Agency profitability
Agency profitability: where the margin actually goes.
Agencies at 20 to 50 people rarely have a pricing problem. They have a delivery problem that shows up as a pricing problem. Here is where the money leaves, in the order it usually leaves.
Why a busy agency can still be unprofitable
Revenue and margin come apart when the cost of delivering the work rises faster than the price of it. That gap opens quietly. Nothing on a standard P&L shows it, because the costs arrive as payroll you were always going to pay and the losses arrive as revenue that simply never became profit.
A healthy B2B agency runs 15% to 25% net. Below 10%, the problem is almost never the rate card. Agencies at that level are usually charging market prices and losing the difference somewhere between the signed contract and the final invoice.
There are three places it goes. Most agencies have all three and have measured none of them.
The three leaks
Where it goes, in the order it usually goes
Refunds, credits, and quiet write-offs
The largest leak in most agencies and the least measured, because partial credits and goodwill discounts never get recorded as refunds. Owners routinely estimate their rate at half the real number. The cause is almost always a delivery failure two or three months upstream of the request.
Non-billable hours inside billable work
Reporting, status updates, internal handoffs, and chasing approvals. None of it is billable and all of it is paid for. It scales with headcount, so it gets worse exactly as the agency grows, and it never appears as a line item anywhere.
Pipeline that arrives in bursts
Referral-led pipeline is cheap but lumpy. The cost shows up as a bench during the gaps and rushed delivery during the surges, and rushed delivery is where the refunds in leak one come from. Uneven demand is a margin problem before it is a growth problem.
How to find yours in an afternoon
Pull three numbers. First, every refund, credit, discount, and write-off from the last twelve months as a percentage of revenue. Count the goodwill discounts, since those are refunds wearing a friendlier name.
Second, ask four people to log where their hours went for one week, split into client work and everything else. The everything-else column is the second leak, and it's usually larger than anyone on the leadership team expects.
Third, chart utilisation by month for a year. If it swings more than about fifteen points, the bench and the scramble are costing you more than the pipeline gap itself.
Those three numbers tell you which leak to fix first. They are also exactly what we work from on a discovery call, so if you'd rather not run it yourself, start with the refund leak or bring the numbers to us.
What it costs
Half of what we save you, once.
We run a thirty minute discovery call, project the annual margin we can recover from your actual numbers, and charge 50% of that projection upfront. Every year the fixes keep working after that is yours. If the projection comes back thin, we say so and there is no project.
Questions agency owners ask about margin
Healthy B2B service agencies run 15% to 25% net. Below 10% usually means the problem is delivery rather than pricing, because agencies at that level are typically charging market rates and still losing the margin somewhere between the sale and the final invoice.
Revenue and margin come apart when the cost of delivering the work rises faster than the price of it. The usual causes are refunds and write-offs, scope that expands quietly after kickoff, and non-billable hours spent on reporting and coordination. All three are invisible on a P&L that only shows revenue and payroll.
Start with three numbers: your refund and write-off rate, your billable utilisation, and the hours between a project finishing and the invoice going out. Each one points at a different leak. Most agencies have never measured the first, which is why it's usually the biggest.
Usually neither first. Raising prices on a delivery process that already generates refunds increases the size of the refunds. Cutting costs on a team that's already at capacity increases delivery failures. Fix the process, then the same team at the same prices produces more margin.
Refund-cause fixes show up in the following quarter, because refunds lag the delivery failure that caused them. Capacity gains from removing admin work show up in weeks. We agree the baseline before building anything, since that's the only way the improvement is provable.
B2B agencies and service businesses between 20 and 50 people with an offer that already sells. At that size a single repeating process failure is worth six figures a year, and the team is still small enough to adopt a new way of working in weeks rather than quarters.
Ready to see the math
Your bottom line has room. We can show you where.
Book a free 30-minute call. We'll look at your refund rate and growth trajectory, then show you the savings we'd project. No pitch deck, no commitment.
Free 30-minute call. The math is yours to keep either way.