When your agency wins new work, it feels like growth. More revenue, more activity, more clients. But here’s the truth: revenue doesn’t equal profit.
If you’re not tracking gross margin by client, you might be celebrating “growth” that’s quietly shrinking your bottom line.
The Profit Illusion
Many marketing agency owners report revenue and total gross margin, but that firm-wide number hides what’s really happening.
You may assume your biggest clients are your best — until you see what it costs to serve them. After factoring in account management, creative time, and contractor hours, many large accounts barely break even.
That’s why tracking gross margin by client is essential. It answers the question every agency leader needs to ask:
“Which clients actually drive profit — and which just create work?”
What Gross Margin by Client Really Measures
Gross margin by client shows how efficiently your team turns each client’s revenue into profit before overhead.
Formula:
(Client Revenue – Direct Client Costs) ÷ Client Revenue = Gross Margin
For agencies, direct client costs should include only labor and contractors directly involved in delivering the work. Software tools, ad spend, and subscriptions aren’t part of this calculation — those belong in overhead. (some exceptions if the software is directly billed back to your client)
When you measure margin this way, you reveal the true economic engine of your agency: how well your team converts time into value.
The Benchmark: 80% Gross Margin Target
For agencies in the $2–10M revenue range, aim for an 80% gross margin by client.
After accounting for team utilization (since no one is billable 100% of the time), that 80% typically lands around a 70% realized gross margin — the level required to:
- Cover leadership and administrative overhead
- Maintain a strong marketing and sales budget
- Invest in team growth and tools
- Still achieve 30%+ net profit, the mark of a top-performing agency
Anything below that puts pressure on cash flow, marketing spend, and salaries — all the things that fuel your growth.
Why Client-Level Margins Matter
Looking only at total agency margin can mask poor-performing accounts. One or two high-margin clients can hide several low-margin ones dragging you down.
Analyzing gross margin by client allows you to:
- Spot your most profitable clients and attract more like them.
- Identify underperformers that need repricing, scope changes, or process improvements.
- Pinpoint efficiency issues in your production workflow.
- Align your team’s effort toward high-return accounts.
This visibility is what separates agencies that grow profitably from those that grow chaotically.
Turning Insight into Action
1. Identify Your “A Clients.”
List your clients from highest to lowest margin. The top 20% likely generate most of your profit. Study what makes them different — industry, service mix, or engagement style — and focus your marketing on attracting more like them.
2. Improve Low-Margin Accounts.
If a client’s gross margin sits below 80%, review your scope and time tracking. Are you over-servicing? Did the project expand without a change order? Often, a few conversations or pricing tweaks can restore profitability.
3. Align Resources to ROI.
Prioritize your best people and attention toward high-margin clients. For lower-margin ones, standardize processes and automate deliverables to improve efficiency.
4. Forecast Confidently.
Knowing your client-level margins helps you plan growth precisely. You can see when it’s time to hire, and whether adding headcount will strengthen or weaken overall profitability.
The CFO’s Lens: Profitability and Smart Scaling
From a fractional CFO perspective, gross margin by client is the single most valuable management metric for agencies between $2–10M in revenue.
Here’s why:
- Labor is your biggest investment — every hour is capital.
- Gross margin tells you how effectively that capital generates returns.
- A consistent 70% realized gross margin allows you to sustain 30%+ net profit even as overhead grows.
That margin provides room to reinvest in marketing, leadership, and infrastructure while maintaining healthy cash flow.
If your gross margin slips below 70%, your growth starts consuming cash instead of creating it — and your ability to scale stalls.
A Tale of Two Agencies
Both agencies generate $5M in annual revenue:
- Agency A tracks gross margin by client and maintains an average of 80%. After utilization, it nets a healthy 70% realized margin, translating to a 30%+ bottom line.
- Agency B runs at 60% gross margin. After utilization, that drops near 50%, leaving little for marketing, hiring, or leadership pay.
They look identical on the surface — but only one has the financial foundation to grow with confidence.
How Argento CPA Helps Agencies Get There
At Argento CPA, we help marketing agencies turn their numbers into strategy. Through our fractional CFO services, we:
- Build dashboards that track gross margin by client
- Analyze utilization and pricing to maintain 80% margins
- Identify which clients and services generate the highest returns
- Model growth scenarios to protect your 30%+ net profit
Because knowing your margins isn’t just about accounting — it’s about making smarter, more profitable decisions.
Final Thought
You don’t need more clients.
You need more profitable clients.
Tracking gross margin by client shows you where your effort creates the most value — so you can build an agency that grows stronger, not just bigger.
About the Author
Michael Argento, CPA, is the founder of Argento CPA, a remote accounting and fractional CFO firm that helps marketing agency owners gain clarity and confidence in their numbers — helping them improve profitability, cash flow, and long-term scalability through data-driven financial strategy.