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Margin: What It Is and How to Calculate It
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Margin: What It Is and How to Calculate It

How to cal­cu­late the project mar­gin in a mar­ket­ing agency? And what is mar­gin in general?

In this arti­cle, we will explain what mar­gin is, how to cal­cu­late it, the types of mar­gin, the dif­fer­ence between mar­gin and prof­it – every­thing you need to know for cal­cu­lat­ing project mar­gin in a mar­ket­ing agency (and beyond).

What is Margin?

Mar­gin is a finan­cial indi­ca­tor that shows the per­cent­age of a com­pa­ny’s prof­it in the total cost of a prod­uct or ser­vice. It is cal­cu­lat­ed as the dif­fer­ence between the sell­ing price and the cost price, expressed as a percentage.

In mar­ket­ing and adver­tis­ing agen­cies, the mar­gin rep­re­sents the prof­it share of the agency in the invoice they issue to the client.

For exam­ple, if the pro­mo­tion costs for a project are 10,000, and the client paid 15,000 for the ser­vices, the project mar­gin is 5,000.

Often, when study­ing what mar­gin is in trade, the con­cept gets con­fused with markup. Although they are equal in mon­e­tary terms, mar­gin is always low­er in per­cent­age terms. This is because the mar­gin relates to rev­enue, not cost.

Mar­gin is cal­cu­lat­ed as follows:

Margin = (Revenue – Cost) / Revenue x 100%

The per­cent­age val­ue forms the busi­ness mar­gin, indi­cat­ing its abil­i­ty to gen­er­ate prof­it on invest­ed cap­i­tal. By the way, mar­gin is the same as profitability.
Mar­gin = Profitability

Project Mar­gin in Mar­ket­ing Agencies

The project mar­gin in mar­ket­ing agen­cies refers to how prof­itable each imple­ment­ed project of the com­pa­ny is. There­fore, the mar­gin is cal­cu­lat­ed for each project separately.

There are sev­er­al mar­gin indi­ca­tors depend­ing on which expens­es are con­sid­ered in the mar­gin cal­cu­la­tion for­mu­la. The indi­ca­tor used for cal­cu­lat­ing busi­ness prof­itabil­i­ty is the net mar­gin.

Net Mar­gin is the mon­ey left in the com­pa­ny after pay­ing all bills, includ­ing CEO compensation.

The uni­ver­sal for­mu­la for cal­cu­lat­ing mar­gin is:

Net Margin = Net Profit / Revenue x 100%

In West­ern agen­cies, a mar­gin of 20 – 25% is con­sid­ered good. A mar­gin­al prof­it lev­el of over 10% is also a nor­mal indi­ca­tor. If an agency is in the growth stage and invests part of the prof­it into devel­op­ment, a low­er mar­gin may be expected.

Hub­Spot, a mar­ket­ing plat­form, sur­veyed near­ly 800 depart­ment heads and top man­agers of mar­ket­ing agen­cies in the USA, UK, and Cana­da. They pro­vid­ed data on their com­pa­nies’ margins.

Types of Margin

​The var­i­ous types of mar­gin include: gross mar­gin, front-end mar­gin, and back-end mar­gin. Each type plays a key role in ana­lyz­ing the finan­cial effi­cien­cy and prof­itabil­i­ty of a busi­ness, reflect­ing dif­fer­ent aspects of its income and expenses.

Gross Mar­gin

Gross mar­gin is the amount of mon­ey that remains in the agency after deduct­ing direct project expenses.
Indi­rect costs, such as rent, util­i­ties, and admin­is­tra­tive staff salaries, are not includ­ed. For a mar­ket­ing agency, a nor­mal gross mar­gin is con­sid­ered to be 50 – 60%.

In addi­tion, large West­ern agen­cies cal­cu­late oper­at­ing mar­gin (share of oper­at­ing prof­it in the company’s turnover), PBIT mar­gin (prof­itabil­i­ty before finan­cial income and tax­es), and PBT mar­gin (prof­itabil­i­ty before taxes).

Front-End Mar­gin

Front-end mar­gin mea­sures prof­itabil­i­ty at the ini­tial sales stage, usu­al­ly con­sid­er­ing income from the sale of goods or ser­vices before deduct­ing oper­at­ing expenses.

Front-End Mar­gin Formula

Front-End Margin = (Revenue - Cost of Goods Sold) / Revenue x 100%

This for­mu­la assess­es the share of total income rep­re­sent­ed by net sales income before account­ing for admin­is­tra­tive, oper­at­ing, and oth­er expenses.

Back-End Mar­gin

Back-end mar­gin mea­sures prof­itabil­i­ty after the trans­ac­tion is com­plet­ed, con­sid­er­ing all dis­counts, bonus­es, and addi­tion­al expens­es not includ­ed in the ini­tial price.

