In 2024, AdAge reported that “budgets are down across the board, because there’s so much pressure with the economy and inflation.” If you work agency-side, you probably feel this every day. With less money to work with, agencies have to be more tactical than ever in how they spend and prioritize.
Off the back of that, a deep understanding of general agency margins and agency profit margins has, arguably, never been more important.
In this article, we’ll define the role and impact of these margins, as well as how to improve yours, based on expert insights.
To learn more about how agency margins and agency profit margins impact the daily lives of agency owners and staff, we spoke with Rob Sayles. Rob is a seasoned agency consultant who’s spent multiple successful decades in the industry.
To kick things off, let’s look at some definitions.
In this article 📖
Agency margins and profit margins, defined
What are agency margins?
Agency margins is a broad term for various types of margins in an agency’s operations. It represents an agency’s efficiency at various stages.
Often, this is used as shorthand for “profit margins” (more on that in a sec) even though they should be distinguished. But, it could also refer to other margins such as retention or overhead margins.
What are agency profit margins?
An agency profit margin is the percentage of revenue that becomes profit. It is used to give an insight into an agency’s overall profitability.
It can be calculated in a few ways, including net profit margin, gross profit margin, and operating profit margin.
⚠️Be aware: Don’t get the definitions for “margins” and “profit margins” mixed up with “profit” and “profitability”. To get us started, let’s talk about profit margins. As we’ve said, there are a few different ways to calculate agency profit margins. The two most common methods are to use gross profit margin, or net profit margin. Gross profit margin for agencies takes the amount left over when you subtract the cost of selling services or goods from your overall revenue (i.e. the total amount of money you bring in). It’s presented as a percentage of that overall revenue. Gross profit margin = (Revenue – Cost of services sold) / Revenue x 100 Net profit margin compares revenue with your net profit (which is revenue minus the total costs of selling your goods or services plus your operating expenses, interest, taxes etc.) It’s also calculated as a percentage. This makes it similar to gross profit margin in that sense, but takes more costs into account. Net profit margin = (Net profit / Revenue) x 100 Where net profit = Revenue – Total costs Just as you need to find your gross profit before you can find your gross profit margin, to get your operating profit margin, you’ve got to first calculate your operating profit. Operating profit goes one step further than net profit. On top of deducting total expenses from your revenue, your operating profit also deducts depreciation and amortization. Once you’ve calculated your operating profit, you can compare it to your revenue, as a percentage. This type of agency profit margin takes ongoing expenses like interest into account, giving you a yet more granular gauge of the true proportion of money your agency has to spend. Depreciation is a calculation of the amount of value an asset loses over its lifetime. Amortization is a calculation of the decrease in value of an asset over its lifetime. Operating profit margin = (Operating profit / Revenue) x 100 Once again, to calculate this profit margin, you’ll need to calculate the initial delivery profit first. To calculate this, subtract your delivery costs from your revenue. Delivery costs include the cost of materials and labour used to deliver your services. Once you’ve calculated that delivery profit, you can use this formula to determine your delivery profit margin. The other agency profit margins we’ve looked at give you a picture of the overall agency’s performance. This margin gives you a granular view of how you’re performing financially against the efforts you put into delivering specific projects and retainers. Delivery profit margin = (Delivery profit / Revenue) x 100 Profit margins aren’t the only kind of agency margin you should measure. Profit, of course, shows how your revenue translates into money that you can reinvest in your business. But, there are plenty of other margins that are useful when it comes to monitoring and evolving your agency. Next, we’ll show you how to calculate some of them. As we’ve said, margins can be understood as the proportional difference between input and output, and those that aren’t strictly tied to profit still help you monitor efficiency and improve your financial performance. Check these out, for example: Acquisition margin measures the revenue an agency gains from new clients in a given timeframe, minus what it cost them to bring that client onboard, like marketing and sales expenses. It’s a helpful gauge of the value of new business. Acquisition margin = Revenue from new clients – Acquisition costs Bringing in new business is important, of course, but holding on to your existing client base is also crucial