How to work out what you can afford to pay for a customer

The single most useful number in paid advertising isn't a platform metric. It's your break-even cost per customer: the most you can spend to win a customer before you lose money on them. Once you have it, decisions get much easier.

Step 1: Break-even cost per customer

Multiply your average sale by your gross margin. Gross margin is what's left after the direct cost of delivering the product or service.

$500 average sale × 60% gross margin = $300 break-even cost per customer

If you spend $300 in ads to win a $500 customer at that margin, you've broken even on the first sale. Spend less and you're profitable; spend more and you're paying to grow.

Step 2: Break-even cost per lead

If you sell through leads, such as calls, quotes or consultations, multiply by your close rate.

$300 × 20% close rate (1 in 5 leads buys) = $60 break-even cost per lead

This is the number to compare against cost per lead in Ads Manager. A $45 lead is good news. A $90 lead is a problem, unless something else, like follow-up speed, can raise the close rate.

Step 3: Set a target with room for profit

Break-even is the ceiling, not the goal. Many owners set a target at roughly 50 to 70 percent of break-even so there's room for profit, overhead and the inevitable bad week. In the example, that's a target of about $30 to $42 per lead.

What about repeat customers?

If customers come back, you can use gross profit over a set window, such as the first 90 days or first year, instead of a single sale. Only do this with real repeat-purchase data, and be conservative. Optimistic lifetime-value numbers are one of the most common ways ad budgets go wrong.

How to use the number

• Cut: an ad set clearly above break-even after a fair test.
• Wait: results near target but with too few conversions to judge.
• Scale: an ad set consistently below target. Raise budgets gradually.

The Your Numbers worksheet in the Ad-Ready Playbook walks through these formulas with space to fill in your own.