Updated
Profit margin is the share of the selling price that remains after the cost of the goods or service. It determines how much you can spend on advertising without making a loss.
How to calculate margin
Margin % = (selling price excluding VAT minus cost price) / selling price excluding VAT × 100. If you buy a product for €60 and sell it for €100 net, your margin is 40%.
Margin vs markup
Markup relates profit to the cost price, margin relates it to the selling price. In the example above, the markup is 66.7% while the margin is 40%. Mixing them up leads to ad budgets that are set too high.
Margin and advertising
Your margin gives you the break even ROAS: 1 / margin. With a 40% margin that is 2.5, or 250%. In other words, your cost of sale must not exceed 40%. For growth, customer lifetime value matters as well, not just the margin on the first order.
Check your numbers with our ROAS calculator.
Further reading: Google Ads budget calculation.
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