How Knowing Your Gross Margin Can Help Your Agency Grow

Do you know what your gross margin percentage is? If you’re an agency owner, this is one of your most important metrics. Gross margin is your revenue minus the cost of service, expressed as a percentage of revenue. The higher your gross margin, the more money you’ll have to reinvest in your business, and generate profits. In this article, we’ll explain why it’s essential to know your gross margin and share how analyzing it can help your agency grow.

Why Gross Margin Matters

As an agency owner, you want your business to not only survive but thrive. Your gross margin is essential to ensuring success. If your gross margin is over 50%, you’re in good shape! You have enough money to invest in your business, grow your team, and have a profit. If your gross margin is between 40% and 50%, you’re at a critical juncture. You’ll need to decide between investing in your business or having a profit. If your gross margin is lower than 40%, you’re most likely losing money, and you’ll need to make a plan to pivot quickly.

Analyzing Your Gross Margin

Once you know your overall gross margin you’ll need to analyze each area’s individual one. These areas are: business, client, team member, office, and project. By looking at all the margins individually you can identify exactly where you need to focus your time and attention. For example, if your agency has an overall gross margin of 43%, but your paid media practice margin is at 50%, while your web development practice margin is at 35%, you know where the problem lies. In this case, it’s your web development group.

How to Increase Your Gross Margin

If you want to improve your gross margin, there are two ways: either increase your revenue, or decrease your cost of service. To achieve this, you can try a few tactics such as:

  • Raising prices
  • Getting rid of unprofitable clients
  • Making sure senior employees are not doing junior work
  • Increasing the number of direct reports per manager: outsourcing work or implementing automations.

The Benefits of a Higher Gross Margin

When you have a higher gross margin, you can invest more in your agency’s growth while maintaining high profits. This could mean investing more in Sales & Marketing or R&D, both of which will help you grow.

Basically- your gross margin should be the guiding light for growing your business. Shoot for that 50% or higher, but don’t panic if it’s lower. If it’s in the 40%-50% range you may not be in a position to invest in your business and if you’re below 40% you’ll need to pivot in order to be making a profit. Either way, when you know your gross margin, you’ll be more empowered to make smart business decisions.