Is Your MSP Growing Revenue but Not Profit?
Revenue growth is often celebrated as the ultimate measure of success in a Managed Service Provider (MSP). More customers, more managed endpoints and increasing monthly recurring revenue (MRR) are all positive indicators, but they do not necessarily mean you are building a more profitable business.
In fact, some MSPs find themselves in the frustrating position of growing revenue, hiring more engineers and working harder than ever, only to discover that their profitability has barely improved.
The underlying problem is often gross margin.
Gross margin measures how much revenue remains after paying the direct costs of delivering your services. It is one of the most important financial indicators for an MSP because it demonstrates whether the underlying service delivery model is commercially sustainable.
An MSP generating $5 million in annual revenue at a 35% gross margin produces $1.75 million in gross profit. Another MSP generating the same revenue at a 50% gross margin produces $2.5 million.
Gross profit at 35% vs 50% margin
Difference: $750,000 a year
That's a difference of $750,000 in annual gross profit without generating a single additional dollar of revenue.
Understanding your gross margin, how it compares with industry benchmarks and what you can do to improve it is fundamental to building a scalable, profitable and ultimately more valuable MSP.
What Is a Good Gross Margin for an MSP?
Quick answer
As a general benchmark, MSPs should aim for a service gross margin of at least 50%, with highly efficient managed services businesses targeting 55% to 65% or higher, depending on their service mix and accounting methodology.
50%Minimum service GM to aim for
55–65%+Highly efficient managed services
~48%+Best-in-class services GM (ConnectWise / Service Leadership)
ConnectWise, drawing on Service Leadership benchmarking, identifies a best-in-class services gross margin of approximately 48% or higher, while Service Leadership has historically used 50% as a key service gross margin benchmark.
For recurring managed services specifically, some industry practitioners recommend targets of 60% to 65% or more. These higher targets generally reflect tightly managed recurring service agreements rather than an MSP's entire blended revenue base.
The distinction matters because managed services, project delivery, hardware resale and software licensing can all have very different margin characteristics.
MSP Gross Margin Benchmarks
The following ranges provide a practical guide for evaluating service gross margin performance.
Where does your service gross margin sit?
DevelopingOpportunity to improve efficiency and pricing
| Service Gross Margin | Performance Assessment |
|---|---|
| Below 30% | Critical – potentially unsustainable service delivery economics |
| 30%–39% | Underperforming – significant improvement required |
| 40%–49% | Developing – opportunity to improve efficiency and pricing |
| 50%–59% | Healthy – strong foundation for sustainable profitability |
| 60%–65% | Excellent – highly efficient delivery model |
| Above 65% | Exceptional – achievable in some recurring service models |
These are illustrative management ranges, not independently verified industry percentile distributions. Actual performance should be compared against a consistent benchmark for the relevant service line.
It is worth noting that a 40% gross margin does not necessarily mean an MSP is losing money. However, once the costs of sales, marketing, finance, administration and management are deducted, there may be relatively little profit remaining to reinvest in the business.
Conversely, an MSP operating at a 60% service gross margin has significantly greater flexibility to invest in growth, technology, employee development and customer experience.
The goal should not simply be to achieve a particular benchmark. It should be to create a delivery model where revenue can increase without requiring a proportional increase in service delivery costs.
How to Calculate MSP Gross Margin
The formula for calculating gross margin is straightforward:
Gross margin formula
Gross Margin %=(Revenue−COGS)÷Revenue×100
For an MSP, Cost of Goods Sold (COGS) represents the direct costs associated with delivering services to customers.
Technical labour
Fully loaded employment costs for service desk engineers, project engineers and other technical personnel delivering customer services.
Direct service management
The appropriate proportion of Service Desk Manager and technical team leadership costs.
Tools and technology
PSA, RMM, security, backup and other platforms directly attributable to delivering services.
Third-party services
External NOC, SOC, service desk, cloud or specialist delivery providers.
Offshore resources
Dedicated offshore engineers and other technical resources used to deliver contracted services.
Customer-specific costs
Directly attributable vendor subscriptions, infrastructure or other service delivery expenses.
Sales salaries
An operating expense, not a direct cost of delivering services.
Marketing expenditure
An operating expense, not a direct cost of delivering services.