Back-End Mar­gin Formula

Back-End Margin = (Final Revenue - Total Expenses) / Final Revenue x 100%

This for­mu­la cal­cu­lates the actu­al prof­itabil­i­ty of a sale or project, tak­ing into account all addi­tion­al dis­counts, bonus­es, and expens­es that arise after the ini­tial pricing.

Mar­gin vs. Markup

Mar­gin and markup are often mis­tak­en­ly equat­ed, but they are dif­fer­ent. Mar­gin is cal­cu­lat­ed once the ser­vice is sold and deter­mines how prof­itably the com­pa­ny operates.
Markup or pre­mi­um (markup) is the amount the com­pa­ny adds to the cost of its ser­vices to invoice the client.

Markup For­mu­la

Markup = (Price – Cost) / Cost x 100%

That’s why the val­ues of markup and mar­gin don’t match: markup is applied only to the cost price, while mar­gin is cal­cu­lat­ed from the sum of the cost price and markup. As a result, the mar­gin val­ue is always lower.
Mar­gin < Markup

The Dif­fer­ence Between Mar­gin and Profit


Mar­gin is the per­cent­age ratio of income to rev­enue, while prof­it is the quan­ti­ta­tive amount remain­ing after deduct­ing expenses.

Why Cal­cu­late Project Margin?

Mar­gin is an impor­tant indi­ca­tor of the prof­itabil­i­ty of the entire mar­ket­ing agency and each project. With­out cal­cu­lat­ing the mar­gin, it’s unclear how prof­itably the busi­ness is oper­at­ing and where it is heading.
If you do not cal­cu­late the mar­gin, you do not under­stand how prof­itably the busi­ness operates.
With prop­er mar­gin cal­cu­la­tion, you can identify:
  • How employ­ee salaries affect project margins;
  • The mar­gin­al prof­it of each project and the busi­ness overall;
  • Which projects require the most resources;
  • How much each ser­vice brings;
  • The prof­itabil­i­ty dynam­ics of the company;
  • The most valu­able clients;
  • Where the gross income goes.
Based on the obtained data, appro­pri­ate man­age­ment deci­sions are made. For exam­ple, to reduce costs, increase ser­vice prices, or aban­don unprof­itable projects.

How to Cal­cu­late the Mar­gin of a Marketing/​Advertising Project?

To under­stand how to prac­ti­cal­ly cal­cu­late a pro­jec­t’s mar­gin, let’s go through this sim­pli­fied algorithm:

Step #1 – Deter­mine the Cost per Hour

The first step is deter­min­ing the hourly rate of each employ­ee. To do this, first cal­cu­late the total annu­al earnings.

For full-time employ­ees on a full work­ing day, this will include:

  • Pen­sion contributions;
  • Insur­ance and bonuses;
  • Gross salary;
  • Oth­er payments.
Then, cal­cu­late the num­ber of work­ing hours per year. Mul­ti­ply the stan­dard 40 work­ing hours by 52 weeks, then sub­tract vaca­tion, sick, and hol­i­day days. Next, divide the annu­al wage sum by the total work­ing hours.

Hourly Rate = Annual Earnings / Total Working Hours Per Year

Know­ing the hourly rate and the time spent on the project allows you to deter­mine the direct expens­es for the project.

Step 2 – Cal­cu­late Over­head Expenses

To deter­mine the net mar­gin, cal­cu­late both direct and over­head expens­es for the year.

Over­head expens­es include all expect­ed costs not attrib­ut­able to a spe­cif­ic project:

  • Work hours not relat­ed to a spe­cif­ic project;
  • Admin­is­tra­tive staff salaries;
  • Soft­ware, host­ing, tools;
  • Office equip­ment;
  • Util­i­ties;
  • Enter­tain­ment expenses;
  • Insur­ance;
  • Trans­port;
  • Rent.
Add up the list­ed annu­al expens­es to deter­mine the over­head costs.

Step 3 – Cal­cu­late Over­head Costs Per Hour

First, cal­cu­late the total paid hours of all employ­ees for the year by mul­ti­ply­ing the num­ber of employ­ees by annu­al work­ing hours.
Then, divide the annu­al over­head costs by the paid hours:

Overhead Costs Per Hour = Total Overhead Costs / Total Paid Hours

Step 4 – Deter­mine Gross and Net Mar­gin for Each Client

To cal­cu­late the gross mar­gin, sub­tract the total cost of the hours worked from the total val­ue of com­plet­ed contracts:

Gross Margin = Gross Sales – Total Hours Worked * Hourly Rate

To cal­cu­late the net mar­gin, include the over­head expenses:

Net Margin = Gross Sales – Total Hours Worked * (Hourly Rate + Overhead Costs Per Hour)

To express the project mar­gin in per­cent­age, divide the mar­gin in mon­e­tary terms by the total gross sales and mul­ti­ply by 100%.

