Most agency owners know their total revenue. Few know which clients are actually profitable. That gap matters. Your biggest client by revenue could be your worst client by profit — eating team hours, driving scope creep, and burning through revisions while you celebrate the invoice. Revenue is vanity. Profit by client is sanity. Here's how to track agency profitability by client so you can make decisions based on reality, not top-line numbers.
Key Takeaways:
- Total revenue is misleading — your highest-revenue client may be your least profitable once you account for time, overhead, and hidden costs
- Use the formula: (Client Revenue - Direct Costs - Allocated Overhead) ÷ Client Revenue = Profit Margin
- Direct costs include team time (hours × internal hourly cost), subcontractors, and out-of-pocket expenses
- Allocate shared overhead (rent, tools, admin) across clients by revenue share or by hours worked
- Hidden costs matter: scope creep time, excessive communication, repeated revisions, and context-switching between clients
- Build a simple monthly client profitability tracker — spreadsheet-level is enough to start
- Use the data: raise prices on unprofitable clients, fire those below threshold, and replicate what makes profitable clients profitable
- Benchmarks: 25%+ per client is healthy; 10-25% is a warning zone; below 10% is unprofitable
Why Total Revenue Is Misleading
Agencies that only watch revenue celebrate when the biggest invoices land. They don't see that Client A — the one bringing in $40K/month — is consuming 80% of a senior strategist's time, requires weekly emergency calls, and has pushed through three rounds of revisions on every deliverable for six months. Meanwhile, Client B brings $15K/month with minimal hand-holding and consistent approvals. Client B might deliver 3x the profit margin. You'd never know if you're only looking at revenue.
Revenue tells you how much money came in. It doesn't tell you how much it cost to get it. Two clients with identical revenue can have radically different profit profiles based on how much time they demand, how many revisions they trigger, and whether they respect scope. If you're not tracking agency profitability by client, you're flying blind. You might be subsidizing your most demanding clients with the profit from your easiest ones — or worse, losing money on clients you think are paying the bills.
The Client Profitability Formula
The formula is straightforward:
(Client Revenue - Direct Costs - Allocated Overhead) ÷ Client Revenue = Profit Margin
Everything else is filling in the numbers. Get those numbers right, and you'll see which clients actually contribute to your bottom line.
Direct Costs
Direct costs are anything you can clearly trace to a specific client.
Team time. This is usually the largest cost. Multiply the hours each team member spent on the client by your internal hourly cost for that person. Your internal cost isn't your bill rate — it's the fully loaded cost (salary, benefits, taxes, allocated overhead) divided by billable hours. If a designer costs you $75/hour internally and spent 30 hours on Client A this month, that's $2,250 in direct labor cost for that client.
Subcontractors. Freelancers, specialists, and vendors you hire for client-specific work. Invoice amounts and pass-through costs count here.
Out-of-pocket expenses. Client-specific software licenses, stock assets, travel, shipping, or any expense you incur because of that client.
The sum of team time, subcontractors, and expenses is your total direct cost for that client.
Allocated Overhead
Overhead is the cost of running your agency — rent, utilities, software, insurance, admin salaries, marketing, and the like. No single client "owns" these costs, but every client consumes a share of them. You need a fair way to allocate that share.
By revenue share. If Client A represents 25% of your monthly revenue, allocate 25% of your overhead to Client A. Simple and defensible. Clients who pay more carry more of the burden of running the shop.
By hours. If you track time by client, you can allocate overhead proportionally to hours. If Client A consumed 30% of total billable hours across the agency, assign 30% of overhead to Client A. This captures the reality that some clients absorb more capacity — more meetings, more iterations, more coordination — even if their revenue isn't the highest.
Choose one method and use it consistently. Revenue-based allocation is easier if you don't have robust time tracking. Hour-based is more accurate if you do.
Hidden Costs Most Agencies Miss
Direct costs and allocated overhead get you most of the way there. But several hidden costs routinely slip through. They're real — and they destroy margin on clients that look profitable on paper.
Scope creep time. Work the client requested that wasn't in the original scope, and that you didn't bill for. "Quick fixes," "small tweaks," and "while you're in there" requests add up. Track them. If your team spends 5 hours a month on unbilled scope creep for one client, that's 5 hours × internal cost — gone.