General finance
An operating expense, not a direct cost of delivering services.
Administration
An operating expense, not a direct cost of delivering services.
An important distinction is that not every expense should be included in COGS.
Sales salaries, marketing expenditure, general finance and administration costs are generally operating expenses rather than direct costs of delivering services. Allocation policies should be applied consistently, particularly where employees or tools support multiple business functions.
Example: Calculating MSP Service Gross Margin
Consider an MSP generating $200,000 in monthly managed services revenue. The calculator below uses that example. Replace the figures with your own.
MSP service gross margin calculator (monthly)
Service gross margin
50%
You keep 50¢ of every revenue dollar after direct delivery costs.
Total cost of service delivery$100,000
Gross profit / month$100,000
Gross profit / year$1,200,000
60%New gross margin
+10 ptsMargin improvement
$240,000Added gross profit / year
View the example as a table
| Monthly Financial Metric | Amount (AUD) |
|---|---|
| Managed Services Revenue | $200,000 |
| Service Desk Engineers | $45,000 |
| L3 and Escalation Engineers | $20,000 |
| Service Delivery Management | $12,000 |
| PSA, RMM and Security Tools | $18,000 |
| External Support Services | $5,000 |
| Total Cost of Service Delivery | $100,000 |
| Gross Profit | $100,000 |
| Gross Margin | 50% |
Illustrative financial model, not an industry average.
In this example, the MSP retains 50 cents from every dollar of managed services revenue after paying the direct costs of service delivery.
That remaining 50 cents must cover the business's operating overheads, sales and marketing, administration and ultimately generate a return for the owners.
If the business can reduce its service delivery costs by $20,000 per month while maintaining revenue and service quality, gross margin increases from 50% to 60%.
This creates an additional $240,000 in annual gross profit without requiring new customers, higher prices or additional revenue.
Gross Margin vs Net Profit: Understanding the Difference
One of the most common mistakes MSP owners make is confusing gross margin with net profitability.
Gross margin measures the efficiency of delivering services, while net profit measures what is left after all business expenses have been accounted for.
Consider an MSP with $5 million in annual revenue.
Where $5M of revenue goes
Direct service delivery costsOperating expensesOperating profit
$2,000,000Gross profit
$500,000Operating profit
10%Operating profit margin
| Financial Metric | 40% Gross Margin | 50% Gross Margin |
|---|---|---|
| Annual Revenue | $5,000,000 | $5,000,000 |
| Direct Service Delivery Costs | $3,000,000 | $2,500,000 |
| Gross Profit | $2,000,000 | $2,500,000 |
| Operating Expenses | $1,500,000 | $1,500,000 |
| Operating Profit | $500,000 | $1,000,000 |
| Operating Profit Margin | 10% | 20% |
Illustrative example using the same revenue mix and operating expenses in both scenarios. Operating profit is not necessarily equivalent to EBITDA or net profit.
Improving gross margin by just ten percentage points has doubled operating profit in this example.
Of course, in the real world, some operating expenses may change as service delivery models evolve. However, the example illustrates why even relatively small improvements in gross margin can have such a substantial impact on overall profitability.
For MSPs, the real opportunity is to improve the economics of delivering services rather than relying exclusively on revenue growth to increase profits.
Why MSP Gross Margins Are Often Lower Than They Should Be
Many MSPs have evolved from traditional break-fix IT businesses into managed services providers without fundamentally redesigning how their services are delivered.
The transition to recurring monthly support agreements provides greater revenue predictability, but it also changes the economics of the business.
In a traditional break-fix model, more support activity generally meant more billable hours. Under a fixed-fee managed services agreement, additional support activity often means higher costs without additional revenue.
This creates several common challenges.
1. Too Much Reactive Support
Reactive support is expensive because it consumes engineering time responding to problems after they occur.
An MSP that spends most of its engineering capacity resolving tickets has limited opportunity to invest in proactive maintenance, standardisation and automation.
As customer numbers increase, ticket volumes often increase as well, creating pressure to continually hire more engineers.
The result is a service delivery model where costs grow alongside revenue, limiting the opportunity to expand margins.
2. The Wrong Mix of Technical Resources
Another common challenge is the allocation of work across engineering levels.
