What Gross Margin Should I Target?

What Gross Margin Means for an MSP

Gross margin is revenue minus the direct cost of delivering it, divided by revenue. For an MSP, direct cost means the technicians doing client work, the tools you license per seat or per device on a client's behalf, and the cost of anything you resell. Management, sales, marketing, rent and the owner's strategy time sit below that line, and gross margin exists to pay for them and still leave a profit.

That is why the target is not a single number. An MSP with a lean back office can run a lower gross margin and still earn a healthy profit, while one carrying a large sales team needs more room above the line. Work backward from the profit you want, add your overhead, and the gross margin you need falls out of the arithmetic.

Your stage of growth matters too. An MSP that is hiring ahead of new agreements will see margin dip while new technicians ramp up, and that is a deliberate investment rather than a failure. What matters is that the dip is planned, has an end date you can see in your pipeline, and recovers once the seats arrive.

What the Industry Benchmarks Show

Service Leadership, now part of ConnectWise, publishes quarterly averages from the MSPs in its index. Its Q2 2024 report shows how differently the three main service lines behave, and its Q4 2024 report shows how quickly one of them can move.

Read the averages as a floor rather than a goal. An average includes the MSPs that are struggling, and 16% of the index reported a loss in the same quarter. If your managed services gross margin sits below the average, your pricing, your staffing or your tool stack deserves a close look before you chase more clients.

Compare yourself with the benchmark on the same basis it uses. If you count the owner's client time and every per-seat tool while the MSPs in the index leave some of that out, or the other way round, the comparison flatters or punishes you for reasons that have nothing to do with how well you run delivery. Define your cost of delivery first, then compare.

Set a Separate Target for Each Service Line

The most common error is tracking one blended figure. Managed services, projects and resale have structurally different margins, so a blended number moves whenever the mix moves. A quarter with a large hardware order looks like a collapse when nothing about delivery has changed, and a quarter with no hardware flatters a business that is quietly losing money on its agreements.

• Managed services: your highest target, because it is recurring, predictable and priced by you. Track it as managed services gross margin.
• Projects: track project gross margin per project, and compare estimated hours with actual hours at close.
• Product and licensing resale: a lower margin you accept for convenience and control, so keep it off the managed services line.
• Blended total: report it to the bank or a buyer, but make decisions from the lines underneath it.

The Q4 2024 fall in project margin to 12.9% from 23% a year earlier is a useful warning. Projects are where fixed quotes meet unplanned hours, and a few overruns can erase the margin of a whole quarter. If your project margin is thin, look at how you scope and quote before you look at what you charge per hour.

Product and licensing margin needs a different kind of attention. Vendor price increases arrive through the year, and if your agreements pass them through only at renewal, the gap comes straight out of managed services margin for the months in between. Build the right to pass through vendor increases into your agreements, and review your per-seat tool costs whenever a major vendor changes its pricing.

What Belongs in Cost of Delivery

Most MSPs who feel squeezed find the problem is in what they count. Leave a cost out and the margin looks fine on the accounts that are losing money. Put an overhead cost in and a healthy service line looks weak.

• Technician wages, employer taxes and benefits for time spent on client work.
• The owner's hands-on client time, valued at what you would pay someone to do it.
• Per-seat and per-device tools delivered to clients: RMM, EDR, backup, email security.
• Third-party help desk or NOC services you pay to deliver the agreement.
• Travel and onsite costs tied to specific clients.
• Not included: sales and marketing, management salaries, office rent, internal software like your PSA.

Owner-operators undercount their own time more than anything else. Hours spent on client work are a direct cost even when nobody invoices them internally, and leaving them out hides exactly the accounts that could not be serviced if the owner stepped back.

When a High Margin Is a Warning

A margin that looks unusually strong is not always good news. It can mean technicians are stretched across too many seats, tickets are waiting longer than clients will tolerate, or planned work such as patching and reviews is being skipped to keep the queue down. Each of those raises margin this quarter and costs you clients next year.

Check a strong margin against service measures before celebrating it. If SLA attainment is slipping or client satisfaction is falling while margin rises, the margin is borrowing from the future. The same is true when one senior technician is carrying far more than their share, because that margin disappears the day they resign.

A healthy business shows margin and service improving together, usually because automation or standardization removed work rather than because people simply worked harder. That is the pattern worth aiming for, and it is the one a buyer or a lender will look for when they study your numbers.

The Levers That Move Margin

Once the counting is right, margin moves through a small number of levers. Each has a KPI you can watch month to month, and each points to a different fix.

The KPIs behind that table are technician billable utilization, endpoints per technician and tickets per endpoint. The service multiple of wages is a quick cross-check: it compares service revenue with what you pay the people delivering it, and it falls fast when headcount grows ahead of revenue.

Tracking Margin by Client

A healthy average can hide a few clients that cost more to support than they pay. Calculate margin per client at least quarterly, using time logged in your PSA and the tools assigned to that client. The Client Margin Calculator does this for one account at a time.

When a client stays underwater for two or three quarters, the answer is usually a price change, a scope change or a standardization project, in that order. How MSPs price their services covers the pricing side, and the Renewal Cost Worksheet helps you bring the numbers to the renewal conversation. Gross margin is what funds your adjusted EBITDA margin, so a problem left in one client flows straight through to the profit you can take out of the business.

Review the clients at the top of the list as well as the bottom. A very profitable client is often the one most exposed to a competitor's lower quote, and knowing its margin tells you how much room you have if the client pushes back at renewal. It also tells you where to spend account management time, because losing that client would hurt the whole business.