What Is a Healthy Profit Margin for Online Service-Based Businesses?
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Episode Summary
In this episode of The Profit Pillars Show, Parker Stevenson focuses on what makes a healthy profit margin for an online service-based business. While product-based businesses like digital courses or memberships can often aim for 30% or higher margins, Parker explains why service-based businesses should target 20% or better.
The difference comes down to team costs. In service-based models, your “product” is your people, the team members doing the work for clients. As you take on more clients, you must either increase hours for existing staff or hire more people. That makes scaling more expensive compared to selling a digital product, where labor costs don’t rise at the same pace as sales.
Parker outlines two key stages of service business profitability. If you’re in the early stages still doing all of the work yourself, margins can be 50%, to even as high as 80%. But as you hire and delegate, margins usually settle closer to 20%. The trade-off is that your business becomes more stable, scalable, and potentially more sellable in the long run.
Parker emphasizes the importance of accurate bookkeeping and monthly profit and loss (P&L) reviews to track profitability. Without solid financial data, it’s impossible to forecast growth, plan for hiring, or manage costs effectively. Parker recommends starting with a spreadsheet in the early stages and moving to professional bookkeeping as the business grows.
Applying the Profit Pillars framework, Parker explains how marketing expenses tend to be lower in service-based businesses, while offer delivery and labor costs take center stage. Managing the cost of the team delivering client work is the number one driver of profitability, with operating expenses generally playing a smaller role, unless you have significant overhead like office space.
Parker closes by highlighting the unique stability and value potential of service businesses. While margins may be slightly smaller, the combination of strong systems, predictable delivery, and steady demand can create a business that’s both profitable and desirable to future buyers.
Important links from this episode:
Profit Pillars Book: evolvedfinance.com/book
Evolved Finance Services: evolvedfinance.com/services
Finance Tools and Courses: evolvedfinance.com/learn
Frequently Asked Questions
Here are a few common questions business owners ask around this topic:
For most established online service-based businesses with a team delivering client work, a healthy profit margin is around 20% or better. This allows you to pay your team fairly, cover operating costs, and still have a profitable bottom line. In the early stages, if you’re still doing all of the work yourself, you can often see much higher margins (sometimes 50–80%) because there are little to no labor costs. However, those higher margins typically decrease once you begin hiring and scaling your service delivery.
Service businesses grow by adding people, and labor is often the biggest expense in your budget. If you want to serve more clients, you usually need more hours from your existing team or you need to hire additional staff. In contrast, digital creators and other online business models can sell to hundreds or thousands of customers without increasing their team size in the same way, which is why their profit margins can often be higher. For online service-based businesses, your people are your product, which changes the financial equation.
While staying solo might mean more profit in the short term, it often limits how much you can grow and can make the business entirely dependent on you. Building a team can reduce your margins slightly, but it can also make your business more stable, scalable, and attractive to buyers if you ever decide to sell. Many owners find that the trade-off is worth it for the freedom and long-term value it creates.
Your team costs (the salaries, wages, or contractor payments for the people delivering your services) are the single biggest factor affecting your profitability. If this category eats up too much of your revenue, your margins will shrink quickly. The solution may be adjusting your prices, improving efficiency, or rethinking your compensation structure. Keeping this number in check is essential for maintaining a healthy profit margin.
Absolutely. One of the big advantages of the service-based model is that you can create systems, hire a capable team, and deliver consistent results without the business depending solely on you. This makes it possible to grow beyond your personal capacity, serve more clients, and build a business that’s valuable to potential buyers. That’s not always the case with digital creators or personal brand-based businesses, which often rely heavily on the owner’s direct involvement and expertise.
Not typically. Many successful service-based businesses grow through organic marketing, referrals, repeat clients, and networking. This means your marketing budget can often be smaller than that of other online businesses. However, having clear lead generation systems in place, whether through content, partnerships, or ads, can help you grow strategically.
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The Profit Pillars Show
The Profit Pillars Show by Evolved Finance gives online entrepreneurs and modern small business owners the real-world guidance and insights they wish they had sooner. Each episode delivers actionable, straight-to-the-point advice on finances, operations, and overall business strategy, drawn from host Parker Stevenson’s years of experience helping entrepreneurs build stronger, more profitable businesses.