when it comes to financial performance. That’s why measuring retention margin is so crucial. Retention margin measures the revenue generated from an existing client in a given time period, minus the operational and service costs to maintain the relationship. Retention margin = Revenue from retained clients – Retention costs Overhead margins refer to the portion of revenue left after covering the direct costs of servicing clients, which contributes to covering an agency’s fixed or indirect expenses, such as office rent, salaries of non-billable staff, utilities, and administrative costs. Overheads should always stay on your radar if you want to protect your revenue. You can use this margin to see how they’re proportionally impacting your revenue. Overhead margin = (Overhead costs / Revenue) x 100 Billable utilization rate shows you how effectively billable hours of employees are being used relative to total available hours. It’s not a margin in the most traditional sense of the word, but it is a proportional way to compare outputs and inputs at your agency. Billable utilization rate (%) = (Total billable hours / Total available hours) x 100 Further reading: Need some help figuring out the variables for this one? Try our free billable hours calculator. Although it’s important to consider these different agency margins, according to Rob, profit margins are often the most essential margins for managing and maintaining a financially healthy agency. From here, we’ll dig deeper into them, discussing industry benchmarks, tactics for improving them, and how these profit margins differ at different agency types. It’s all well and good to see how your agency is performing internally, but it’s also important to compare how you’re performing against your competition. As such, looking into benchmarks for agency net profit margins is a best practice worth participating in. Benchmarks can differ based on a number of factors including agency type, external factors (such as the state of the economy), and strategic goals. Rob has worked with just about every kind of agency you can imagine, and provided us with an average benchmark based on a combination of what he’s seen from marketing, digital, and creative agency net profit margins: “Most healthy agencies are around 20% in terms of net profit margin. But, I typically say between 15% and 30% is a relatively good net profit margin. I haven’t seen many agencies that can honestly say that—quarter in, quarter out—they’re doing a 40% – 50% net profit margin.” Practically speaking, at the most basic level, agency margins are important because they help gauge how well (or not well) things are going at an agency. Without them, it would be far more difficult to understand agency performance contextually. You can think of margins as the difference between input and output, either in financial or in non-financial terms. They reflect how well resources, time, or energy translate into results and impact. You can then spot specific gaps in inefficiencies so you can then address them. For example, you can review your pricing strategies, improve your resource management, or make cost improvements. By focusing on improving your profit margins, you can reinvest that profit into other parts of your agency, and look to drive business expansion. Rob reiterates this by telling us that “a strong margin gives you the opportunity to reinvest in growth, or at least maintain stability and be competitive on pricing.” If increasing revenue is a key focus area for you or your agency, it might be time to consider some new tactics to bring extra dollars in. To help, we’ve written an eBook on the subject. You can get a free copy here: When we asked Rob what those “healthy” agencies are doing that the unhealthy ones aren’t, he identified efficient project management as the biggest factor that affects agency profit margins. Project management is the practice of planning, executing, and monitoring a project, so it can be as successful as possible in line with your predefined goals. “It’s fundamentally about keeping projects on budget, reducing idle time, optimizing the efficiency of the resources, and minimizing scope creep. If you’re delivering projects efficiently, you’re increasing client satisfaction. That, by proxy, creates a higher retention rate and more predictable revenue. If you’ve got a client that is generating 25 – 30% of your total income and you aren’t delivering the project very well, you’re just amplifying the risk. Chances are that they’ll walk. Then you’ve got a major problem.” Resource management is the act of forecasting, preparing, and scheduling resources and people, to make sure your company or project has the team and equipment it needs to succeed. Rob cautions against giving the wrong teammates the wrong tasks, as they could be working on higher value projects instead, and vice versa. “As an agency, are you using the right people for the right tasks? Are you giving under-skilled people heavy duty tasks? Or are you giving seniors that should be working on strategy and concepts tasks that are too simple? How you’re optimizing your people and resources can have a dramatic impact on your profit margins.