Client profitability analysis is the process of working out how much money each client makes for you after the cost of serving them. It compares the revenue you invoice with the hours and expenses that client consumes. Done monthly, it shows which clients to keep, which to reprice, and which to let go before they cost you a year's profit.
How to calculate client profitability
The formula is short.
Client profit = revenue from the client − (hours worked × cost per hour) − direct expenses
Client profit margin = client profit ÷ revenue from the client
Three inputs, and each has a trap.
Revenue is what you invoiced for the period, not what was quoted. A discount, a credit note or an unbilled change order lowers it. Read it from the invoices.
Cost per hour is the loaded cost of a person's time: salary, employer taxes, benefits and a share of overheads, divided by the hours they are available to work. It is not the rate you charge. For a team, use a blended figure or each person's own. The billable hours calculator works this out from your own numbers.
Direct expenses are things you bought for this client: contractors, stock assets, software you only run for them, ad spend you did not mark up. Overheads such as rent are not direct, so leave them out at the client level and count them at the agency level.
Worked example: a client pays a monthly fee of 6,000. The team logged 48 hours at a loaded cost of 65 per hour, which is 3,120. A contractor cost 400. Profit is 2,480. Margin is 41 percent. That is fine if your target is 40; it is a problem if it is 55.
What to track each month
Agency margin tracking does not need many numbers. One row per client per month:
- Revenue invoiced
- Hours worked
- Direct expenses
- Profit and margin
Add two columns over time: the hours the client was priced for, and the trend in margin over the last three months. The first shows over-servicing. The second shows drift.
Then sort by margin once a month and read the bottom five. That is the whole routine. Agencies that do this often find that a small number of clients produce most of the profit and a small number consume it.
Agency profit margin benchmarks
The ranges agency owners commonly quote are a gross margin of fifty to sixty percent on client work, and a net margin of fifteen to twenty-five percent after overheads. Below ten percent net, one slow quarter puts the agency at risk.
Treat the figures as a range, not a target. Benchmarks come from surveys with different samples and different definitions of cost. A media agency with pass-through spend will show a lower margin on the same profit. A small agency where the owner works on client accounts will show a higher margin than is real until the owner's time is counted at a proper salary.
Your own last twelve months are the more useful benchmark. Aim to improve the trend before you chase a number from a report.
Retainer profitability
Retainers hide losses better than projects do. A project ends and its margin is visible. A retainer rolls on, and a team that works fifty hours on a forty-hour retainer month after month sees only that the client is happy.
To find out whether your retainers are profitable, put hours sold next to hours worked, per retainer, every month. Then apply the normal formula. Two warning signs: the hours worked creep up while the fee stays flat, and the fee has not changed in more than eighteen months while salaries have. The fix is a re-scope or a price change at renewal. The retainer management guide covers how to structure that conversation.
Client profitability software and project profitability software
The job of client profitability software is to join three numbers that usually sit in three places: revenue per client from invoicing, hours per client from time tracking, and cost per hour per person. Project profitability software does the same at the project level, which matters when one client has several projects with different margins.
A spreadsheet does this for an agency of five. Past ten people, the hours stop being entered on time and the sheet stops being trusted. That is the point at which a tool that holds invoices and hours in one place earns its cost.
Spodus holds the revenue side: contacts, deals, quotes and invoices per client, with a dashboard across them. Put your hours next to it and the margin per client is one division away.
Whatever tool you use, the constraint is the same: it can only calculate from hours that were logged. Fix the logging habit before buying the report.
What to do with an unprofitable client
There are four options, in order.
- Re-scope. The work has grown past what was sold. Write the current scope down and price it. Most low-margin clients are scope creep, not bad clients.
- Reprice. Costs rose and the fee did not. Give notice, explain the change once, and hold to it at renewal.
- Change the delivery. Move the work to cheaper people, fewer meetings or a smaller number of revisions.
- Let the client go. If none of the above works, end the contract cleanly and use the hours for a better client.
Do the analysis before the conversation. A client is much more likely to accept a new price when you can show the hours.
