Gross Margin & Gross Profit: The MSP Playbook for Better Business Health

In our ongoing series on MSP Unit Economics, we’ve already delved into Customer Acquisition Costs (CAC) and Average Deal Size—two critical metrics that help shape your profitability. But what’s next on the list? It’s time to tackle two of the most important financial indicators for any MSP: Gross Margin and Gross Profit.

Missed our earlier posts? Don’t worry, you can catch up on WTF Are Unit Economics, The CAC Trap, and Why You Need to Know Your Average Deal Size before diving in here. Trust us, you’ll want to know how all these metrics stack up to ensure your MSP business is on the right track.

Gross Margin vs. Gross Profit: What’s the Difference?

• Gross Profit is the actual dollar amount left over after you subtract the Cost of Goods Sold (COGS) from your revenue. For MSPs, COGS often includes software licenses, technician time, and other direct costs of delivering services
• Gross Margin is the percentage that shows how much of each dollar earned remains after covering COGS. The formula is simple:

While these terms are often used interchangeably, they represent two different ways to measure profitability. Both are crucial, but Gross Margin is typically the better metric for understanding how efficiently you're running your MSP.

Why Gross Margin Matters for MSPs

Gross Margin is one of the most telling indicators of your MSP’s operational health. The higher your Gross Margin, the more room you have to reinvest in growth, hire new staff, and navigate unforeseen costs.

According to MSP360, MSPs typically see a Gross Profit Margin of 50-60%, but best-in-class businesses aim for 70% or higher . The difference between a mediocre and a top-performing MSP often comes down to how effectively they manage their costs while maximizing revenue.

Where Does Your MSP Stand?

If you’re hovering below 50%, you’re likely facing some operational inefficiencies that need addressing. For example, Service Leadership found that MSPs with lower margins tend to have excessive labor costs, overpriced vendor contracts, or simply inadequate pricing strategies .

But don’t panic. A 40-50% Gross Margin is still workable, and with some strategic adjustments, you can bump those numbers up.

• 40% or below: This could indicate you’re underpricing services or struggling with high COGS.
• 50-60%: The industry average, but still room for improvement.
• 70% or higher: You’re likely operating as a high-efficiency, premium MSP with room for scaling.

How to Improve Your Gross Margin

1. Reduce Vendor Costs: Regularly review your contracts with software vendors and hardware suppliers. Negotiating better deals or switching providers can have an immediate impact on your bottom line.

2. Increase Automation: One of the biggest expenses for MSPs is labor. By integrating automation into your daily workflows, you can reduce the manual workload on your team, which increases your efficiency and boosts your Gross Margin.

3. Tiered Pricing Models: Consider offering a tiered service model where your basic package covers essential services, but premium packages come at higher price points. This lets you charge more without a proportional increase in COGS.

4. Optimizing Labor Costs: Labor is one of the largest contributors to COGS. Training your team to work more efficiently or outsourcing certain low-level tasks to reduce labor costs can help improve profitability.

Example: The Power of a Small Boost in Margin

Imagine your MSP generates $1 million in annual revenue with a 50% Gross Margin. That means you’re left with $500,000 after covering COGS. If you can improve that margin to 60%, you’d be keeping $600,000—an extra $100,000 without increasing your customer base.

These boosts don’t just happen overnight, but with steady optimization in areas like vendor costs, labor efficiency, and pricing strategy, you can get there.

Gross Profit: Your Cash Flow Lifeline

While Gross Margin shows the percentage of revenue retained, Gross Profit is the actual cash you can use to cover operating expenses, marketing, and growth initiatives. A high Gross Profit doesn’t just mean your business is healthy today—it means you have the resources to sustain that growth over the long term.

But beware: even if your Gross Profit looks solid, you need to keep an eye on your operational costs to ensure you’re not bleeding cash elsewhere. Profitability is about balance, and having a healthy Gross Profit is only half the equation.

Final Thoughts

By now, it’s clear that your Gross Margin and Gross Profit are critical in determining whether your MSP can thrive in today’s competitive landscape. These metrics not only reveal how well you’re managing costs but also whether your pricing is strong enough to sustain growth.

With the right strategies, even a small boost in Gross Margin can translate into significant profits, allowing you to scale your business with confidence.

Now that you’ve tackled Gross Margin and Gross Profit, what’s next? Stay tuned for the next posts in this series, where we’ll be breaking down Gross Margin Payback Period and Retention Rate. These two metrics will tell you how quickly you can recoup the cost of acquiring new customers and how long you can keep those customers on board—both crucial for maximizing your MSP’s profitability.