Learn how to calculate true agency client profitability using fully loaded costs, overhead allocation, and project-level analysis. Stop subsidizing unprofitable clients.
Agency client profitability analysis requires calculating fully loaded costs (labor at loaded rates, not billing rates, plus direct expenses and allocated overhead) for each client relationship to reveal which accounts generate genuine profit versus those that consume resources while appearing profitable on paper. According to AgencyAnalytics' 2024 State of Agency Report, agencies that terminate their bottom 20% of clients by profitability see average profit increases of 22% within 6 months while working fewer total hours, because they stop subsidizing money-losing relationships that bookkeeping alone can't identify.
If you don't know which clients are actually profitable (not just which generate the most revenue), you're allocating resources blindly.
Scenario: Your agency has two clients
Client A - Large Retainer:
Client B - Small Project:
Without profitability analysis, you assume:
With profitability analysis, you discover:
Client A actual profitability:
Revenue: $10,000
Labor costs (145 hours × $65): $9,425
Direct expenses (tools, ads): $800
Allocated overhead: $1,200
Total costs: $11,425
Profit: -$1,425 (LOSING MONEY)
Margin: -14.3%
Client B actual profitability:
Revenue: $3,000
Labor costs (25 hours × $65): $1,625
Direct expenses: $150
Allocated overhead: $360
Total costs: $2,135
Profit: $865
Margin: 28.8%
Reality: Your "best client" (Client A) is costing you $1,425/month. Your "small client" (Client B) generates $865 profit—at nearly 29% margin.
Without profitability analysis: You'd invest more in Client A (wrong) and undervalue Client B (opportunity cost).
"Revenue is vanity, profit is sanity," says Rebecca Martinez, Managing Director at Deloitte's Agency Advisory Practice. "I've worked with 50+ agencies, and the pattern is universal: the loudest, most demanding clients are almost always the least profitable. They consume disproportionate resources through scope creep, endless revisions, and constant firefighting. Agencies that track profitability discover 20-30% of clients destroy value. That's not a rounding error—it's an existential crisis."
Your team's hourly cost is NOT salary ÷ 2,080 hours. You must include benefits, taxes, and overhead.
Formula:
Loaded Hourly Rate = (Annual Salary + Benefits + Payroll Taxes + Allocated Overhead) ÷ Billable Hours
Example: $75,000 Mid-Level Account Manager
Annual Salary: $75,000
Benefits (health, 401k, etc.): $13,500 (18%)
Payroll Taxes (FICA, UI, etc.): $5,738 (7.65%)
Subtotal Direct Cost: $94,238
Allocated Overhead:
Rent & utilities (10%): $9,424
Software & tools (8%): $7,539
Admin & management (12%): $11,309
Subtotal Overhead: $28,272
Total Loaded Cost: $122,510
÷ Billable Hours:
Total hours: 2,080 (40 hrs/week × 52 weeks)
- PTO (10%): 208 hours
- Non-billable (25%): 520 hours
= Billable hours: 1,352 (65% utilization)
Loaded Hourly Rate: $122,510 ÷ 1,352 = $90.61/hour
Key insight: You bill this person at $150-175/hour, but they cost you $91/hour. True margin = $59-84/hour, not $150-175.
Create loaded rate table for all roles:
| Role | Salary | Loaded Cost | Billable Hrs | Loaded Rate | Bill Rate | Margin/Hr |
|---|---|---|---|---|---|---|
| Junior Designer | $50,000 | $78,500 | 1,352 | $58/hr | $100/hr | $42/hr |
| Mid Designer | $70,000 | $106,750 | 1,352 | $79/hr | $150/hr | $71/hr |
| Senior Designer | $95,000 | $141,625 | 1,352 | $105/hr | $200/hr | $95/hr |
| Account Manager | $75,000 | $122,510 | 1,352 | $91/hr | $175/hr | $84/hr |
| Strategist | $90,000 | $145,800 | 1,352 | $108/hr | $200/hr | $92/hr |
Critical: Use loaded rates (not billing rates!) when calculating project costs.
Without accurate time tracking, you cannot calculate labor costs at client/project level.
Requirements:
Time tracking tools:
Example time log (January for Client A):
| Team Member | Hours | Loaded Rate | Labor Cost |
|---|---|---|---|
| Account Manager | 35 hrs | $91/hr | $3,185 |
| Senior Designer | 45 hrs | $105/hr | $4,725 |
| Mid Designer | 40 hrs | $79/hr | $3,160 |
| Junior Designer | 25 hrs | $58/hr | $1,450 |
| Total | 145 hrs | Avg: $86/hr | $12,520 |
Note: This is cost, not billing. You may have billed client $22,000 (145 hrs × $150 avg bill rate), but your cost was $12,520.
