Yes, Ignoring Advertising Costs For Your Small Businesses Will Bankrupt You
If you’re serious about really growing your business, advertising is the single most direct and effective route to get there.
There’s a simple golden rule that says that the one who effectively spends the most on advertising wins, and it’s been proven time and time again.
But let’s be honest, advertising is three things: simple in concept, difficult in practice, and scary as hell.
The fundamental truth that became a lie:

In 1915, John Wanamaker famously stated:
Half my advertising spend is wasted; the trouble is, I don’t know which half.
For decades, this statement rang true for business owners. Even 25 years ago when I started my marketing career, the advertising game was a lot of educated guesswork. (yes, I’ve been around for a while) Today, that’s no longer the case.
Modern digital advertising tools—like Google Ads and Facebook Advertising—have transformed how businesses track and measure their marketing efforts. These platforms offer unprecedented accuracy, allowing you to:
- Precisely track every dollar spent
- Identify exactly which ads generate results
- Eliminate wasteful advertising strategies
If you’re not taking advantage of these technologies, you might as well be tossing money out the window—an overused expression that couldn’t be more accurate in this case.
The real challenge arises when frustrated business owners are forced to rely on guesswork to evaluate their advertising effectiveness. Many feel like they are left with no option other than to resort to pulling random numbers from thin air or trying to follow “industry standards” suggested by so-called experts.
The reality is that those numbers do not, and will never reflect the unique circumstances of your business.
Understanding your specific advertising costs and metrics isn’t just a good idea; it could be the most profitable decision you ever make.
Without this vital knowledge, you’re gambling with your personal and business future.
So, enough of the potential downsides, let’s solve this so you can take the essential steps that are the key to unlocking your business’s full potential.
The Importance of Knowing Your Business Numbers
For small business owners, knowing the numbers that drive your business isn’t a luxury. Without a clear path ahead making informed decisions becomes impossible.
Key metrics such as sales revenue, profit margins, and advertising costs are not just numbers on a spreadsheet; they are the heartbeat of your business. Understanding these figures helps you gauge how well your business is performing and where adjustments are needed.
When we talk about advertising costs, two main components play a significant role: Operating Expenses (OPEX) and Cost of Goods Sold (COGS).
Operating Expenses (OPEX)
This includes everything you spend to keep your business running, from rent and utilities to salaries, software, even cleaning expenses. Knowing these costs helps you understand the baseline you need to cover every month.
Cost of Goods Sold (COGS)
This is the direct cost of producing the products you sell. This includes materials and labor directly tied to production. Knowing your COGS helps you determine how much profit you make on each sale.
By grasping these numbers, you can make smarter choices about where, how, and how much to allocate to your advertising funds.
The Advertising Budget Scam

Creating an “advertising budget” is a tool for inexperienced or otherwise lousy campaign managers.
It’s based on the idea that you should have a monetary limit to your advertising spend because your advertising will not turn a profit.
This concept was invented by advertising agencies when they were still stuck in that “not sure which half is wasted” era, back then, failure was baked into the cake, that was, for the most part, the only way to do it.
Today, your ideal advertising “budget” should not be about the amount of money you can afford to lose, even though many “experts” will still tell you this.
Your budget is not just a random figure; it should come from careful calculations of your expected revenue, desired profit margins, all associated costs, and most importantly, what your maximum fulfillment capacity is.
Simply stated, profitable advertising budgets are set by your ability to fulfill your products or services, not the amount you can spend.
The Only Advertising You Will Ever Pay For, Is Bad Advertising.

Many small business owners make the mistake of choosing an arbitrary number for their budget. This approach will always lead to overspending or underspending, both of which will harm your business.
The only time your advertising budget should be set on a dollar amount, is when you expect that campaign will likely fail financially. This is actually a very important part of advertising, but there is a name for this, this is your advertising research and development budget.
During our research and development phase, our goal is to spend as much as we can comfortably afford to find the perfect plan for growth. We’re not paying for sales here, we’re paying for comprehensive research.
By analyzing what worked and what didn’t in previous advertising efforts, you can create an advertising strategy that aligns with your goals. This method allows you to invest wisely and track your ad performance to find the combination that will consistently deliver positive results.
The Basics Of The Advertising Process For Growing Businesses
Here’s what we’re looking for and how we are going to find it.
We want to know exactly how much we are willing to pay for a new customer. This is not guess work, there is a very clear and proven path to finding this exact number.
When you find this number you will put your business on a consistent and predictable path for growth.
We will do this by figuring out what a customer is worth to you, and how much profit you want to take from each customer to maintain healthy growth for your business.
When you hit that number, your budget is only limited by how much you can produce at which point you will focus on improving your production or fulfillment capabilities, but more on that later.
Determining Your Averages