“ By understanding how efficiently you’re allocating resources, you can drastically reduce wasted efforts and overworked teams, leading to healthier humans, and margins. Rob also recommends offering the client more, for more: “A really, really good tactic to positively jack up your agency profit margin is bundling services. So, for example, if you’re a digital agency and you’re producing a website, can you also bundle that with a CRM set up, or email marketing, or social media. Those kinds of things may be outside of your agency’s current remit, but you could potentially bring people in to do that, or you could partner (white label) with another agency to do that kind of stuff.” You could even propose to a client that you continue providing them services over a longer period of time. This may come in the form of a retainer agreement. And in turn, that will help improve your profit margins as you’ll have a steady and guaranteed revenue stream, you won’t encounter new acquisition or onboarding costs, and you may even find some new upselling opportunities once you’ve established a strong client-agency relationship. As we’ve said, Rob’s advice above can apply to just about every kind of agency. But, to dig a bit deeper, we asked him to break down the situation at two key agency types. When asked about advertising agency profit margins specifically, Rob categorized these as needing a high level of scrutiny in order to manage them: “For ad agencies, unfortunately, they’re in that whole media buying territory, where profitability has to take discounts and fees and the constantly fluctuating media spend cost per platform into account. Ad agencies really need to be digging into those and working out things like their cost of acquiring customers, customer lifetime value, and how much they’re spending on software platforms. If clients are asking for tools with exorbitantly high costs, the agency can ask to stick with a platform they know, where there’s less monetary risk that threatens their margins.” Leadership at traditional and digital marketing agencies also need to keep a keen eye on profit margins, to keep business on track. Interestingly, when we asked Rob about the importance of marketing agency profit margins, he said it was actually more important to track a general type of margin. Specifically, retention margins. “For marketing agencies, retention margins are hugely important. Looking at the recurring revenue from ongoing client work. If we keep a client for X service and Y, and Z. If we have them on a 12-month contract, assuming revenue recognition is actually going to have us receiving capital on the first day of every month, what does that overall retention margin look like? Ask yourself: Can we increase our contract? Is there an issue with the timescale? Can we offer an incentive for a client to buy in with us for two years based on foreign performance? It’s important that marketing agencies measure time-boxed agency profit margins, especially those that relate to retention.” To ensure your agency thrives in a tough economic landscape, mastering agency margins and agency profit margins is non-negotiable. All the above should set you in the right direction to measure and make the most of your margins, but we’ve got one more helping hand to offer before we close out. As we said, effective project scheduling and resource scheduling are two of the most powerful levers you can pull to up your agency margins. But, without the right tools, it can be a minefield. Resource Guru’s 30-day trial is your first step toward improving project efficiency, resource utilization and, ultimately, profitability. Get yours here: Join thousands of project managers who have made scheduling a breeze.How to calculate agency profit margins
Agency gross profit margins
What is a gross profit margin?
Formula:
Sample calculation:
Agency net profit margins
What is a net profit margin?
Formula:
Sample calculation:
Agency operating profit margin
What is agency delivery profit?
Formula:
Sample calculation:
Agency delivery profit margin
What is agency operating profit?
Formula:
Sample calculation:
Examples of other general agency margins
Acquisition margin
What is an acquisition margin?
Formula
Sample calculation:
Retention margin
What is a retention margin?
Formula
Sample calculation:
Overhead margins
What is an overhead margin?
Formula:
Sample calculation:
Billable utilization rate
What is billable utilization?
Formula:
Sample calculation:
Benchmarks for agency net profit margins
Why are agency margins important?
1. They give an overview of your agency’s overall financial health and competitiveness
2. They help you understand your efficiency
3. They help you to reduce risk, and reinvest in revenue growth
How to improve agency profit margins
Improve your project management
Double down on resource management
Create service packages
Identify retainer opportunities
How profit margins differ per agency type
Ad agency profit margin
Marketing agency profit margins
The final word on agency margins and agency profit margins
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