Gross Margin vs Net Margin for Agencies
Gross margin is what remains after the cost of delivering the work. Salaries of billable staff, subcontractors, and anything consumed producing the deliverable. It tells you whether the work itself makes money.
Net margin is what remains after overhead as well. Rent, software, non-billable salaries, and the principal time that never touches a client project. It tells you whether the business makes money.
An agency can hold a strong gross margin and still run a loss, which is the most common shape of a struggling studio.
The formula
Gross margin % = (Net revenue − Cost of delivery) / Net revenue × 100
Net margin % = (Net revenue − Cost of delivery − Overhead) / Net revenue × 100
Net revenue = Gross revenue − Pass-through costs billed at cost
A worked example
An eight-person studio over a year:
- Gross billings: $1,150,000
- Pass-through costs (media, print, rebilled at cost): $250,000
- Net revenue: $900,000
- Cost of delivery (billable salaries and subcontractors): $477,000
- Overhead (rent, software, admin salaries, non-billable principal time): $315,000
Gross margin = ($900,000 − $477,000) / $900,000 = 47%. The delivery work is priced above what it costs to produce.
Net margin = ($900,000 − $477,000 − $315,000) / $900,000 = 12%. After the cost of simply existing, $108,000 remains.
Move overhead to $400,000 with everything else held constant and net margin falls to 2.6%, while gross margin does not move at all. That is the whole point of tracking both.
What each number is for
Gross margin answers pricing and delivery questions. A weak gross margin means rates are too low, estimates are too optimistic, or too many hours are written off. Fix it with rates, scope discipline, or realization. It is also the number to compare across clients, since it isolates the work from the cost of the building.
Net margin answers structural questions. A strong gross margin sitting beside a weak net margin means the business carries more overhead than its revenue supports, and no amount of repricing fixes that. Either revenue grows into the cost base or the cost base comes down.
Small agencies commonly aim for gross margin around 50% and net margin in the low teens, though both vary with how much work is subcontracted and how much principal time is billable. Calculate your own before benchmarking against anyone; the agency profit margin calculator runs both from the same inputs.
The mistakes that distort both
Leaving pass-through costs in revenue is the biggest one. Media spend in the denominator makes both margins look far worse than the work justifies, and makes comparison with other agencies meaningless.
Putting the founder salary in the wrong place is the second. A principal who bills 60% of their time belongs 60% in delivery cost and 40% in overhead. Loading all of it into overhead flatters gross margin and hides the fact that delivery is underpriced.
The third is measuring margin against invoiced hours rather than worked hours. Written-off time is real cost, and excluding it produces a gross margin that exists only on the invoice. That gap is what effective billing rate measures.
Which margin answers which question
| Question | Use |
|---|---|
| Are our rates high enough? | Gross margin |
| Is this client worth keeping? | Gross margin, per client |
| Can we afford another hire? | Net margin |
| Is the studio actually profitable? | Net margin |
| Are we writing off too many hours? | Gross margin against effective billing rate |
Frequently asked questions
What is the difference between gross margin and net margin for an agency?+
Gross margin is what remains after the cost of delivering the work, meaning billable salaries and subcontractors. Net margin is what remains after overhead as well, meaning rent, software, and non-billable salaries. Gross margin says whether the work makes money; net margin says whether the business does.
How do you calculate agency gross margin?+
Gross margin percent equals net revenue minus cost of delivery, divided by net revenue, times 100. Net revenue is gross billings less pass-through costs billed at cost. A studio with $900,000 net revenue and $477,000 of delivery cost has a 47% gross margin.
What is a good net margin for an agency?+
Small agencies commonly land in the low teens, though it varies with how much work is subcontracted and how much principal time is billable. Calculate your own figure before benchmarking, since a published average across agencies with different structures is not a target.
Can an agency have a good gross margin and still lose money?+
Yes, and it is the most common shape of a struggling studio. A 47% gross margin with overhead consuming 44% of net revenue leaves 3% at the bottom. When gross is strong and net is weak, the business carries more overhead than its revenue supports and repricing will not fix it.
Should the founder salary count as delivery cost or overhead?+
Split it by how the time is spent. A principal billing 60% of their hours belongs 60% in delivery cost and 40% in overhead. Loading all of it into overhead flatters gross margin and hides underpriced delivery.
Do pass-through costs affect margin?+
They should be removed before either margin is calculated. Leaving media spend or rebilled print in revenue inflates the denominator, making both margins look far worse than the work justifies and making comparison with other agencies meaningless.
Related calculators & guides
Work the same numbers from the next angle.
Agency Profit Margin Calculator
Separate gross margin from net margin and see whether a thin bottom line is a delivery or an overhead problem.
Open toolMarkup vs Margin Calculator
Enter a cost and any one of markup, margin, or price. The other two follow, plus what swapping the terms would cost you.
Open toolWhat Are Pass-Through Costs?
Third-party spend billed at cost. Why it leaves revenue before margin is measured, and the cash risk it carries.
Open toolAgency Overhead Rate Calculator
Work out your overhead as a percentage of direct labour — the number that sets a defensible billing rate.
Open toolWhat Is Effective Billing Rate?
Effective billing rate defined — revenue divided by hours worked, with a worked example.
Open toolWhat Is a Rate Card?
The published price per role that every quote is built from. What goes on one, and when to quote a project fee instead.
Open toolBoth margins start with hours you can trust.
Ascend logs time against the client and the task, so delivery cost is a measured number rather than an estimate when you work out either margin. The free tier covers one client end to end.
Start with Ascend free