Budgeting From Gross Profit, Not Revenue

Revenue is what you take in. Gross profit is what you get to keep and spend.

You have probably heard the rule: spend some percent of your revenue on marketing. It sounds tidy, and for that reason it is tempting. But a percent of revenue treats every dollar of sales as if it were worth the same, and they are not.

Two businesses can have the same revenue and very different amounts left to spend. Which dollar are you really budgeting?

Why a percent of revenue misleads

Let’s use a labelled example. Say two jobs each bring in $10,000. Job A costs $4,000 in materials and labor to deliver, so it leaves $6,000 of gross profit. Job B costs $8,000 to deliver, so it leaves $2,000.

Now apply a rule of 5% of revenue, picked only to show the problem, not as a number to copy. Both jobs get a $500 marketing budget. But $500 is about 8% of Job A’s gross profit and 25% of Job B’s. (500 ÷ 6,000 is roughly 0.083, and 500 ÷ 2,000 is 0.25.) The same rule that feels light on Job A takes a quarter of everything Job B has to give. Nobody paid the mortgage with revenue. They paid it with what was left.

The percent-of-revenue rule also hides trouble. If your costs rise and your margin thins, revenue can look fine while the money available for marketing has quietly shrunk. You keep spending the same, and the business feels the squeeze somewhere else.

Budget from what a sale leaves behind

Gross profit is revenue minus the direct costs of delivering the work: the materials, the crew time, the food, whatever would not exist if you did not do the job. If that is a new word, start with Gross Margin Versus Net Margin, which explains the distinction in plain terms.

Once you know your gross profit, the budgeting question changes, and this is the rule we work by: build the marketing budget from gross profit, not from revenue. Instead of “what percent of sales should I spend?” you ask “how much of what each sale leaves behind am I willing to invest to win the next one?” That is a question about what a customer is worth. Your Marketing Budget: The Number Everyone Underestimates, earlier in the course, gets you a first dollar figure by working back from customer value, and it points forward to this lesson, which is the method for setting that figure properly from gross profit.

A labelled example: say your average job leaves $1,200 of gross profit and you decide to put up to a quarter of it, $300, toward winning that customer. The quarter is only for the example; the share is your choice. If your leads cost $50 each and 1 in 5 becomes a customer, a customer costs $250 to win. Five leads times $50 is $250. That fits inside the $300. If leads crept up to $70, a customer would cost $350, and you would know the channel no longer pays for itself. The number tells you when to stop, which a percent of revenue never does.

Keep one more thing in mind. Gross profit still has to cover your rent, software, insurance and your own pay. So the share you choose for marketing should be a decision, not a guess. Start conservative, watch what comes back, and adjust.

This is also a good way to test an idea before you spend on it. Suppose a new channel would need $400 to win a customer and your gross profit per customer is $300. You do not need an expert to tell you that it loses money on the first job. It might still pay off if the customer buys again, and that is a fair thing to consider, but then you are betting on repeat business, and you should know that you are placing that bet.

Notice what this does to the conversation with yourself. A budget in dollars taken from a real margin is hard to argue with. A budget that is simply a percent of sales can feel arbitrary, and arbitrary numbers are the ones we override when we feel nervous or excited. The Marketing Budget Calculator on the Resources page does the same backward math from the number of customers you want.

Your next step

Pick your most common job or product and write down its price and the direct costs of delivering it. Subtract to find gross profit. Decide what share of that gross profit you will spend to win one customer, write the dollar figure, and compare it with what a customer really costs you now.

It takes about an hour if you know your direct costs, longer if you have never separated them. It is free. A calculator and last month’s invoices are enough, and the Monthly P&L Tracker on the Resources page can help you find the margin.

Free download: the Marketing Budget Calculator, a spreadsheet that works backward from the customers you want to a budget. It is also on the Resources page.