“What should our marketing spend be – 5% of sales? 15%? More? What does a good ROAS look like?”

We hear these questions a lot!  Understandably, businesses want a simple rule of thumb that brings a sense of clarity, control and something easy to report on. 

However, relying too heavily on these headline ratios can be misleading.

Why? Because both conflate efficiency with actual financial impact. And optimising purely for these ratios can lead to underinvesting in campaigns that are generating real profit – or worse, cutting profitable activity and harming your bottom line.

The metric that really matters…

It’s not about how efficient your marketing looks, but how much profit it drives. That’s where marketing contribution comes in: the actual profit your marketing generates after covering its own direct costs.  The formula is fairly simple:

Marketing Contribution = (Marketing Revenue x Gross Margin) – Marketing Spend

If this number is positive, your marketing spend is pulling its own weight by generating enough profit to cover its direct costs, like media spend or production, and to start contributing towards fixed overheads like salaries and rent – ultimately helping to drive your bottom-line profit. To take things a step further you might want to allocate a share of broader marketing-related overheads, like team time, to your campaigns, to account for the cost of planning and executing that activity.

The important thing to keep in mind is that some campaigns might look “inefficient” based on a lower ROAS, but if they’re generating a positive contribution, they’re still profitable – and worth running. In fact, a campaign with a lower ROAS but higher volume might actually deliver more total contribution simply because it operates at greater scale. Cutting spend that looks “less efficient” on a ratio basis might actually reduce your total marketing contribution, and hurt your overall profitability.

That’s not to say ROAS has no role to play. Used wisely, it’s a helpful shortcut for ongoing optimisation. If you know your breakeven ROAS – the minimum return you need per £1 spent to cover your costs – you can quickly gauge whether a campaign is likely to be profitable. It’s simple to calculate: just divide 1 by your gross margin. So if your gross margin is 40%, your breakeven ROAS is £2.5. Used this way, ROAS is an easy way to spot which campaigns are underperforming, and which may have headroom to scale. 

A quick maths lesson

Time to crunch some numbers and see these concepts in action! Let’s compare two marketing scenarios for an imaginary D2C brand – a higher spend scenario (scenario 1), and a “tightening the belt” scenario (scenario 2).  For the sake of simplicity, let’s assume all of this business’s sales are generated by marketing.

	Scenario 1	Scenario 2
Marketing spend	£1,600,000	£1,100,000
Marketing spend as a % of sales	14.55%	12.50%
ROAS	6.9	8
Sales	£11,000,000	£8,800,000
Gross margin %	40%	40%
Gross profit	£4,400,000	£3,520,000
Marketing contribution	£2,800,000	£2,420,000
Other overheads	£2,500,000	£2,500,000
Net profit	£300,000	-£80,000

Glancing at the first few lines, Scenario 2 – the ‘tightening the belt’ scenario – appears more efficient: lower spend, higher ROAS, and a “better” marketing spend to sales ratio.  Many businesses would instinctively prefer this more cautious approach, particularly during challenging times.

But look at the bottom line: the efficient approach has actually turned a profitable business into one losing money. 

Why does the efficient scenario lose here? There are two reasons at play.

1.      It cuts profitable marketing  

In Scenario 1, the additional marketing spend didn’t only generate more sales, but did so profitably; this extra spend was generating a positive contribution and growing the pot of net profit, the bottom line.  In Scenario 2, although the business improved overall ROAS by cutting less efficient spend, that spend was still profitable, so cutting it left money on the table.

2.       Fixed costs don’t flex

Notice that the fixed costs remain unchanged at £2,500,000 in both scenarios: unlike variable costs, overheads like rent or salaries don’t automatically decrease when you sell less, or magically shrink when your marketing spend is reduced. In Scenario 2, although marketing is more efficient, it generated £380,000 less marketing contribution – not enough to cover those fixed costs. Meanwhile, the “less efficient” approach in Scenario 1 generates enough contribution to cover all fixed costs and deliver a £300,000 profit.

A real world example

This understanding underpinned our approach at Loaf – but the pandemic really put it to the test. When demand for furniture dropped dramatically in March 2020, conventional wisdom suggested we should cut marketing spend in line with falling sales, to keep our marketing spend ratio within a safer, more ‘acceptable’ range. But we modelled the numbers and showed that accepting a higher marketing spend as a percentage of sales would actually drive not only more revenue but more total profit, and crucially, keep momentum for when demand returned. So while others pulled back, we pressed on – launching our first ever TV campaign. Loaf came out of the pandemic stronger, with greater market share and better profitability than before. 

Understanding this might save your business

But recognising this principle isn’t just about growth – it can be paramount to survival. When sales and profits are squeezed, the first instinct of many businesses is to cut costs – starting with marketing. It’s flexible, discretionary and often one of your heftiest spend lines. But as you saw in the example above, cutting spend doesn’t necessarily preserve profit – it can actually reduce it. This can lead to a self-fulfilling cycle of cutting marketing spend even deeper in an effort to preserve profit. But the result is yet another dip in sales and profit – and potentially a descent into the dreaded death spiral.

The Takeaway

Marketing isn’t just another cost. It’s the engine that actively generates sales and –  more importantly – profit.

Instead of asking, “What percentage of sales should we spend?”, ask  “How much can we invest while still growing our net contribution?” Look to dial up spend in areas where contribution is positive, and pull back where negative. That’s easier said than done, of course – attributing sales and measuring the resulting contribution isn’t always straightforward (perhaps a topic for another day!). But knowing which campaigns are clearing breakeven is the difference between marketing that drives profit and marketing that drains it.

The same principle applies when weighing up new channels or opportunities: model the performance benchmarks you need to hit to deliver a positive contribution, and ask yourself whether these seem feasible. 

A high ROAS or low spend ratio might look good on paper, but if it means cutting or forgoing profitable campaigns, you’re shrinking the money available to cover your fixed costs and grow your bottom line. The goal isn’t to look efficient.  The goal is to generate more profit after your marketing has done its thing.