Paid advertising: budgets, targeting and measuring results
Plan a small test budget for online ads, choose sensible targeting and judge results with CPC, CPA and break-even ROAS instead of gut feeling.
What you will learn
- The core ad metrics (CPM, CTR, CPC, conversion rate, CPA, ROAS) and how they connect
- How to calculate your maximum affordable cost per order and your break-even ROAS
- How to set a test budget and structure targeting so the result means something
- Why "the platform says it worked" is not the same as "it made money"
Explanation
Paid advertising means you pay a platform, such as a search engine or social network, to show your message. Organic reach was covered in earlier lessons; here you buy reach directly. Results come faster, but every click costs money, so you need numbers before you scale.
The metric chain
Every ad campaign moves through the same chain. Learn these terms in order:
- Impression: one time your ad is shown on a screen.
- CPM (cost per mille): what you pay for 1,000 impressions.
CPM = spend ÷ impressions × 1,000 - CTR (click-through rate): the share of impressions that lead to a click.
CTR = clicks ÷ impressions - CPC (cost per click):
CPC = spend ÷ clicks - Conversion rate (CVR): the share of clicks that complete the goal, for example a purchase.
CVR = orders ÷ clicks - CPA (cost per acquisition, here cost per order):
CPA = spend ÷ orders = CPC ÷ CVR - ROAS (return on ad spend): revenue per euro of ad spend.
ROAS = ad revenue ÷ ad spend
Your two limits: maximum CPA and break-even ROAS
ROAS uses revenue, not profit. A ROAS of 2 sounds good, but if your product costs a lot to make and ship, you may still lose money. Use your contribution margin (price minus variable costs, from the business basics course) to set two limits:
Maximum CPA = average order value × contribution margin ratio. Spend more than this per order and each order loses money.Break-even ROAS = 1 ÷ contribution margin ratio. Below this ROAS, the campaign loses money on the first order.
A product with a 25% margin needs a ROAS of 4 just to break even. A digital product with an 80% margin needs only 1.25. This is why ads often work for high-margin products and fail for low-margin ones.
Targeting
Targeting is the choice of who sees your ad. Search ads target intent: the person typed a query, such as "bookkeeping course for freelancers". Social ads target audiences: interests, demographics or people similar to your customers. Intent traffic usually costs more per click but converts better. Start narrow and relevant, then widen what works.
In Germany and the EU, tracking pixels and most marketing cookies need the visitor's consent first (General Data Protection Regulation, GDPR, plus the German TDDDG), so platform reports miss some conversions. Treat them as estimates and compare them with real orders.
Test budgets
A test needs enough conversions to mean something. Rule of thumb: plan at least target CPA × 20 per idea tested; with a €25 target CPA, that is €500. Change one thing at a time (audience or ad text or offer) so you know what caused the difference.
Worked example
Hypothetical example: a small online shop sells a €60 leather notebook. Variable costs (product, packaging, shipping, payment fee) are €36, so the contribution margin is €24, or 40%. It runs a social media campaign with €600 spend. Assumptions: CPM €8, CTR 1.2%, CVR 2%. VAT, returns and fixed costs are excluded; prices are net.
- Impressions: €600 ÷ €8 × 1,000 = 75,000
- Clicks: 75,000 × 1.2% = 900
- CPC: €600 ÷ 900 = €0.67 (rounded)
- Orders: 900 × 2% = 18
- CPA: €600 ÷ 18 = €33.33
- Revenue: 18 × €60 = €1,080, so ROAS = €1,080 ÷ €600 = 1.8
- Contribution: 18 × €24 = €432. Minus ad spend €600 = −€168
Check against the limits: maximum CPA = €60 × 40% = €24, and break-even ROAS = 1 ÷ 0.40 = 2.5. The real CPA (€33.33) is above €24, and the ROAS (1.8) is below 2.5. The campaign lost money on first orders, even though the platform dashboard showed "€1,080 revenue". It might still be worth it if many buyers order again, but that is a separate calculation (see lesson 12).
Common mistake
Practice activity
Hypothetical: you sell an online workshop recording for €80. Variable costs (payment fees, hosting share, platform commission) are 65% of the price, so your contribution margin ratio is 35%. Search ads cost €0.50 per click and 3% of clicks buy. On paper, calculate: (a) CPA, (b) maximum CPA, (c) contribution per order after ad cost, (d) ROAS and break-even ROAS. Is the campaign profitable on the first purchase?
Show solution
(a) CPA = €0.50 ÷ 0.03 = €16.67.
(b) Maximum CPA = €80 × 35% = €28.00.
(c) Contribution per order after ads = €28.00 − €16.67 = €11.33.
(d) ROAS = €80 ÷ €16.67 = 4.8. Break-even ROAS = 1 ÷ 0.35 = 2.86 (rounded).
Yes: CPA is below the maximum and ROAS is above break-even, so each order contributes about €11.33 towards fixed costs.
Limitations: this assumes CPC and conversion rate stay constant when you increase the budget. In practice, costs often rise as you reach less relevant people, and VAT, refunds and taxes are ignored here.
Key takeaways
- CPA = CPC ÷ conversion rate; small changes in either change the cost per order a lot.
- Maximum CPA = order value × margin ratio; break-even ROAS = 1 ÷ margin ratio.
- Test with a planned budget (about 20 × target CPA per idea) and change one variable at a time.
- Platform reports are estimates; check results against real orders and real margins.
Next step
In the next lesson you follow visitors after the click and calculate conversion rates through a complete sales funnel.
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