Direct costs are expenses incurred specifically for a client or project.
Common direct costs:
Example (Client A - January):
Media spend (Facebook Ads): $4,500
Freelancer (video editor): $1,200
Stock photos: $180
Travel (client meeting): $350
Total Direct Costs: $6,230
Booking in QuickBooks:
Overhead = costs that support all clients but aren't directly billable.
Typical overhead categories:
Two allocation methods:
Method A: Revenue-Based (Simpler)
Total monthly overhead: $35,000
Total client revenue: $150,000
Client A revenue: $10,000 (6.67% of total)
→ Allocate: $35,000 × 6.67% = $2,335
Client B revenue: $3,000 (2% of total)
→ Allocate: $35,000 × 2% = $700
Method B: Hours-Based (More Accurate)
Total monthly overhead: $35,000
Total billable hours: 2,500 hours
Client A hours: 145 (5.8% of total)
→ Allocate: $35,000 × 5.8% = $2,030
Client B hours: 25 (1% of total)
→ Allocate: $35,000 × 1% = $350
Why hours-based is better: High-revenue clients don't always consume high resources. A $10K retainer client might use 145 hours (resource-intensive), while a $10K project client uses 50 hours (efficient). Hours-based allocation reflects true resource consumption.
Recommendation: Use hours-based allocation for profitability analysis.
Formula:
Client Profitability = Revenue - Labor Costs - Direct Costs - Allocated Overhead
Client Margin % = (Profit ÷ Revenue) × 100
Example: Client A (Full Analysis)
REVENUE: $10,000
COSTS:
Labor (145 hours):
- Account Manager (35 × $91): $3,185
- Senior Designer (45 × $105): $4,725
- Mid Designer (40 × $79): $3,160
- Junior Designer (25 × $58): $1,450
Subtotal Labor: $12,520
Direct Costs:
- Media spend: $4,500
- Freelancer: $1,200
- Stock photos: $180
- Travel: $350
Subtotal Direct: $6,230
Allocated Overhead (hours-based): $2,030
TOTAL COSTS: $20,780
PROFIT: -$10,780 (LOSS)
MARGIN: -107.8%
Interpretation: For every $1 of revenue from Client A, you're spending $2.08. This client is destroying $10,780 in value every month.
Example: Client B (Full Analysis)
REVENUE: $3,000
COSTS:
Labor (25 hours):
- Mid Designer (15 × $79): $1,185
- Junior Designer (10 × $58): $580
Subtotal Labor: $1,765
Direct Costs:
- Stock photos: $85
Subtotal Direct: $85
Allocated Overhead (hours-based): $350
TOTAL COSTS: $2,200
PROFIT: $800
MARGIN: 26.7%
Interpretation: Client B generates healthy 27% margin. For every $1 of revenue, you keep $0.27 as profit.
After calculating profitability for all clients, segment into tiers:
Characteristics:
Action: Protect these relationships, invest in growth, create case studies, ask for referrals
Example clients:
Characteristics:
Action: Monitor closely, tighten processes, consider price increase or scope reduction
Example clients:
Characteristics:
Action: Immediate intervention required—raise prices, reduce scope, or prepare to exit
Example clients:
Characteristics:
Action: Renegotiate immediately or fire within 30-60 days
Example clients:
Portfolio view:
| Tier | Clients | Revenue | Avg Margin | Total Profit |
|---|---|---|---|---|
| Tier 1 (30-50%) | 3 | $16,500 | 36% | $5,940 |
| Tier 2 (15-30%) | 2 | $10,000 | 20% | $2,000 |
| Tier 3 (0-15%) | 2 | $16,000 | 10% | $1,600 |
| Tier 4 (Negative) | 2 | $15,000 | -68% | -$10,200 |
| Total | 9 | $57,500 | -0.9% | -$660 |
Analysis: Company-wide P&L shows -$660 loss (close to breakeven). But reality: 3 clients generate $5,940 profit, subsidizing 2 clients losing $10,200. Fire Tier 4 clients → instant $9,540 profit increase (+16.6% margin).