Project Margin in % = Margin in Monetary Terms / Total Gross Sales * 100%
In prac­tice, the cal­cu­la­tion algo­rithm is much more com­plex: agen­cies employ spe­cial­ists with dif­fer­ent wages, projects can be long-term or one-off, and some work may be sub­con­tract­ed. Thus, a large num­ber of vari­ables are involved in the cal­cu­la­tion process.

Com­mon Mis­takes Lead­ing to Reduced Busi­ness Margins

If you are dis­sat­is­fied with the result, you might be doing some­thing wrong. Here are typ­i­cal mis­takes dig­i­tal agen­cies make that poten­tial­ly lead to reduced busi­ness margins:
  1. Per­form­ing unpaid work, i.e., com­plet­ing client tasks not includ­ed in the agreed project scope. This can lead to sig­nif­i­cant unfore­seen expens­es. If this is a con­scious choice to gain client loy­al­ty, high­light the pro­vi­sion of addi­tion­al ser­vices as a gift or spe­cial offer.
  2. Not account­ing for all time spent on the project. Neglect­ing accu­rate time track­ing can lead to incor­rect billing. This is impor­tant for both hourly and fixed pay­ments to under­stand the effec­tive use of time and resources.
  3. Fail­ing to ana­lyze mis­takes after project com­ple­tion, lead­ing to repeat­ed errors. Hold post-project meet­ings with the team to answer ques­tions: What was done well? What didn’t work out? What should be done dif­fer­ent­ly next time?
  4. Under­es­ti­mat­ing project costs due to the fear of los­ing a client. Reg­u­lar­ly review the cost of ser­vices, com­pare prices with com­peti­tors, and adjust accordingly.
  5. Reduc­ing prices dur­ing nego­ti­a­tions with poten­tial clients out of fear of miss­ing out on the deal. In real­i­ty, reduc­ing prices dur­ing client nego­ti­a­tions is rarely com­pen­sat­ed. It can lead to bud­get and work­load reduc­tions in both the short and long term.

Tools for Cal­cu­lat­ing Mar­gin and Project Management

Omni Cal­cu­la­tor

​

Omni Cal­cu­la­tor is a sim­ple online cal­cu­la­tor. It cal­cu­lates net mar­gin, gross mar­gin, mar­gin includ­ing tax­es, and markup. The resource offers sev­er­al dozen cal­cu­la­tors, includ­ing four mar­ket­ing ones.

Ulti­mate Mar­gin Cal­cu­la­tor by Lemon­ade Stand


The mar­ket­ing agency Lemon­ade Stand devel­oped the Ulti­mate Mar­gin Cal­cu­la­tor for their own use and decid­ed to share it with the world. It is avail­able in Google Sheets along with usage instructions.

The doc­u­ment has sep­a­rate sheets for cal­cu­lat­ing the mar­gins of reg­u­lar clients, PPC clients, and one-off projects. The cal­cu­la­tor is suit­able for both large agen­cies with many clients and employ­ees and small com­pa­nies with 3 – 4 employ­ees and sev­er­al projects.

TrinityP3 Cal­cu­la­tor


An online cal­cu­la­tor that cal­cu­lates annu­al and hourly salaries, the num­ber of paid hours, and the over­head cost and mar­gin mul­ti­pli­er. Apps are avail­able for Android and iOS.

Mar­gin and Worksection

Work­sec­tion helps cal­cu­late mar­gin by pro­vid­ing tools for effec­tive resource man­age­ment. The sys­tem allows you to track time spent on var­i­ous project tasks and allo­cate expens­es, enabling pre­cise project cost calculations.

Reports and Bud­get Con­trol in Worksection

Reports in Work­sec­tion pro­vide a detailed overview of the pro­jec­t’s finan­cial indi­ca­tors. This infor­ma­tion helps cal­cu­late and con­trol the margin.


Work­sec­tion pro­vides detailed reports on bud­gets and expens­es, allow­ing analy­sis of the pro­jec­t’s finan­cial per­for­mance. This way, project man­agers and finan­cial ana­lysts can make deci­sions based on cur­rent finan­cial data.

Con­clu­sion

Mar­gin is a key indi­ca­tor of busi­ness finan­cial efficiency.
The mar­gin­al prof­it of an adver­tis­ing project or mar­ket­ing agen­cy’s ser­vices shows how well the costs of project pro­mo­tion and office main­te­nance are cov­ered. Cal­cu­lat­ing the mar­gin of each project allows for ana­lyz­ing the agency’s order port­fo­lio and adjust­ing oper­a­tions. Not cal­cu­lat­ing mar­gin is akin to run­ning a busi­ness blindly.

Work­sec­tion is an assis­tant that effec­tive­ly aids in cal­cu­lat­ing project mar­gins by pro­vid­ing users with tools for pre­cise resource track­ing. This allows project man­agers to opti­mize prof­itabil­i­ty and con­tribute to the over­all suc­cess of projects.
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