The average marketing agency earns a net profit margin of between 6 and 10 percent, and digital agencies report even higher margins, around 20 percent. Corporate advertising agencies, in some cases, report margins of up to 40 percent. There is a lot of room for growth in the marketing field. Single-digit margins are a sign of problems.
What this implies is that in a mature service-based business, your net profit (before tax) should be around 30 percent. Based on industry benchmarking data, marketing agencies average a net profit margin between 6.0% and 12.0%, which means there's plenty of room for improvement. We suggest that a well-managed agency should aim to achieve an operating margin between 15% and 20%, and the average operating profit margin of the top 50 improved slightly from a low of 9.9% last year to 10.4%. Interestingly, these agencies ranged in size (as defined by their fee revenues) from £6 million to £95 million, demonstrating that premium margins are achievable across the board.
This behavior is not sustainable in the long term and it is those agencies that can separate themselves from price competition that will generate sustainable benefits. If you run a more distributed agency and use freelancers or contractors, you may have a lower overhead rate (14-24%), allowing you to offset a potentially higher hourly cost (paying freelancers instead of full-time employees) and remaining highly profitable with a lower gross margin target (40- 60%). One way to think about this is to set your net margin goal, evaluate the amount of overhead needed for your business model, and add them together. In the HubSpot survey of digital agencies, most companies were unsure of their profit margins or reported margins between 11 and 20%.
From sharing educational content and resources to creating tools in Parakeeto to make it easier to measure the most important metrics, everything it does aims to make the agency's profitability more accessible. Benchmarking agency profit margins is a worthwhile exercise, however, it is not an end goal. It was about setting rates that would prepare the company for a healthy margin at the outset and ensure that billable utilization remained high and that the customer paid for those billable hours as often as possible. For a deeper insight into how you can maximize your marketing agency's profit margin, check out the next episode of YouTube Live.
For example, if your goal is a 25% net margin, your overheads are 20% of adjusted gross income, then you want to aim for a gross margin of at least 55% (100% — 45%) to make that goal attainable. Profitability should be fully tracked, but your agency should also consider tracking profitability by customer and service. This can make it appear that an agency has a low gross margin, even if it has a solid net margin, compared to the industry. In addition, learn how it compares to industry benchmarks and how to improve agency profitability in the future.