Let’s be real. You might be spending money on paid ads, getting clicks, and even making some sales. But the big question is: are those sales actually profitable?

Making sales through ads isn’t the hard part; it’s making sure you're making money as you grow. For example, it’s easy to spend $100 to make $50, but the challenge is flipping that around—spending $50 to make $100.

The Common Mistake

We see this a lot. Business owners start running paid ads and get a few sales, which is exciting! But when they try to scale up, things stop working. Why? They haven’t considered the most important factor: unit economics.

If you don’t know how much it really costs to make each sale, you might end up losing money as you try to grow.

Understanding Unit Economics

Unit economics is key to making sure your growth stays profitable. It’s not just about getting sales; it’s about knowing what each sale costs you and making sure it’s less than what you’re earning from it. This helps you figure out what’s working and what isn’t, whether it’s your ads, landing page, pricing, or something else.

Let’s break down the important parts:

• Customer Acquisition Cost (CAC): This is the total cost to get one customer. It includes ad spend and any other marketing expenses.
• Gross Margin: This is your selling price minus the cost to make the product (COGS). It’s your profit before you take out other business expenses.
• Profit Margin: This is your gross margin minus CAC. If this number is negative, it means your ads are costing more than you’re earning.

If your profit margin isn’t positive, then scaling your business with paid ads will only increase your losses.

Why This Matters

Not understanding these numbers can trick you into thinking your business is growing, when in reality, you’re losing money. More sales don’t always mean more profit. Knowing your unit economics helps you figure out which ads are performing well and which need to be fixed or stopped.

Use Our Free Prompt

To make things easier, we’ve created a simple ChatGPT prompt. Just plug in your numbers for product price, cost to produce, ad costs, and conversion rates, and it’ll show you if your ad strategy is profitable or not.

Copy and paste this prompt into ChatGPT, and replace the placeholders with your own numbers:

"Calculate the cost per sale and profit margin for my product with the following details:

• Sales Price: $[X]
• Cost to Produce (COGS): $[X]
• Cost Per Mille (CPM): $[X] (average is around $30 on Google, $15 on Meta, replace with your numbers if you have them*)
• Click-Through Rate (CTR): [X]% (average is around 3%)
• Conversion Rate (CR): [X]% (average is around 2%)
• Desired Profit Margin: [X]% (e.g., 10%, 25%, 50%)

Please show the following:

• Gross Margin Calculation: Sales Price minus Cost to Produce.
• Ad Cost Per Sale: Use CPM, CTR, and CR to calculate the total ad cost needed to get one sale.
• Profit Margin Comparison: Compare the ad cost per sale with my desired profit margin, and tell me if my ad strategy is profitable. If not, suggest what I could do to improve it (e.g., lower ad costs, improve conversion rates, or adjust my product price)."

Here’s an Example for a $50 Pre-Workout Supplement Product:

• Gross Margin: You sell it for $50, and it costs $15 to make. Your gross margin is $35.
• Profit Margin Goal: Let’s say you want a 50% profit margin, which means you want to keep $17.50 from each sale. That means you can only spend up to $17.50 to get each sale.
• Ad Costs: If you’re paying $15 for 1,000 impressions (CPM), getting a 3% click-through rate, and a 2% conversion rate, you’ll spend around $25 in ads to get one sale.

Conclusion: You can only spend $17.50 per sale to keep your 50% profit margin, but right now, your ad costs $25 per sale. You’ll need to either lower your ad costs, improve conversion rates, or increase your product price to stay profitable.

If your goal was a 25% profit margin instead of 50%, you’d be able to spend up to $26.25 per sale. Since your ad cost is $25 per sale, you’d be within your target profit margin.

To Improve Profits

You could try increasing your average order value (AOV). For example, offer bundles like “buy two, get a discount,” or pair relevant products together. Another option is testing your landing pages to increase conversion rates. Even a 1% increase in conversion rate can boost your revenue by 50%.

Why Doing the Math Pays Off

• Clear Insights: You’ll know instantly if your ad spend is helping or hurting your profits.
• Smart Decisions: Use actual data to decide whether scaling your ads is worth it.
• Actionable Results: Find out exactly where to optimize – reduce your customer acquisition cost, boost conversion rates, or increase your margins.

Need help figuring it all out or fine-tuning your strategy?

Book a consultation with us, and we’ll help you break down your numbers, optimize your ads, and turn them into a real profit-making machine.

Paid ads can grow your business, but only if you know the numbers behind them. Don’t risk your profits—know your unit economics and make every ad dollar count.