Profit Margin as Professional Services KPIDefinition, Calculation, Example

What is profit margin? Why is profit margin an important metric? How to calculate and measure profit margin?

Profit margin definition

Profit margin is the percentage of profit within the revenue.

Why profit margin is an important metric

This profitability metric facilitates comparison of companies, offices, departments, and even employees, not by the amount of income but by the profitability percent. It could be the main metric to track for optimal control of the company. The typical profit margin for a professional services organization is in the range from 15% to 25%, while a particular project margin could be from 25% to 50%, and the profit margin for a particular consultant could be from 50% to 400%.

How to calculate profit margin

The following is the formula to calculate profit margin in a consulting business.
$$Profit\; Margin\; =\; \frac { Profit }{ Revenue } \; ×\; 100\%$$

Profit margin calculation example

The company sold and delivered a project. The client paid $160,000 for the service. It cost$84,000 to the company to deliver the project.
The profit margin of the company is 47.5%.
$$Profit\; Margin\; =\; \frac { \160,000\; -\; \84,000 }{ \160,000 } \; ×\; 100\%\; =\; 47.5\%$$

How to measure profit margin

Measurement should be taken over time to compare the current margins to previous ones. Often a profit margin goes down while the company grows fast. Profit margin is the primary metric in the consulting business model. By comparing the planned and actual profit margins, officers can review a company's operational results.

With profit margin measurements, you can:
• Know how close the projected delivery was to the estimation
• Compare performance of teams
• Compare profitability of projects
• Compare yourself to industry norms
• See the organization's progress over time
• Make a relative comparison of the organization's financial performance to the industry average as well as compare companies, offices, and departments between each other.

Here is how Metric.ai calculates the profit margin for the whole company over time with segmentation by client or project.