If highly paid L3 engineers are routinely resolving relatively simple support issues, the MSP is using expensive resources for lower-value activities.
Conversely, relying too heavily on L1 engineers can create excessive escalations, longer resolution times and unnecessary duplication of effort.
The objective is to have the right technical resources resolving the right issues at the lowest sustainable total cost.
This does not necessarily mean employing the cheapest engineers. A capable L2 engineer who resolves an issue on the first interaction may be significantly more cost-effective than a lower-cost L1 engineer who needs to escalate the same issue multiple times.
3. Inefficient Service Delivery Processes
Inconsistent documentation, poorly configured PSA workflows, manual processes and a lack of standardisation all increase the time required to deliver support.
Consider how much time engineers spend performing repetitive activities such as user onboarding, licence management, password resets, device remediation and recurring maintenance tasks.
Individually, these tasks may only consume a few minutes, but across hundreds or thousands of managed users, they represent a considerable amount of engineering capacity.
4. Customers Who Consume More Than Their Agreement Supports
Not all managed services customers are equally profitable.
Two customers may generate the same monthly recurring revenue while consuming vastly different levels of support.
A customer with ageing infrastructure, inconsistent technology standards and frequent support requests can require significantly more engineering effort than a customer operating a modern, standardised environment.
Without customer-level gross margin reporting, MSPs can inadvertently subsidise unprofitable customers using profits generated from better-performing agreements.
5. Engineering Costs Increasing Faster Than Revenue
As MSPs grow, they often respond to capacity constraints by hiring additional engineers.
While this may solve immediate operational problems, it can create long-term margin pressure if the cost of additional resources increases at the same rate as, or faster than, customer revenue.
The challenge is particularly significant when recruiting experienced L2, L3, security and automation engineers in competitive labour markets such as Australia, New Zealand and the UK.
This is why MSPs need to focus on improving revenue and gross profit per technical employee, rather than simply increasing headcount as customer numbers grow.
1 of 5
Seven Ways to Improve Your MSP's Gross Margin
Improving gross margin requires more than reducing expenses. It involves rethinking how the business delivers services, manages its engineering capacity and creates value for customers.
1Reduce the Volume of Reactive Support Tickets
One of the most effective ways to improve service gross margin is to eliminate unnecessary support tickets before they occur.
Rather than continually expanding the service desk to handle increasing ticket volumes, MSPs should invest in proactive monitoring, maintenance, patch management, standardisation and automated remediation.
A dedicated Centralised Services Engineer can play an important role in this approach by focusing on the underlying causes of recurring support issues.
Reducing reactive support demand frees up engineers to support more customers, improve service quality and deliver greater value without requiring the business to increase its headcount at the same rate as revenue.
2Invest in Automation
MSPs frequently have substantial opportunities to automate repetitive activities across their PSA, RMM, Microsoft 365 and customer environments.
Platforms such as Rewst, Pia and n8n can help automate activities including onboarding, offboarding, ticket enrichment, routine maintenance and common remediation tasks.
The economics can be compelling. Imagine an MSP that handles 1,000 tickets per month, with each ticket requiring an average of 30 minutes of engineering time. This represents 500 hours of monthly support effort.
If automation and process improvements reduce that effort by 20%, the MSP could release approximately 100 engineering hours per month. At an illustrative fully loaded labour cost of $50 per hour, that represents $5,000 per month in potential capacity value.
Automation capacity calculator
500Support hours / month
100Hours released / month
$5,000Capacity value / month
While this does not automatically translate into cash savings, the freed capacity could support additional customers, reduce overtime, avoid future recruitment or allow engineers to focus on more valuable work.
The financial benefit should always be measured net of automation implementation, licensing and ongoing maintenance costs.
3Optimise Your Engineering Team Structure
A profitable MSP needs the right balance between technical capability and delivery costs.
This may involve moving away from a traditional service desk dominated by junior engineers towards a more balanced structure that combines capable L2 engineers, specialist L3 resources, automation and centralised services.
The ideal structure will depend on the complexity of customer environments, the volume and type of tickets being generated and the service levels customers expect.
The objective should be to minimise the total cost of resolving issues while maintaining excellent customer satisfaction.
4Leverage Dedicated Offshore Engineering Resources
Technical labour is often one of the largest direct costs in an MSP, making it an important area to optimise.
