Key Takeaway: Healthy MSP gross margins on managed services run 50% to 65%. Most MSP owners do not know their actual margin per client. The four margin killers are underpriced clients, tool sprawl, reactive service delivery, and poor documentation. All four are fixable, and fixing them builds a better business regardless of whether you ever plan to sell.
Most MSP owners do not know their actual gross margin per client. They know their total revenue. They know their total expenses. They have a general sense of whether the business is profitable. But the specific question, which clients are profitable, which are not, and by how much. Most MSPs cannot answer that question without significant effort.
That gap is expensive. The MSP that does not know its margin per client cannot make good decisions about pricing, about which clients to keep, about when to hire, or about whether the business is actually building toward something worth having.
The Margin Benchmarks
Healthy MSP gross margins on managed services run 50% to 65%. That means for every dollar of managed services revenue, 50 to 65 cents remains after paying for the direct costs of delivering the service: technician labor, tool costs, and any other costs directly attributable to serving that client.
Net margin, after accounting for overhead, sales, marketing, and owner compensation, typically runs 10% to 20% for well-run MSPs. The MSPs at the high end of that range have built operational efficiency through documentation, standardization, and process discipline. The ones at the low end are often carrying inefficiencies that compound over time.
If your gross margin is below 40%, you have a pricing problem, a cost problem, or both. If your net margin is below 10%, you have an overhead problem, a growth problem, or both. Neither situation is sustainable at scale.
How to Calculate Gross Margin Per Client
The calculation is straightforward. For each client, identify the direct costs of delivering the service: the portion of technician time spent on that client, the tool costs attributable to that client (RMM licenses, backup storage, EDR seats), and any other direct costs. Subtract those costs from the client’s monthly recurring revenue. The result is the gross profit for that client. Divide by the monthly recurring revenue to get the gross margin percentage.
The challenge is that most MSPs do not track time by client with enough precision to do this calculation accurately. If your PSA does not capture time by client, start there. The data you need to manage your business is the data you need to track.
The Margin Killers
The most common causes of compressed margins in MSP businesses are predictable and fixable.
Underpriced clients. The clients you acquired at below-market rates in year one are still at those rates. Every hour your team spends on an underpriced client is an hour that could be spent on a client who pays market rates. The underpriced client is not just a revenue problem. It is an opportunity cost problem.
Tool sprawl. Every tool in your stack that does not earn its seat is a margin leak. The MSP that has accumulated tools over the years, some used actively, some barely used, some duplicating the function of other tools, is paying for complexity that does not generate revenue. Audit your stack annually. Remove tools that are not delivering value. Consolidate where possible.
Reactive service delivery. The MSP that spends most of its technician time responding to incidents rather than preventing them is paying for the same problems repeatedly. Proactive maintenance, patch management, and monitoring reduce the incident rate, which reduces the labor cost of delivering the service. The MSP that invests in proactive processes has better margins than the one that does not, because it is not paying to fix the same things over and over.
Poor documentation. The technician who spends 45 minutes figuring out a client’s environment before they can start working on a ticket is consuming margin. The technician who opens the PSA, finds the documented environment, and starts working immediately is not. Documentation is a margin investment. The time spent documenting is recovered many times over in reduced troubleshooting time.
Client concentration. The client that represents 25% of your revenue is also consuming a disproportionate share of your attention, your escalations, and your senior technician time. High-concentration clients often have below-market rates because they were acquired early and have never been repriced. They also create operational risk: if they leave, the impact on your business is significant. Diversification is a margin strategy as much as a risk strategy.
The EBITDA Target
For MSP owners thinking about the long-term value of their business, EBITDA margin is the metric that matters most. Buyers value MSPs on a multiple of adjusted EBITDA, and the multiple is significantly higher for MSPs with strong, consistent EBITDA margins than for those with thin or volatile margins.
A well-run MSP should target EBITDA margins of 15% to 25% of revenue. At $2M in revenue, that is $300K to $500K in EBITDA. At $5M in revenue, that is $750K to $1.25M. Those numbers, combined with the valuation multiples discussed in the exit strategy post, represent the financial case for building a well-run MSP rather than a busy one.
The path to strong EBITDA margins runs through the same disciplines that produce strong gross margins: market-rate pricing, lean tool stacks, proactive service delivery, and documentation. There is no shortcut. The margin is built in the operations, not in the spreadsheet.
The Conversation Most MSP Owners Avoid
The margin conversation is uncomfortable because it requires looking honestly at which clients are profitable and which are not. The client you have had for five years, who you like personally, who refers you to other businesses, but who is paying below-market rates and consuming above-average support time. That client may be unprofitable. Knowing that is the first step to doing something about it.
The options are not binary. You can raise the client’s rate to market level. You can reduce the scope of the agreement to match the rate. You can have a conversation about the relationship and what it would take to make it sustainable. Or you can decide that the relationship has run its course and offboard the client professionally.
All of those options are better than continuing to serve an unprofitable client while telling yourself the relationship is valuable. The relationship may be valuable. The economics may not be. Both things can be true simultaneously, and the MSP owner who cannot distinguish between them is making financial decisions based on sentiment rather than data.
Frequently Asked Questions
What is a good gross margin for an MSP?
Healthy MSP gross margins on managed services run 50% to 65%. Below 40% indicates a pricing or cost problem that needs to be addressed. Above 65% is achievable for MSPs with highly efficient operations and strong pricing discipline, but it is not the norm.
How do I improve my MSP’s margins without raising prices?
Reduce the cost of delivering the service. Audit your tool stack and eliminate tools that are not earning their seat. Invest in documentation to reduce troubleshooting time. Build proactive processes that reduce incident rates. Standardize your client environments to reduce the complexity of supporting them. Each of these reduces the labor cost of delivering the service without changing the revenue.
What is the difference between gross margin and net margin?
Gross margin is revenue minus the direct costs of delivering the service: technician labor and tool costs. Net margin is revenue minus all costs, including overhead, sales, marketing, and owner compensation. Gross margin tells you whether your service delivery is profitable. Net margin tells you whether the business is profitable. Both matter, and they measure different things.
About Brent Lacy: Brent Lacy is a technology advisor and the voice behind Rewired MSP. He helps MSPs operate with greater maturity and helps business owners make IT choices that make them more secure and more efficient. He is the author of Rewired MSP: Mastery, Scalability & Performance, vCIO Rewired: Virtually Conquering IT Obstacles, and Near Miss: Preventable IT Failures Threatening Your Business Security.
Related Reading
- MSP KPIs: The Metrics That Actually Tell You Whether Your Business Is Healthy
- The Math That Matters: MRR, Churn Cost, and Client Lifetime Value
- The Silent Margin Killer: How Tool Sprawl Is Eating Your MSP’s Profits
- How to Raise Prices on Existing MSP Clients Without Losing Them
- MSP Growth and Sales Hub
