What is agency gross margin?

Agency gross margin is the share of revenue left after paying the direct costs of delivering client work, before overhead. Formula: gross margin = (revenue - direct delivery costs) / revenue x 100 Direct delivery costs (cost of goods sold) for an agency include the fully loaded cost of billable staff time, freelancer and contractor fees, and software or assets bought for specific projects. Pass-through costs such as client ad spend should be excluded from both revenue and costs, or they distort the margin. Example: an agency earns $100,000 in a quarter. Billable staff cost $42,000 and freelancers $13,000. Gross margin is ($100,000 - $55,000) / $100,000 = 45%. If overhead (rent, admin, sales, software) is $33,000, net margin before tax is 12%. Gross margin is not net margin. Net margin also subtracts overhead such as management salaries, rent, marketing, insurance and tools. Promethean Research puts the average digital agency after-tax net margin at 13% in 2025, and notes that gross margins vary widely, roughly 25% to 65%, because pricing power and utilization differ so much between agencies. Gross margin is the better metric for delivery decisions because it isolates how well you price and deliver work from how much the business costs to run. If gross margin falls, look at pricing, scope creep and who is staffed on the work before cutting overhead. Ways to improve it: price from delivery cost rather than habit, enforce scope with change orders, use templates for repeat deliverables, put junior staff on work that does not need senior time, and drop services that consistently earn less than the rest.