Dedicated offshore engineering teams can provide access to experienced technical skills at a lower fully loaded cost than equivalent onshore resources, while allowing MSPs to retain control over their service delivery processes, customer relationships and technology stack.
For example, consider an MSP with an annual managed services revenue base of $2 million and direct service delivery costs of $1.2 million. Its gross margin is 40%.
If the MSP can restructure its delivery model and reduce direct costs by $200,000 annually through a combination of offshore engineering, automation and improved processes, gross margin increases to 50%.
That represents an additional $200,000 in annual gross profit without increasing revenue.
The key is that offshore resources must be integrated into the MSP's operations rather than treated as a disconnected outsourced support provider.
When dedicated engineers work within the MSP's PSA, RMM, documentation, processes and customer service standards, they can contribute to both operational maturity and financial performance.
5Standardise Customer Environments
Supporting customers with vastly different technology stacks creates unnecessary complexity and inefficiency.
Engineers must maintain knowledge across multiple platforms, troubleshooting becomes more difficult and automation opportunities are reduced.
By standardising core infrastructure, security platforms, endpoint management, backup technologies and support processes, MSPs can improve resolution times and reduce the cost of delivering services.
Standardisation also improves the scalability of the business because engineers become more productive as processes and environments become repeatable.
6Review Pricing and Customer Profitability
Pricing should reflect the scope, risk and complexity of the services being delivered.
Too many MSPs continue supporting customers on agreements that were priced several years ago, despite increasing wage costs, technology expenses and customer expectations.
Regular reviews of customer-level gross margin can identify agreements that require changes to pricing, service scope or delivery methods.
In some cases, the solution may be a price increase. In others, the opportunity may be to reduce the amount of support required through technology standardisation or proactive improvements.
The objective is to ensure that every customer relationship contributes appropriately to the overall profitability of the business.
7Build a Financially Accountable Service Delivery Culture
Gross margin should not be a number reviewed exclusively by the business owner or finance team.
Service Delivery Managers, Technical Leads and Operations Managers all influence profitability through the decisions they make about staffing, processes, automation and customer support.
Providing these leaders with visibility into the financial performance of service delivery helps connect operational decisions with commercial outcomes.
For example, understanding the cost of recurring tickets, engineer utilisation, escalation rates and customer profitability can highlight where improvements will have the greatest financial impact.
The most successful approach is to create a culture where service quality, employee experience and financial performance are managed together rather than treated as competing priorities.
The Economics of Improving MSP Gross Margin
Small improvements in gross margin can create substantial financial benefits, particularly as an MSP grows.
Consider a business generating $500,000 in monthly revenue from services.
| Gross Margin | Monthly Gross Profit | Annual Gross Profit |
|---|---|---|
| 35% | $175,000 | $2,100,000 |
| 40% | $200,000 | $2,400,000 |
| 45% | $225,000 | $2,700,000 |
| 50% | $250,000 | $3,000,000 |
| 55% | $275,000 | $3,300,000 |
| 60% | $300,000 | $3,600,000 |
Moving from% to% adds$600,000a year. Every 1 point is worth $60,000.
Assumes consistent annual revenue of $6 million and comparable direct cost allocation.
For this MSP, every one-percentage-point improvement in gross margin generates an additional $60,000 in annual gross profit.
Moving from a 40% gross margin to 50% creates an additional $600,000 in annual gross profit.
Importantly, that improvement can be achieved through a combination of better pricing, more efficient support delivery, automation, proactive maintenance and a more cost-effective engineering team.
It does not necessarily require winning more customers.
Why Higher Gross Margins Make Your MSP More Valuable
Improving service gross margin is not simply about increasing short-term profitability. It can also contribute to the long-term value of the business.
For MSP owners thinking about succession, acquisitions or eventually exiting their business, the quality and sustainability of earnings are important considerations.
A business with healthy recurring revenue, strong service gross margins and scalable operations is generally better positioned to deliver predictable future cash flows.
Higher margins can also give the MSP more flexibility to invest in sales, marketing, leadership development, customer experience and new technical capabilities.
However, gross margin is only one consideration in business valuation. Buyers also assess adjusted EBITDA, revenue quality, customer concentration, recurring contract terms, retention, management depth and growth prospects.