Pattern: Estimated 40 hours, actually worked 80 hours, billed for 40
Example:
Financial impact:
Covered hours: 30 × $65 loaded = $1,950
Actual hours: 55 × $65 loaded = $3,575
Uncompensated: $1,625/month loss
Annual impact: $19,500 lost profit
Solution:
Pattern: Pricing based on "market rates" or "what competitor charges" instead of your actual costs
Example:
Solution:
Pattern: Takes your team 80 hours to deliver what should take 40 hours
Causes:
Example:
Efficient delivery: 40 hours × $65 = $2,600 cost
Inefficient delivery: 80 hours × $65 = $5,200 cost
Extra cost: $2,600 (eats entire margin)
Solution:
Pattern: Assigning expensive senior talent to price-sensitive clients
Example:
Client pays: $3,000
Senior designer (40 hrs × $105): $4,200
Junior could have done it (40 hrs × $58): $2,320
Overspend: $1,880 (62% of revenue wasted)
Solution:
Pattern: Spending heavily on tools, ads, or freelancers not covered by client fee
Example:
Client pays: $6,000/month
Media spend (their ads): $4,000
Your fee after media: $2,000
Labor + overhead cost: $3,200
Net loss: $1,200/month
Solution:
When it works: Client values relationship, willing to pay for quality
Approach:
"[Client Name], we've reviewed our account profitability and identified that the scope has expanded significantly since we started. To continue delivering the quality you expect, we need to adjust our monthly retainer from $5,000 to $7,500 starting next month. This reflects the 55 hours we're consistently delivering vs. the 30 hours originally scoped."
Target increase: 30-50% to reach breakeven, then add margin
Success rate: ~60% of clients accept if presented with data
When it works: Client can't/won't pay more but willing to accept less
Approach:
"We can maintain the $5,000 retainer, but we need to reduce deliverables to match. Here's what we can deliver for $5,000: [List 70% of current scope]. Additional requests beyond this scope will be billed hourly at $175/hour."
Target reduction: Cut scope to match current pricing + target margin
Success rate: ~40% of clients accept
When it works: Client is profitable at current price IF you reduce hours
Approach:
Target: Reduce hours by 20-40% through efficiency gains
Success rate: ~50% improvement achievable
When it works: Client won't pay more, won't accept less, or is fundamentally incompatible
Approach:
"After careful review, we've determined that we're not the right fit for your needs going forward. We'll complete the current month's work and provide a 30-day transition period to help you find a new partner. We're happy to provide recommendations if helpful."
When to choose this option:
Success rate: 100% profitability improvement (stop losing money)
According to Hinge Marketing's 2024 High Growth Study, agencies that fire their bottom 10% of clients by profitability annually grow 2.1× faster than peers who keep all clients, because they reallocate resources to high-value opportunities instead of subsidizing bad fits.
Agency: 18-person digital marketing agency, $3.6M revenue, 8% net margin (struggling)
Step 1: Profitability Analysis (Month 1)
Calculated profitability for all 32 active clients:
| Segment | Clients | Revenue | Avg Margin | Total Profit |
|---|---|---|---|---|
| Top 10 (40%+ margin) | 10 | $1,200,000 | 46% | $552,000 |
| Middle 12 (20-40%) | 12 | $1,400,000 | 28% | $392,000 |
| Bottom 10 (0-20%) | 7 | $680,000 | 8% | $54,400 |
| Unprofitable | 3 | $320,000 | -35% | -$112,000 |
| Total | 32 | $3,600,000 | 24.6% | $886,400 |
Discovery: 3 clients (9% of count, 8.9% of revenue) were destroying $112,000 in annual profit.
Step 2: Client Action Plan (Month 2)
Top 10 clients:
Middle 12 clients:
Bottom 10 clients:
Unprofitable 3 clients:
Step 3: Results (6 Months Later)
Before (Year 1):
Revenue: $3,600,000
Profit: $288,000 (8% margin)
Team: 18 people (stressed, overworked)
After (Year 1 + 6 months):
Revenue: $3,250,000 (-9.7%)
Profit: $975,000 (30% margin)
Team: 16 people (happier, sustainable workload)
Key outcomes:
Founder quote: "We were working 60-hour weeks to serve clients that were bankrupting us. Profitability analysis forced uncomfortable conversations, but firing those 2 clients was the best business decision we ever made. We now work 40-hour weeks, make 3× more profit, and actually enjoy the work."
Your agency shouldn't work 60-hour weeks serving clients that lose money while your profitable relationships wait for attention. Real profitability analysis reveals which clients deserve your best resources and which are costing you thousands every month.
Ready to see which clients are actually profitable—and which are destroying value? Contact us for a free consultation and discover how controller-level profitability analysis transforms agency economics.