Finding your average sale, and average cost per sale are the first steps to ensuring your advertising efforts are profitable.
To determine this number, start by calculating your average sale. Then, factor in your total true cost to deliver that sale including the cost of goods and your operating expenses.
Then we will add to that, your desired profit.
For example, let’s say you sell handmade book covers for $20 each.
If the cost to produce and ship those book covers is $11 that leaves you with $9 profit.
Sale Price – COGS = gross profit
Now let’s assume your annual costs to run your business when divided by all of the orders you ship in a year tacks on another $2 in cost per item sold.
Total Expenses Annually / Total Sales Annually = Operating Costs Per Sale
Example: If you get 1000 Sales per year, and you spend $2000 annually on all your expenses to keep the doors open and the lights on, you have to add an additional cost of $2 per order filled.
This leaves us with $7 in profit.
From this $7 in profit you need to determine how much you need as a personal owner, or how much the business needs in order to be a healthy company or have a healthy business.
How Much Profit Should My Business Keep?
The general rule is strong businesses have an overall profit margin of 10% – 20%.
Wait what? I thought the keystone markup was 100%, so 50% margins, right?
These numbers I’ve listed are much less than what you’re probably used to seeing. Most businesses do not factor in OPEX, they only look at COGS, which is an extremely bad way to look at sales.
Consider that many retail clothing businesses routinely will have 1000% markup on their goods, creating T-Shirts for $5 that they sell for $50 or more.
Even a small retailer will boast 40% – 60% margins on items that they double in price over their cost. Now think about how many retail chains that have gone bankrupt due to their undisclosed overhead expenses?
I’ve found a healthy target for predictable consistent growth is 15% and a goal target of 20% in total profit per sale.
Back to our book covers.
After all our expenses, we’re making $7 off of each sale.
If you want to make 20% profit off of each sale that ends up being $4 per sale in take home or business profit.
This leaves us with $3 from each sale that we can spend in order to get another predictable sale with $7 in profit that we can use to do it all over again.
Here’s the breakdown:

This means for every book cover sold, you can spend up to $3 on advertising and still achieve your profit goal.
Let’s think about this,
- We’ve agreed that we want 20% profit per sale.
- We know that at that rate our business will flourish.
- We now know we can spend up to $3 to get every new sale and be very happy.
Knowing this number does more than just help you make informed decisions, it puts you in a completely different position.
So let me ask you the big question?
If you knew you could always make $7 from every $3 you invested…
Would you want to invest
$3 to get $7?
$6 to get $14?
$30 to get $70?
$3,000 to get $7,000?
What would your “Budget” be if you had a guaranteed positive return?
If you’re like me, you’d be scraping together from every dime you could possibly find, and seriously considering if little Timmy is too young to get a job at 8 years old? (Ok that’s a bit extreme)
An Ad Budget Based On Output
In the above scenario where you are guaranteed to more than double your money every time, your budget would be simple, it’s every dollar you could possibly come up with from every resource possible.
That is our target goal.
We want to hit the cost per sale of $3 in this scenario and repeat that as many times as we possibly can.
Reality Check – Here is where your real budget comes into play.
In the book cover scenario, she’s not just trading $3 for $7, and neither is your business.
Our artist and you are both delivering a product or completing a service. Either way, there is some work to do, or product to be delivered.
If your delivering a product or service, there is only so much you can do. There are only so many hours in the day, you only have a certain number of employees, you have a limit on warehouse space, there’s manufacturing limitations, or you have some other physical limitation on what you can deliver.
This limitation on your ability to complete orders, is where you should set your ideal budget.
For example, if our book cover artist can realistically only produce 10 new book covers per day and she’s able to hit her $3 per sale target, then….
Her daily budget should never be more than $30.
If she spends more than that, she can’t fulfill the orders, if she spends less than that she will predictably get less sales and lose out on profit.
At this point she would set her daily budget to $30, knowing it will generate 10 sales, and then, she would look into expanding her business.
The Awesome X-Factor In Ad Value We Didn’t Calculate
The numbers above are very simple.
They are an example to get you used to this kind of thinking.
This is created as an introduction to budgeting your ad spend based on your output rather than your wallet.
Maybe you’ve already spotted the missing ingredient in my calculations above?
If you’re a business that has a one to one relationship between customers and orders, these numbers are for you, and they work.
This would be for a business like an in-ground pool contractor. They are typically only going to build one pool for one customer.
But how would this work for a pool cleaner? Or in our specific case, what if our book cover artist has repeat customers?
This is where the magic happens.

