When Is A 30% Markup Not Really 30%?

A Lesson in AGI Math

For agencies needing a little refresher, Agency Gross Income is the amount left after subtracting the costs of media, printing, outside digital services, photography, etc., from billings. AGI is calculated before operating expenses. It is the real amount of cash put into the business, and is the only true measure of agency size. To achieve a 30 to 40 percent profit margin, first consider several points:

1.  Agencies only make 15 percent margin on media, if they're lucky.

2.  Agencies make 100 percent margin on creative, in-house services. (We recommend agencies treat payroll as an operating expense.)

3.  To achieve proper AGI margin, agencies must make at least 30 percent on outside buys.

Be aware that IF an agency takes the costs of outside buys and marks them up 30 percent, they are not making 30 percent margin on buyouts. Are you surprised? We certainly were when someone laid this on us. Just think about it. Why do you think it’s traditional in our business for the agency to take a 17.65 percent markup… and why such an odd number? It is because 17.65 percent is the markup percentage needed to make a 15 percent profit margin.

Always keep this in mind:

Markup is a percent of cost.

Margin is a percent of selling price.

Let’s try it out.

Say you have a buyout from an outside service that cost $100.00. If you mark it up 30 percent, the selling price is $130.00 and the AGI is $30.00. When you determine what percentage $30.00 is of $130.00, you find the result is 23 percent. That’s not enough to achieve the kind of overall AGI an agency should be making.

To achieve a 30 percent margin on buyouts, the agency must resell the buyout to the client for a higher selling price than a 30 percent markup will permit.

Here’s the formula for determining selling price, based on any set profit margin:

Take the vendor’s price and divide it by the inverse of the anticipated profit margin (i.e., if you hope to make 30 percent, the divider should be 70 percent).

C (cost) ÷ inverse of PM {profit margin} = Selling Price

Try it. Say you want to achieve an AGI of 30 percent on a particular buyout. Take the same $100.00 bill from the outside service and work the equation.

$100 ÷ (inverse of .30 = .70) = 142.85 $142.85 is your selling price. Thirty percent of $142.85 is $42.85.

This gives you a full 30 percent margin.

Keep this in mind when estimating and billing, and your agency will make more money this year.