MSP Gross Margin by Revenue Line: Managed Services vs. Resale

Key Takeaways

• Healthy managed services gross margin runs 50–60% for mature MSPs, according to ConnectWise BrightGauge benchmarks cited by Flexpoint.
• Hardware resale at pass-through pricing earns approximately 0% gross margin; managed resale with a markup and procurement fee can reach 15–25%, per Throne of Profit.
• A reseller with 90% hardware and 10% services can see an overall profit margin as low as 6%, versus 15% for an MSP-weighted mix, per ConnectWise.
• Reporting resale revenue gross versus net changes your margin percentage without changing your actual profit dollars — the choice matters for how you read your P&L.
• Blended gross margin hides which lines are carrying the business and which are dragging it down; tracking margin by revenue line is the only way to see clearly.

MSP gross margin is the percentage of revenue left after subtracting the direct costs of delivering each service or product — and it varies dramatically by revenue line. Managed services typically run 50–60% gross margin in a healthy, mature MSP. Hardware resale at pass-through pricing runs close to zero. Mixing those two lines into a single blended number without separating them makes it nearly impossible to manage either one.

The formula is the same across every line. What changes is what goes into COGS — and whether you're reporting resale revenue gross or net.

The Formula

Gross Margin % = (Revenue − COGS) / Revenue × 100

Define each term before applying it:

• Revenue: The amount billed to the client for that line item (managed services fees, hardware invoice, project fees).
• COGS: The direct costs to deliver that line. For managed services, this is primarily fully burdened technician labor plus tooling (PSA, RMM, documentation software). For hardware resale, this is the distributor cost of the equipment.
• Gross Margin %: The percentage of revenue remaining after direct costs. This is what funds your overhead, sales, and profit.

Example: Managed Services Line (Hypothetical)

Consider a hypothetical MSP billing $50,000/month in managed services fees. Fully burdened technician labor and tooling costs total $22,500.

Revenue:  $50,000
COGS:     $22,500
Gross Profit: $27,500
Gross Margin %: ($27,500 / $50,000) × 100 = 55%

This hypothetical 55% sits inside the 50–60% benchmark range that Flexpoint attributes to ConnectWise BrightGauge data for healthy, mature managed services operations.

Example: Hardware Resale at Pass-Through (Hypothetical)

Consider a hypothetical $12,000 hardware order passed through at cost.

Revenue:  $12,000
COGS:     $12,000
Gross Profit: $0
Gross Margin %: 0%

As Throne of Profit puts it: "When you resell hardware at pass-through pricing, you've turned your MSP into a bank that lends money at zero interest and absorbs the delivery risk for free."

Example: Hardware Resale with Markup and Procurement Fee (Hypothetical)

Same hypothetical $12,000 order, now with a markup and a named procurement/configuration fee bringing the client invoice to $14,400. Both the revenue and COGS figures below are hypothetical illustrations.

Revenue:  $14,400  (hypothetical — $12,000 cost plus markup and fee)
COGS:     $12,000  (hypothetical — distributor cost)
Gross Profit: $2,400
Gross Margin %: ($2,400 / $14,400) × 100 = 16.7%

This hypothetical result sits inside the 15–25% range that Throne of Profit identifies for managed resale with real pricing discipline.

Margin-by-Line Table

The table below shows sourced benchmark ranges by revenue line. Each row is a distinct line on your P&L — not a blended average.

Note: "Typical gross margins for MSPs" of 8–18% cited by CloudBolt / MSP360 reflect blended figures that include hardware-heavy revenue mixes — not the managed services line in isolation. The 50–60% figure applies specifically to the recurring managed services line when labor and tooling are mapped correctly.

What Should Managed Services Gross Margin Be?

Managed services should earn 50–60% gross margin in a healthy, mature MSP, according to ConnectWise BrightGauge benchmarks cited by Flexpoint. Best-in-class operations — those with strong automation, predictable ticketing, and well-mapped tooling costs — can reach 70% or higher, per Gradient MSP citing MSP360 data.

If your managed services line is running below 50%, the most likely culprits are:

• Underestimated labor cost. Flexpoint notes that most MSPs underestimate their true labor cost by 20–40%. A technician with a $90,000 salary often carries a fully burdened cost of $130,000–$145,000 annually once burden, PTO, meetings, and non-billable time are factored in.
• Low utilization. Adam Hannemann identifies 75% billable utilization as a good annual target for service businesses — meaning daily targets need to run 80–85% to account for PTO and overhead time.
• Tooling costs not mapped to the line. PSA, RMM, and documentation software are service COGS, not overhead. If they're sitting in operating expenses, your managed services margin looks artificially high.

In practice, a managed services line running at 38% gross margin when the target is 55% is a specific, answerable problem. As Flexpoint puts it: "Specific reality-based questions are the only actionable questions that can be brought to a meeting."

For more on how to structure the accounts that feed this calculation, see the chart of accounts for MSPs.

