I pulled my ad budget out of thin air (and had no idea if it was right)

I used to run my ads trying to get the cheapest clicks possible.

$0.10 CPC was the goal, and honestly I thought that was what good advertising looked like.

Then I hired an agency. I wasn’t a professional ads guy so I figured there must be more I was missing, and if someone else could squeeze more out of it then why not let them try?

I remember the first call when the agency owner asked me “what’s your marketing budget?”

My answer after a long pause… came purely from my gut…

“Errr. I don’t have a budget, if the ads translate to more profit then we keep spending!”

Music-to-his-ears.

But he still needed a number to work with, so I pulled 10% of revenue as our marketing budget out of thin air and that’s what we ran with.

The problem was I had absolutely no idea if 10% was right or not…

Was I underspending and leaving growth on the table? Overspending and bleeding profit? I genuinely couldn’t tell, and it annoyed me because I didn’t have anything to evaluate it against.

It wasn’t until someone walked me through the unit economics of my own business that it all felt like it “clicked”.

How this number connects to that number…

Why this metric matters, but that one doesn’t so much.

It’s the unit economics of the business.

And once I saw it I couldn’t unsee it… I loved it! It gave me answers to almost everything.

Today, it’s the centre of how we make decisions in our business.

And I think you’ll feel the same way once you see it too.

So over the next couple of emails I’ll show you how it works and how you can use it.

Here’s how it goes…

In your ecom business, everything starts as revenue. Imagine a big bucket, it’s 100% full.

From that bucket, money gets poured into three other buckets before anything is left for you.

They don’t share equally, but they share completely… whatever’s left at the end is your profit.

The first and biggest is product cost; what you pay your supplier for the product.

In a typical dropshipping business this sits around 75% of revenue, leaving 25% remaining.

100% − 75% = 25% remaining

The next is overheads… all the operating costs that went into generating that revenue; staff, software, subscriptions. Let’s call it 10%.

25% − 10% = 15% remaining

And then the last one before profit is marketing; what you pay for ads. Another 10% in this example.

15% − 10% = 5%

The full picture so far looks like this:

Revenue 100%

Product cost −75%

Overheads− 10%

Marketing −10%

= Profit 5%

Now most founders look at that model and immediately focus on the marketing bucket as the level they can pull.

Spend less on ads and profit goes up. Spend more and it disappears.

So naturally that’s where all the attention goes.

But here’s what I want you to notice… marketing isn’t the biggest bucket. Product cost is.

And because we’re working with 100% of revenue and nothing more, that’s where the biggest opportunity usually sits.

In a dropshipping business you’re handing 75 cents of every dollar straight back to your supplier before you’ve paid for anything else.

That’s not a fixed law of ecommerce… It’s just the game that dropshipping makes you play.

When you build your own branded products, that changes…

Instead of 75%, your product cost can come down to 60% or lower.

And when that happens, watch what it does to the whole model…

Revenue 100%

Product cost −60% (reduced from −75%)

Overheads −10%

Marketing −10%

= Profit 20%

Your product costs come down from 75% to 60% or lower.

Everything else stays the same… overheads, ad spend, revenue. Nothing changes except what you paid for the product.

So the 15% gained by lowering your product costs ends up as profit.

Let’s translate that into dollars:

Dropshipping at $100k revenue… $5,000 profit.

Branded products at $100k revenue… $20,000 profit.

Which would you rather?

This is the first thing we work on inside Escape Velocity, before teams, before scaling, before any of it. We get clear on the numbers and then we unlock the margin.

Because without it, everything else is just fighting over scraps.

In the next email I’ll show you what happens when you take that extra 15% we gained as profit and decide where it goes…

Because that decision is where founders either use this as fuel to amplify or quietly leave a lot of money on the table and not even realise it.

— Matthew