Agency profit margin calculator
Calculate your agency's gross and net profit margin from revenue, delivery costs, operating expenses and tax, and see which costs are pulling profit down.
Revenue
Total income from all clients and projects
Cost of Goods/Services (COGS)
Subcontractors, freelancers, tools/licenses used for client work, materials, third-party services
Operating Expenses
Rent, salaries (non-billable staff), marketing, software subscriptions, utilities, insurance, professional services, office supplies
Taxes
Income taxes, payroll taxes, and other tax obligations
Gross Margin
Gross Margin
60%
$300,000 gross profit
Net Margin
Net Margin
15%
$75,000 net profit
About the reference points: The 60% gross and 20% net figures are this calculator's comparison targets, not a published industry average. Compare against your own past years first.
How the calculator works
- Gross profit = revenue - cost of delivery (COGS).
- Gross margin = gross profit / revenue x 100.
- Operating profit = gross profit - operating expenses.
- Net profit = operating profit - taxes.
- Net margin = net profit / revenue x 100.
Each margin is then compared with a fixed reference point: 60% for gross margin and 20% for net margin. Those reference points are built into the calculator. They are not a published industry average.
Worked example
With the defaults, $500,000 revenue minus $200,000 delivery cost is $300,000 gross profit, a 60% gross margin. Subtract $200,000 operating expenses for $100,000 operating profit, then $25,000 tax for $75,000 net profit. Net margin is 15%, 5 points under the 20% reference.
What goes in each input
- Cost of goods (delivery cost): pay for billable staff and freelancers, plus tools, materials and third-party services used for client work.
- Operating expenses: rent, non-billable salaries (management, admin, sales), marketing, insurance, and software used to run the agency.
- Taxes: income tax for the period.
Where billable staff pay goes changes the result. Put it in delivery cost and gross margin shows how efficiently you deliver. Put it in operating expenses and gross margin will look far higher than it should.
How to read the result
Gross margin answers "are we priced right for the work we deliver?" Net margin answers "is the business as a whole profitable?" A healthy gross margin with a weak net margin points to overhead. A weak gross margin points to pricing, scope creep or low utilization.
What a good agency margin looks like
Published figures vary by source, agency size and what each one counts as cost. One recent reference point: Promethean Research's 2026 Digital Agency Industry Report found an average net margin of 13% in 2025 across the agencies it surveyed.
Your own trend matters more than any average. Calculate both margins every quarter, by service line if you can, and look into any sustained decline.
How to improve your agency margins
Improve gross margin
- Raise rates: a price increase with the same delivery cost goes straight to gross profit
- Charge for scope changes: quote extra requests instead of absorbing them
- Raise utilization: billable staff who bill more hours lower delivery cost per dollar of revenue
- Review freelancer costs: renegotiate rates or bring regular work in-house
- Price on value: where results matter more to the client than hours
Improve net margin
- Control overhead: rent, software and office costs
- Check non-billable headcount: make sure each role pays for itself
- Cut low-return marketing: keep the channels that bring clients
- Automate admin: invoicing reminders, reporting and onboarding
- Plan tax: work with an accountant on what you can legally reduce
Example: on the default numbers, a 10% price rise with no change in costs takes revenue to $550,000, gross margin to 63.6% and net profit (before any change in tax) from $75,000 to $125,000.
Common margin problems
- Undercharging: rates have not kept up with salaries and costs
- Scope creep: extra work done without a change order
- Overruns: projects regularly take more hours than estimated
- High overhead: office space or non-billable staff out of line with revenue
- Low utilization: billable people not billing enough of their week
Tracking and managing margins
- Calculate margin per project to separate profitable work from unprofitable work
- Track margin by service type to see which offerings to grow
- Compare year over year
- Set a margin target and act when you miss it two quarters running
Margin vs. revenue
A $1M agency with a 20% net margin earns $200,000. A $2M agency with a 5% net margin earns $100,000. More revenue at a thin margin adds work and risk without adding profit.
When to act
- Margins have fallen for two or more quarters
- Net profit is negative
- Profit cannot cover debt repayments or owner pay
The project profitability calculator shows margin on a single project, and the overhead calculator shows where operating costs go.
Frequently asked questions
What's a good profit margin for an agency?
It depends on size, services and how you classify costs, so compare against your own history first. For an outside reference, Promethean Research's 2026 Digital Agency Industry Report found an average agency net margin of 13% in 2025. This calculator compares your figures with 60% gross and 20% net, which are its own targets rather than an industry average.
What's the difference between gross margin and net margin?
Gross margin is what is left after the direct cost of delivering client work: billable staff, freelancers and project tools. Net margin is what is left after everything, including overhead and tax. Gross margin tells you about pricing and delivery; net margin tells you whether the business as a whole makes money.
How can I improve my agency's profit margins?
For gross margin: raise rates, charge for scope changes, raise utilization and review freelancer costs. For net margin: cut overhead that does not produce revenue, check non-billable headcount and automate admin. Measure margin by service to find which work to grow and which to drop.
Should I include salaries in cost of goods or operating expenses?
Put the pay of people who bill client work in cost of goods. Put management, admin and sales pay in operating expenses. If someone splits their time, split their pay by the share of hours they bill.
My margins are below the reference points. What should I do?
Find the cause first. If gross margin is low, look at rates, overruns and utilization. If gross margin is fine but net margin is low, look at overhead. Make one change at a time and track margins monthly so you can see what worked.
See margin by client and service
AgencyPro Pro adds time tracking to every client request. Plus adds team performance and profitability reports that put revenue next to time spent per client and service.