- June 12, 2025
- 9:11 pm
The Master Equation of Paid Advertising
If you want to win with ecommerce and ensure that you don’t lose a lot of money on paid ads, this article is for you.
According to recent estimates, around 75% of brands lose money with paid advertising.
Despite social media being the most powerful advertising platform known to man, it seems there is a huge disconnect in how to actually translate this into profit.
One of the biggest mistakes I see founders make is neglecting to know their numbers.
If you don’t know how much you can afford to spend on acquiring customers, you are bound to lose money.
This seems to be the case for the vast majority of advertisers.
So how do you know how much you can afford to spend on a new customer?
Enter the Master Equation of Paid Advertising…
The Master Equation:
LTGP ÷ 3 = Maximum CAC
LTGP = Lifetime Gross Profit.
This is the total amount of money you keep after product costs and shipping is accounted for.
CAC = Customer Acquisition Cost.
We insist of maintaining an LTV/CAC ratio above 3 because we’ve learnt that when this number dips below 3, it becomes very difficult to scale the business. Usually this results in a cashflow crunch or big losses in money for the business.
If you’re smart (which I know you are) it’s best to keep this ratio above 3.
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Want to Calculate This For Your Business?
Here’s a fill-in-a-blanks worksheet. 
View Worksheet
Simply punch in your numbers and the calculator will tell you how much you can afford to spend on acquiring customers with paid ads.
Congratulations. You are now ahead of at least 75% of advertisers!
Why Is Max CAC Is Your Marketing North Star?
When you know your Max CAC it becomes your North Star for all marketing efforts. It will help you avoid overspending on campaigns that don’t work and underspending on campaigns that do.
If an ad campaign or other marketing initiative can’t bring in customers for less than your Max CAC, you need to find ways to improve upon it to ensure you don’t lose money.
As a final exercise, I encourage you to go to your paid ads accounts and look back at the last 12 months of data.
Did you exceed your Max CAC?
If so, it’s time to take another look at your ad targeting, visuals and messaging to see where you can improve.
TL;DR
- 75% of advertisers aren’t making money with paid ads
- Calculate your Max CAC using the Master Equation
- Compare your Max CAC with previous performance in your ad account.
- Adjust campaign budgets accordingly.
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Leaked: 7-Figure Shopify Tactics & Insights Delivered To Your Inbox Every Monday
- Practical tips and strategies to grow your sales
- Meta ads, Google ads, Email Marketing, CRO & more
- Get access to exclusive subscriber-only resources