An MSP that can demonstrate improving margins while maintaining customer satisfaction and retention has a more compelling operating story than one that relies on continual revenue growth to offset inefficient service delivery.
How Dijital Team Helps MSPs Improve Gross Margins
At Dijital Team, we believe that building a more profitable MSP requires the right combination of technical capability, operational maturity and financial discipline.
Our approach goes beyond simply helping MSPs reduce the cost of employing technical resources.
We help MSPs build dedicated engineering teams that integrate into their existing operations, allowing them to improve service delivery efficiency while creating a more sustainable cost structure.
Our capabilities include:
- Dedicated L2 and L3 Engineers: Experienced technical resources who work as an extension of your team, helping improve resolution rates, manage escalations and deliver consistent customer support.
- Centralised Services Engineers: Resources focused on proactive maintenance, standardisation, monitoring and remediation to reduce the volume of reactive support and improve engineering capacity.
- Automation Engineers: Specialists with skills across Rewst, Pia, n8n, Microsoft Power Platform and other automation technologies to help eliminate repetitive work and improve productivity.
- Specialist Technical Resources: Access to cybersecurity, Microsoft 365, Azure, data, software development and other specialist capabilities without needing to build every capability through expensive onshore recruitment.
- Transparent Fixed Monthly Pricing: One fixed monthly fee per role, without the confusing surcharges and hidden expenses associated with many offshore staffing models, allowing MSPs to forecast their delivery costs with greater confidence.
Beyond staffing
The Better Business Pathway
Through our Better Business Pathway, Dijital Team works with MSPs to strengthen the foundations required for sustainable growth.
Rather than focusing exclusively on reducing technical labour costs, the programme is designed to help MSPs improve their operational maturity, productivity and profitability.
This includes helping MSP leaders identify opportunities to improve delivery efficiency, build more scalable teams and create the capacity required to grow without costs increasing at the same rate as revenue.
Our philosophy is simple: the opportunity is not just to offshore work, but to create a better business.
Start Improving Your MSP Gross Margin Today
If you are not currently measuring service gross margin as a distinct financial KPI, this should be one of your first priorities.
Start by separating managed services revenue from project revenue and product resale, identify the direct costs of delivering each service and calculate your current performance.
Then ask yourself some important questions. Tick the ones you can answer with data today.
0 of 5 answered.
Most importantly, what would a five- or ten-percentage-point improvement in gross margin mean for your business?
$250,000Added gross profit / year at +5 points
$500,000Added gross profit / year at +10 points
For many MSPs, the opportunity is substantial.
The most profitable MSPs are not necessarily those with the highest revenue. They are the businesses that have built efficient, scalable service delivery models capable of generating more value from every dollar earned.
Frequently Asked Questions
What is a good gross margin for an MSP?
As a general benchmark, MSPs should aim for a service gross margin of at least 50%, with highly efficient managed services businesses targeting 55% to 65% or higher, depending on their service mix and accounting methodology.
How do you calculate MSP gross margin?
Gross Margin (%) = ((Revenue − Cost of Goods Sold) ÷ Revenue) × 100. For an MSP, COGS represents the direct costs of delivering services: technical labour, direct service management, tools and technology, third-party services, offshore resources and customer-specific costs.
What costs should not be included in MSP COGS?
Sales salaries, marketing expenditure, general finance and administration costs are generally operating expenses rather than direct costs of delivering services. Apply allocation policies consistently, particularly where employees or tools support multiple business functions.
What is the difference between gross margin and net profit for an MSP?
Gross margin measures the efficiency of delivering services, while net profit measures what is left after all business expenses have been accounted for.
How can an MSP improve its gross margin?
Reduce reactive support tickets, invest in automation, optimise the engineering team structure, leverage dedicated offshore engineering resources, standardise customer environments, review pricing and customer profitability, and build a financially accountable service delivery culture.
Ready to Unlock Better Margins?
Whether you are looking to improve service desk efficiency, introduce automation, build a Centralised Services capability or optimise your engineering cost structure, Dijital Team can help.
Discover how our dedicated teams and Better Business Pathway can help you improve your margins, strengthen operational maturity and build a more scalable MSP.
