Target 65-75% gross margin on managed services labor, 15-25% on hardware and software resale, and 40-60% on project labor. Blended gross margin across all revenue types for a healthy growth-stage MSP
Target 65-75% gross margin on managed services labor, 15-25% on hardware and software resale, and 40-60% on project labor. Blended gross margin across all revenue types for a healthy growth-stage MSP typically falls between 55-65%. Below 50% blended gross margin usually signals a pricing problem, an efficiency problem, or both.
Gross margin in an MSP is calculated as (Revenue - Direct Costs) / Revenue. Direct costs include technician labor (salary + benefits for billable staff), tool stack spend allocated to clients, and cost of goods for hardware/software resale. Overhead (management salaries, office rent, sales and marketing) is an operating expense, not a direct cost. The most common MSP gross margin mistake is treating management labor as overhead when it belongs in direct costs — owner-operators especially tend to undercount their own time. If you serve a mix of managed services, projects, and resale, track gross margin by revenue type. Managed services should be your highest-margin revenue line. If it isn't, check your pricing against your actual cost per technician hour.
Gross margin and net margin are not interchangeable. Gross margin is before operating expenses. Net margin is what's left after you pay for sales, marketing, management, office, and everything else. A 65% gross margin MSP with high overhead can still lose money. Focus on gross margin by service line first, then work the operating expense side.