What Gross Margin Should Hardware Resale Earn?

Hardware resale earns almost nothing at pass-through pricing — and it costs real money in cash flow, staff time, and delivery risk. The Throne of Profit analysis of a $12,000 hardware order illustrates the contrast clearly: pass-through yields approximately 0% margin while floating the cost for 45 days and absorbing dead-on-arrival risk; managed resale with a markup and procurement fee yields 15–25% margin for the same order.

The fear driving pass-through pricing is that clients will price-check the hardware against retail. But as Throne of Profit notes, that fear produces a worse outcome than the one it's protecting against: "a product line that consumes cash, absorbs staff time, and returns nothing."

Five practices that shift hardware from a cash-flow trap to a real margin contributor, per Throne of Profit:

1. Set a real markup floor — a minimum margin percentage below which the order isn't worth the risk.
2. Bill the work around the box — add a named procurement or configuration fee covering spec'ing, imaging, and deployment.
3. Stop floating the cost — require a deposit or client-paid-upfront on larger orders.
4. Sell the bundle, not the sticker — quote hardware as a configured, installed, warranted package.
5. Set restocking and carry terms — protect against cancellations and unpaid balances before ordering.

Should Resale Revenue Be Reported Gross or Net?

This is a reporting choice with real consequences for how you read your own P&L — and it's worth making deliberately.

Gross reporting means you record the full client invoice as revenue and the distributor cost as COGS. Using a hypothetical $12,000 hardware order billed at $14,400, the full $14,400 appears as revenue with $12,000 in COGS, leaving $2,400 gross profit.

Net reporting means you record only your markup as revenue. Using the same hypothetical figures, only $2,400 appears as revenue, with no corresponding COGS entry for the hardware cost.

The profit dollars are identical. The margin percentage is not:

Both rows above are hypothetical illustrations. The $12,000 cost and $14,400 invoice are assumed inputs, not measured benchmarks.

The net method makes resale look like a high-margin line — because you're only recording the markup. The gross method makes it look like a low-margin line — because the full hardware cost runs through COGS. Neither is wrong, but mixing methods across periods or across clients makes comparisons meaningless.

For most MSPs, gross reporting is the more transparent choice: it shows the true scale of hardware flowing through the business and keeps margin percentages comparable to industry benchmarks (which are typically stated on a gross basis). If you're unsure which method your books currently use, that's worth confirming with your accountant — especially before comparing your margin to any published benchmark.

How Does Resale Mix Distort Blended Margin?

Blended gross margin — total gross profit divided by total revenue — is the number most MSPs see first. It is also the number most likely to mislead.

When hardware resale is a significant portion of revenue, it pulls the blended margin down sharply. ConnectWise data shows a reseller with 90% hardware and 10% services running an overall profit margin of approximately 6%. An MSP-weighted mix can reasonably target 15% net profit margin on the same revenue base.

The distortion runs in both directions. An MSP whose managed services line is genuinely underperforming at 38% margin can look acceptable in blended terms if a small, high-margin professional services line is propping up the average. Flexpoint identifies exactly this pattern: "you may discover that your 'profitable' MSP is actually running at 8% total margin only because managed services are propping up consistent losses in professional services."

The fix is a service-line P&L — a separate margin calculation for each revenue type. This is not a complex model. It requires:

• Revenue coded by line (managed services, hardware, professional services, break/fix)
• COGS coded to the same lines (labor allocated by time logs, tooling allocated by line, hardware cost matched to hardware revenue)
• A margin calculation run for each line independently

Once you have line-level margin, the blended number becomes a summary rather than a substitute for understanding. For a deeper look at how client-level profitability works across your book — a related but distinct question — see MSP client profitability analysis.

Frequently Asked Questions

What is a good gross margin for an MSP?

For the managed services line specifically, 50–60% gross margin is the healthy benchmark for mature MSPs, with best-in-class operations reaching 70% or higher, per MSP360 data cited by Gradient MSP. Blended gross margins of 8–18% reflect hardware-heavy revenue mixes and are not comparable to services-only benchmarks.

Why is my MSP gross margin lower than industry benchmarks?

The most common causes are underestimated fully burdened labor cost (which Flexpoint notes MSPs underestimate by 20–40%), low technician utilization, tooling costs booked as overhead instead of COGS, and hardware resale at pass-through pricing pulling the blended figure down.

What is the difference between gross margin and net margin for an MSP?

Gross margin is revenue minus direct COGS — labor, tooling, hardware cost. Net margin deducts all remaining expenses including sales, marketing, G&A, and owner compensation. For MSPs, net margin typically runs 10–30%, per Growth Generators, well below the gross margin figure on the managed services line.

Laya provides this content for informational purposes only. This material does not constitute tax, legal, or accounting advice. Please consult your own tax, legal, and accounting advisors before engaging in any transaction.

If you want to see what service-line margin reporting looks like in practice — with managed services, resale, and project revenue tracked separately — book an intro with Laya to walk through a sample close.