Does a 20% margin mean 20% profit for your agency?

Margin and markup measure profit against different numbers

Your margin is profit as a share of the price. Your markup is profit as a share of the cost. The profit is the same, the denominator is not.

Margin = profit / price. Markup = profit / cost.

Run the numbers on a job that costs you $10,000 to deliver. Add 20% to the cost and you charge $12,000. That $2,000 of profit is 16.7% of the price.

These figures describe an invented job chosen to show the arithmetic. They are not a client result.

If you quote by adding a percentage to cost, every job you think earns 20% earns 16.7%. On every $100,000 you bill that way, you keep $3,333 less than you planned.

A job margin is not the profit you keep

The margin on a job usually counts only what it took to deliver: your team's time, freelancers and anything bought for the work. Everything else comes out afterward.

• Account management and status calls that nobody bills.
• Rent, software, and the finance and admin work that keeps the agency running.
• Your own salary, which is easy to leave out of every margin you quote.
• Pitches and proposals for work you did not win.

Run the numbers on an invented agency billing $800,000 a year, with a 20% margin on every job.

An invented agency, chosen to show the arithmetic. It is not a client result.

Every job hit its 20%. The agency kept 2%. Nothing went wrong on any single job, which is exactly why the gap stays hidden.

Media spend changes which 20% you are looking at

If client ad spend runs through your books, it inflates revenue without adding profit. Your margin then looks thinner than the work really is.

Agency gross income = revenue - pass-through costs such as media spend

Measure margins against agency gross income instead. It is the money your team actually earned, so it is the fair base for every percentage you track.

How to check your own 20%

1. ( 01 )

   Write down where the 20% came from

   A quote, last quarter's profit and loss, or a figure someone repeated. Each one measures something different.

2. ( 02 )

   Check the denominator

   If the 20% was added to cost, it is a markup. Your margin is the markup divided by one plus the markup.

3. ( 03 )

   Check what sits above the line

   If only delivery costs come out first, you have a job margin. Your profit is still to come.

4. ( 04 )

   Take out pass-through costs

   Remove media spend and anything else you pass straight to a supplier, then work the percentages out again.

5. ( 05 )

   Find the profit you keep

   Divide last quarter's net profit by agency gross income. That is the number to set against the 20%.

What to do with the answer

If your job margins hold but the profit you keep is thin, pricing is not the leak. Look at overheads and unbilled time first.

If you have been adding 20% to cost, quote a 25% markup instead. That turns the margin you meant into the margin you get.

Either way, you now know which 20% you have, and it is the only one worth making decisions from.