Digital agencies know that they need to keep a close eye on many different metrics and KPIs in order to ensure that they are on the right track to success. There are many different metrics and KPIs for agencies to track, including Return On Marketing Investment, Web Traffic Sources, Customer Acquisition Cost, Click Through Rate, Cost Per Action, Lead Conversion Rate, and more. One of the most important metrics for any digital agency (or any other business) to track is gross margin.
What Is Gross Margin?
Gross margin looks at the direct costs of delivering a service or product compared with the price that service or product sells for. Digital agencies are typically service-based businesses. An example of gross margin in this setting is the cost of offering a service like designing a website. The costs of creating that website could include paying for labor, software, or a website builder like WordPress and any presets or themes, domain and website hosting costs, SSL certificates, and more. The gross margin for a website would total all of these costs and subtract them from the total amount charged for the website. For instance, if all of the costs for building a website came up to $400 and your agency charged $1000 per website, the gross margin is $600 or 60%.
Is Gross Margin Different From Net Profit?
Yes, gross margin and net profit are different concepts. Gross margin is all about the revenue generated by a service and the direct costs of offering that service. It doesn’t take into account the general overheads of the business, such as rent, stationery, utilities, and the like. To ensure a good net profit, there needs to be a healthy gross margin that leaves enough for general expenses.
Why Is Gross Margin So Important?
If services aren’t profitable at a gross margin level, there’s not a chance that they will make a digital agency any net profit. Looking at each service the digital agency offers at a gross margin level can help the agency determine which services are worth carrying on with and which are bringing the agency’s net profit down or causing it to operate at a loss. Paying attention to gross margin allows digital agencies to take an objective look at the big picture and make any adjustments or alterations to increase the agency’s profitability.
Can Poor Gross Margins Be Fixed?
After calculating gross margins for each service and getting an understanding of what each service is (or isn’t) generating, agencies can use this information to make strategic choices. Underperforming services could be helped by increasing the price the service sells for or reducing the direct costs of offering the service. It may mean that agencies should stop offering certain services altogether.
Interested in learning more about gross margin and why it’s important for your digital agency? Head over to our YouTube channel, Globital TV, to learn more. Looking for white label digital marketing services for your agency? Contact us at email@example.com. We’d love to help you out.