Excessive client communication. Some clients need multiple check-ins, long calls, and constant Slack threads. Others are low-touch. If Account Manager A spends 10 hours a month on Client X and 2 hours on Client Y, and both clients pay the same retainer, Client X is consuming 5x the non-billable coordination time. That time has a cost.
Repeated revisions. Clients who demand endless rounds of changes burn creative and production time. Track revision rounds. If Client A averages 4 rounds per deliverable and Client B averages 1, Client A is 4x more expensive per deliverable — even if both pay the same flat fee.
Context-switching between clients. Jumping between clients fragments focus and reduces efficiency. A team member who works on 8 clients in a day loses more time to switching than one who focuses on 2. Heavily fragmented clients — lots of small tasks across many projects — often cost more per hour of output than clients with concentrated work blocks.
You don't need perfect data on day one. Start by estimating. "Roughly 20% of our time on Client A is unbilled scope creep and over-communication" is a conservative placeholder. Refine as you get better at tracking.
How to Build a Simple Client Profitability Tracker
You don't need fancy software to start. A spreadsheet is enough. Here's the structure.
Monthly cadence. Run the numbers once a month, ideally right after you close the books. Use the same cutoff date every month so you're comparing apples to apples.
Rows: one per client. List every active client.
Columns:
- Revenue — What the client paid this month (or what you accrued, if you use accrual accounting)
- Team hours — Total hours spent on this client (billable and non-billable)
- Internal labor cost — Hours × internal hourly cost
- Subcontractors — Amount paid to freelancers/vendors for this client
- Out-of-pocket expenses — Client-specific costs
- Allocated overhead — Their share of rent, tools, admin, etc.
- Total cost — Sum of labor, subcontractors, expenses, and overhead
- Profit — Revenue minus total cost
- Profit margin — (Profit ÷ Revenue) × 100
Add a summary row at the bottom: total revenue, total cost, total profit, and blended margin.
If you don't have time tracking yet, estimate hours based on project notes, calendar blocks, or team recall. Imperfect data is better than no data. You'll improve accuracy over time.
What to Do With the Data
Knowing which clients are profitable is useless if you don't act on it.
Raise prices on unprofitable clients. If a client is marginal or losing money, the first lever is pricing. Communicate a rate increase, tie it to contract renewal, and give 60-90 days notice. Clients who value the relationship will often accept. Those who don't may churn — which, if they're unprofitable, is acceptable.
Fire clients below threshold. Some clients will never be profitable at any price. They demand too much time, resist structure, and burn team morale. Set a minimum profit margin threshold — many agencies use 15-20% — and part ways with clients who persistently fall below it. Continuing to serve them subsidizes their engagement with your profit from better clients.
Replicate what makes profitable clients profitable. Your best clients share patterns: clear scope, limited revisions, efficient communication, timely approvals. Identify those patterns and bake them into how you sell, onboard, and deliver. Use your profitable relationships as the model for the clients you want more of.
Reallocate capacity. If you have a mix of high-margin and low-margin clients, prioritize capacity for the former. When you're stretched, the marginal client gets deprioritized — or phased out.
Profitability Benchmarks
Use these as guardrails, not rigid rules. Context matters: agency type, market, and stage all affect what's achievable.
Healthy: 25%+ profit margin per client. These clients cover their direct costs, their share of overhead, and contribute meaningfully to agency profit. They're the ones you want to keep and grow.
Warning zone: 10-25%. These clients are marginally profitable. They might be worth keeping for strategic reasons (portfolio, reference, or future upsell potential), but they're not driving strong returns. Watch them. Improve efficiency or raise prices.
Unprofitable: below 10%. These clients are costing you money once you count everything. Fix them (pricing, scope, process) or exit. Running an agency on negative-margin clients is unsustainable.
Track the distribution of your clients across these bands. If most of your revenue comes from clients in the warning or unprofitable zone, you have a structural problem — not a client problem.
Free tool: Download our Client Profitability Tracker spreadsheet framework to calculate true profit per client.
Conclusion
Tracking agency profitability by client transforms guesswork into decisions. Revenue tells you how much came in. Profit by client tells you which relationships are worth keeping, which need repricing, and which to end. Use the formula: revenue minus direct costs minus allocated overhead, divided by revenue. Capture hidden costs — scope creep, over-communication, revisions, context-switching — even roughly. Build a simple monthly tracker. Then act: raise prices, fire the worst offenders, and replicate what makes your best clients profitable. Your biggest client by revenue might be your smallest by profit. It's time to know.