We’ve determined that finding the target cost we’re willing to pay for a new customer based on the value of our average purchase profit, however… that assumes they never buy from us again.
Now we get to factor in what is the actual lifetime value of that customer!
What is the average number of transactions our average customers usually have with us?
Back to our Book Cover Creator.
Let’s say our cover artist, on average, sells 2.5 covers to all of her clients. Some buy 1, some buy 10, but the average is 2.5.
Total Orders / Total Customers = Average Transactions Per Customer
E.G. 1000 Orders per year / 450 individual customers per year = Customers will eventually buy 2.5 covers.
(If you can expand to multiple years, your numbers will be more accurate)
In the above case, she will have initially spent $3 to make $7 in profit.
After taking her $4 cut from the $7, she will re-invest the remaining $3 to make another $7
But, if we can now factor in that the customer will not just purchase once, but 2.5 times, she has turned her profit into $17.5 ($7 X 2.5) in profit.
Finding these numbers is a similar process to what we looked at previously with just a little more math.
It’s optional to calculate your cost to acquire a new customer based on the average lifetime value of a customer instead of the average sale price.
In this case calculating that would bring the cost we are willing to spend on a new customer all the way up to $7.50.
At the very least, you could be confident that with an average lifetime value of $17.5 per customer that acquiring a customer for say, $7 will still maintain your desired profit level.
Calculating your maximum spend per new customer leaves you less breathing room and is pushing things in my opinion.
My recommendation is to use the lifetime value calculation as a stepping stone to get to your goal of a positive per sale cost.
Research and Development Budget: Finding What Works

I’ll be blunt, this is the hard part. But, proper testing of your advertising strategies is going to be the key to hitting your targets and getting the business of your dreams that you can feel absolutely confident in.
But first, we have to go after that number. You will need to see what resonates with your audience and drives sales consistently.
During this phase we are expecting that our ads will not work perfectly the first time, or probably the 10th, but we’re going to be disciplined so that we can hit the numbers we need because we know how critical and awesome it is.
Deciding how much to spend here is the one area where your limiting factor is monetary.
At this point you have to look at this money as an investment in research, not ads that you expect to work right away.
You will use extremely targeted and trackable methods to fine-tune your advertising till you get a message that consistently delivers.
How Do You Test Your Ads Properly?
I’m going to go into this in much greater detail in the near future, this information demands it’s own post with strategies and tactics.
However the short version of this is simply that you must be meticulously disciplined with this, it’s critical that you use a process of testing, tweaking and elimination of failed ads in favor of better performing ads.
This will involve tracking and monitoring tiny changes in two versions of ads, choosing a winner and putting the winner against a very similar version repeatedly and waiting until you have enough data to draw a clear conclusion through A/B split testing.
Common Pitfalls in Managing Advertising Costs

Even seasoned business owners can stumble when it comes to managing advertising costs. Here are some common mistakes to watch out for, along with ways to avoid them:
Budgeting Mistakes
- Setting Random Budgets: Some owners set budgets without doing the math, they don’t consider their expenses, or profit that it will bring in. Make sure your budget reflects all of the numbers you’ve calculated after reading this article.
- Using Dynamic Ads From Providers: RnD requires that you follow an exact method to iterate over different versions of your ads. If you’re using dynamic ads that change every time, or changing your ads every week or month, you will never find out for sure what works consistently.
- Ignoring Metrics: Failing to track advertising performance can lead to wasted money. Always monitor your campaigns and continuously adjust as needed based on the data.
- Not Tracking Phone Calls: If your ads are focused on generating phone calls it becomes difficult to track their effectiveness without investing in vanity phone numbers so you can see exactly where the person saw your ad.
- Using your main website everywhere: If your ads just link to your homepage, or list your website in print, it’s going to be impossible to determine the success of those ads.
If your putting in links to your site, be sure to use proper UTM tags, or even better, create specific landing pages for each of your ads so that even if someone has tracking turned off, you will still know exactly how that customer got to you.
If you’re printing your website on something like a flyer or magazine ad, setup similar domains that you can route to your website that you can track. pamsbookcovers.com might also get pamsbookcoverstore.com that directs you to pamsbookcovers.com. - Falling for Quick Fixes: Avoid the temptation to chase after the latest advertising trends without understanding them. Focus on what works for your business.
By being aware of these strategic methods for finding your ideal budget, and avoiding these pitfalls, you’ll be in an excellent position to manage your advertising costs and your business growth effectively and ensure your business is thriving.