Agency Profit Margin and How Your Pricing Sets It

Revenue is great and the profitability is zero. Agency owners I advise put it to me like this: I'm running a million dollar company, with 7% profit.

Others ask me why their margins are going down while their revenue is going up.

Key Takeaways

• I've seen 70 person agencies that have less than 10% profitability for a year, when five years earlier they were at more like 20 or 30%.
• Your higher margin projects come from understanding what the client's problem is costing them.
• Charge for the outcome you create.
• Make the change orders normal.

What profit margin do agencies report?

In the AgencyAnalytics 2026 benchmark survey, 68% of the 201 marketing agency owners and leaders who answered reported operating margins above 20%.

At one of the agencies I was part of before Schmidt Consulting Group, some projects had 70% margin and were time and material, and others came in at 15%.

How does the price you charge set your margin?

If your price is billed by hours, you've kind of handed them the argument, because to them it's just simple math, and less time means a smaller invoice.

And the hours keep shrinking, because the thing you used to build 20 hours for, a good person with the right tools can now pretty much knock out in five.

The floor is what it costs you to deliver, plus your margin, plus a contingency for the risk that you're carrying.

To get the cost right, we used to just add a 20% margin. Then we started pulling the average time spent on the last three projects and pricing the next one from that.

And the ceiling is what solving the problem is worth to the client.

Where our price sits is right in between, and that's usually 10 to 20% of what the result is worth to the client.

I never want to tell the client what our hourly rate is unless it's absolutely necessary, and when I hire landscapers, I don't ask them for hours either, so it should just be this is the price for the project, and this is when you're gonna get it.

If your invoices still go out by the hour, start with how to stop billing by the hour.

Does the pricing model decide an agency's margin?

In SPI Research's 2025 benchmark of 403 professional services firms, the top 80 firms earned 47.2% project margin on fixed price work and 46.8% on time and materials work, so the contract type made almost no difference to project margin.

To me, the healthy way to run a service based business is a mix of engagements, where some are just time and materials, others are value based or long term projects, and some are ongoing maintenance work.

The higher margin projects are going to come from understanding what this is costing the client. You can't do value based pricing if you don't know the value of the work, so price things based on what the client tells you it's worth to them.

Why does an agency's margin slip?

In most of the agencies I advise, profit goes down as they get bigger. In a lot of them, they add overhead and don't adjust their pricing, and the dip lasts up to about 120 people. In most cases the drop sneaks up on owners because they can't see it or forecast it.

If you don't know your true cost per hour, the agency pricing and profitability guide shows how to work it out.

"One bad-fit project leads to scope creep. Scope creep eats margins," as I wrote in my book The Attraction Agency.

When a fixed price project blows up, it's usually because it was scoped wrong. The fix is stronger management of scope changes.

You have to set those expectations up early, that change orders are a normal part of the process.

When should an agency raise prices?

When the team is full, the owner's choices are usually to raise prices or hire more contractors to do more output. And then the complexity comes in, because now you need to hire an operations person and a project manager.

If your team is full and you haven't raised prices, you're probably underpricing, so my answer is raise your prices.

Dropping your rate should never be your first step. It is far better to adjust the scope.

I would never do anything for free. People get used to free very quickly, and if they do decide to hire you, they're going to assume you're really cheap.

How does Schmidt Consulting Group help an agency owner set prices?

Schmidt Consulting Group works with founder-led agencies and professional services firms on positioning, pricing and new business. For how a price gets rebuilt, see agency pricing models.

Owners can work with us through Mentorship or Advisory.