how effectively your ad spend drives revenue.
Here’s an example scenario:
- Fixed expenses = $60,000 / month
- Variable margin (excl. ad spend) = 65% (0.65)
- Net profit goal = $0 (break even)
- Revenue = $7,000 / day
- X = daily ad spend
The formula for net profit is:
Net Profit = Revenue – (Fixed Expenses + Variable Expenses + Ad Spend)
Rearranging for ad spend:
Ad Spend = Revenue – Fixed Expenses – Variable Expenses – Net Profit
Plugging in the numbers:
X = 7000 – (60000 / 30) – (0.65 * 7000) – 0
X = 450
✅ Translation: you need to spend $450 per day to generate $7,000/day in revenue just to break even.
That’s a 15.55 ROAS (Return on Ad Spend) or MER.
Step 3: Reality Check
Can you consistently deliver a 15.55 ROAS? Prrrrrobably not.
And that’s the point—understanding where your break-even sits forces you to be realistic about performance and profitability.
Step 4: The Complication (and the Curve)
As revenue increases or decreases, the relationship between ad spend and profit isn’t linear. It’s logarithmic (curved).
That means the break-even point moves along a curve, not a straight line. Finding the right balance requires constant recalculations as variables change.
This is where most Shopify operators get stuck. The math is heavy, involving multiple variables and second-order impacts.
Step 5: Simplify with Profit Analytics
Here’s the good news: the data you need is already in your P&L.
The challenge is extracting it, connecting it to your revenue forecasts, and turning it into actionable guidance. That’s why we built Pentane—to simplify the complex math behind ad budgets, margins, and profitability for early-stage and growing eCommerce brands.
Instead of juggling spreadsheets and dashboards, Pentane connects your Shopify store, ad platforms, and accounting system to:
- Calculate your true variable margin
- Identify your break-even ROAS
- Show how much revenue and ad spend you need to cover fixed expenses
- Provide clear guidance, not just data
Example: Applying the Framework to $100K Revenue
Let’s say you project $100,000 in revenue with a 50% variable margin (excl. ads).
- Contribution margin = $50,000
- Fixed expenses = $35,000
- Remaining = $15,000 before ad spend
If you spend $30,000 on ads, you’d need a 3.3 ROAS just to break even.
Without analytics, it’s easy to overspend or underspend and miss your targets entirely.
Final Thoughts
Setting ad budgets for a Shopify eCommerce brand isn’t guesswork—it’s math.
The key is knowing:
- Your fixed expenses
- Your variable margin
- Your break-even ROAS
Get those right, and you’ll stop flying blind and start running a business that scales profitably.
If you’re tired of spreadsheets and dashboards that don’t tell you what to do, see how Pentane can give you clarity on ad spend and profitability.
