worksection
Blog
Margin: What It Is and How to Calculate It
  •     •   8 min read
Reports Marketing

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.
⇆

esc
Share
или
PM school
Best Legal Project Management Software 2024
Specialized project management software has become essential for law firms. Legal practices benefit from these tools by streamlining case management, ensuring compliance with legal standards, and enhancing...
30 September 2024   •   12 min read
PM school
Best Engineering Project Management Software 2024
In 2024, engineering firms require robust project management tools to handle complex workflows, resource allocation, and tight deadlines. The right project management software can help engineering firms...
30 September 2024   •   10 min read
PM school
Best Project Management Tools for Nonprofits 2024
Nonprofits operate with limited resources and tight budgets, making efficient project management essential for success. Project management software can help nonprofits streamline operations, manage volunteers...
30 September 2024   •   11 min read
Get started now
Please enter your real email 🙂
Cancel
Digital UI Gantt chart Comments Kanban Project Management Notifications More 79...
Digital UI Gantt chart Comments Kanban Project Management Notifications Agile Crm Planning Files PM Projects Report Reports Calendar Time tracking Timer Interview Consulting Waterfall Task Management Priorities Plan Timetracker Reactions IT Emoji Agency Gannt SEO Optimize Sale Marketing Time tracker Architect People Asana Integrations UI Statuses Tags Search Project Folder Teams Integration SMART Entitling Tasks IOS Android Text editor Code Scrum Lean Bureau Mono Architects Y R Vintage Tebin BIM Egineering Labels Video Subtasks Migration Tasks App Filter Сhecklist Connections Privacy Telegram Advice PM secrets Export API TO-DO Google Documents SSL Security Топ 5 UPD Promo actions Tips&tricks Partnership