Assume the model's revenue categories: managed-service seat fees contribute 52% of revenue and recurring product contributes 21%. Count both as MSP recurring revenue and the calculation is 52% + 21% = 73%, above the model's 70% goal. Now check what earns it: the model targets 50% gross margin on managed services and 30% on recurring product. Passing the revenue-share test doesn't make those margins interchangeable.
Gross margin is revenue less the direct cost of earning it, divided by that revenue. A recurring-share percentage tells you how much of the revenue repeats; the margin tells you what remains to fund the rest of the business. I'd put both on the same page before setting the sales target.
Give Each Revenue Line a Clear Boundary
Start with a completed accounting period and reconcile total revenue to the accounts. Map each offering to a defined category, then apply that definition throughout the period. Something outside the model's categories needs its own label rather than a convenient place inside managed services.
The model's US example uses the following mix. The margin column shows planning targets for the separate lines, not the example's measured or bottom-up result.
| Revenue Line | Share of Revenue | Model Gross-Margin Target | US Example Annual Revenue |
|---|---|---|---|
| Managed services | 52% | 50% | $1,890,000 |
| Recurring product | 21% | 30% | $763,269 |
| Hardware | 19% | 30% | $690,577 |
| Projects | 8% | 50% | $290,769 |
The managed-services line contains the monthly seat fee. Recurring product is the software and other licenses resold on an ongoing basis. Hardware is sold once, and projects are separately sold pieces of work such as migrations or refreshes.
Together the shares total 100%. They are the model's planning mix, not a statement that every MSP has those proportions. The useful question is which category each of your own revenue lines belongs in and which costs earn it.
Calculate the Recurring Share on the Same Basis
Add recurring managed-service revenue to recurring-product revenue, then divide by total revenue for the period. Keep hardware and separately won projects out of that numerator. Billing a project in monthly installments doesn't by itself create an ongoing service agreement.
Use the same category rules in the comparison period. If a bundle combines service and license resale, keep an internal split so you can compare the economics even when the client sees a single invoice. Moving the label doesn't remove the vendor bill.
The model's reference points are a 50% recurring minimum, a 70% goal, and an 85% stretch. Its example clears the goal at 73%. Those are reference points for the revenue mix, not guarantees of renewals or of future profit.
Read the Margin Under the Percentage
The recurring-product line in the example brings in $763,269 a year against $534,288 of vendor costs. It contributes gross profit while earning the model's 30% product margin. That is a real contribution, but it differs from the 50% managed-services target, which includes burdened delivery labor and tools.
At the table's target margins, calculate the blended gross margin by weighting each margin by its revenue share. The working is 52% × 50% + 21% × 30% + 19% × 30% + 8% × 50% = 42%. That is below the model's 45% total gross-margin goal, despite the 73% recurring share.
This is the budget calculation using target margins. The example's bottom-up costs are a separate calculation; don't replace their result with the targets. A plan and a reconciled result belong beside each other.
Adding recurring product can raise the recurring share and the dollars of gross profit while lowering the blended margin. Check the added revenue and vendor cost together with the work needed to support it. A license sold only to improve the percentage still needs an economic reason to be there.
Check the Dollars Behind a Movement
A large hardware sale can reduce the recurring percentage even when monthly service fees have grown. Losing project revenue can push that percentage upward without adding any recurring revenue. Neither movement tells you enough on its own to congratulate or blame the sales team.
I'd ask finance to show the revenue change by line before explaining the percentage change. Keep classification and billing changes visible beside it. You need to distinguish a real addition to the client book from the same offering appearing under a new heading.
- Finance: take the same completed period for every revenue line and reconcile the total to the accounts.
- Finance and the owner: agree which offerings are managed services, recurring product, hardware, or projects. Record any additional category explicitly.
- Finance: calculate each line's share of total revenue, then calculate recurring managed services plus recurring product as a share of the same total.
- Finance and delivery: assign direct costs to the corresponding revenue lines and reconcile any shared allocation.
- The owner: compare each line's revenue and gross margin with the previous period before deciding which offering needs attention.
Build the Revenue Plan Before the Percentage
My preference is to plan revenue in dollars for each line and calculate the recurring share afterward. That gives sales an offering to sell and delivery a workload to assess. A rule of thumb doesn't book the work or pay the people who deliver it.
A flat monthly service fee needs plain boundaries: what it includes, what it excludes, and the price. Include baseline security in each plan and keep advanced tools as add-ons. Put the fixed annual price step in the contract and tell clients ahead of time.
When a refresh or hardware sale creates managed seats, include those seats in the service conversation. When additional licenses serve the client, price them to earn the appropriate product margin. Neither action needs to be justified by making the recurring percentage look larger.
Keep Profit and Owner Dependence in View
The model's enterprise-value position is to build recurring, profitable revenue without reliance on the owner. It values the business using EBITDA, meaning earnings before interest, taxes, depreciation, and amortization. Calculate that after sales spending, overhead, and a fair-market owner salary, rather than treating gross profit as the final profit.
The model discounts non-recurring revenue relative to recurring revenue, but a recurring label still doesn't settle profitability or transferability. Check whether the service is priced to deliver and whether someone besides the owner can keep the work and relationships running. The revenue mix can't answer either question for you.
Take the reconciled revenue lines to your next planning review with their direct costs attached. Calculate the recurring share, then show which line caused it to move and what happened to gross profit. Choose the offering or client group that needs work from that comparison.
mspoutpost.com/articles/msp-recurring-revenue-read-the-mix-and-the-margin
Written by Graham Whitfield
MSP Outpost publishes information, not legal, financial, insurance, tax or compliance advice, and reading it creates no professional relationship. For decisions about your business, talk to a qualified professional.