On a dashboard, a dollar of monthly recurring revenue looks like any other dollar. It is not. Growth in MRR or ARR can be a sign of a healthier business, or just a bigger one with thinner margins. The difference comes down to where the dollar came from.
Why Is Every Dollar of Recurring Revenue Not Equal?
Because four things change with the source: gross margin, labor required, churn risk, and valuation quality. Valuation quality is how confident a buyer, lender, or you can be that the dollar will still be there, and still be profitable, next year.
Two MSPs can report the same MRR and have very different businesses underneath.
How Do Five Types of Recurring Revenue Compare?
Here is how $1 from each source tends to behave. These are general tendencies, not benchmarks, so check them against your own numbers.
| $1 of... |
Margin tends to be |
Labor required |
Churn risk |
Valuation quality |
| Licensing resale |
Thin |
Low, though billing and support still take time |
Medium: clients can move vendors |
Lower: easy to replace, small profit |
| Managed services |
Higher |
High |
Lower when delivery is good |
Higher: sticky and profitable |
| Backup |
Moderate |
Low to medium |
Lower: switching is painful |
Higher: sticky, grows with data |
| Consulting retainer |
Varies with scoping |
Medium to high |
Medium: depends on the relationship |
Medium: depends on scope discipline |
| Outsourced labor |
Thin |
High, and it is someone else's |
Medium |
Lower: mostly a markup on labor |
How Can ARR Growth Mislead You?
When growth comes from the lowest-margin lines, revenue rises faster than profit.
Illustrative example, not a benchmark: two MSPs each add $200,000 of recurring revenue this year. MSP A adds it through licensing resale at an assumed 10% margin, which is $20,000 of gross profit. MSP B adds it through managed services at an assumed 35% margin, which is $70,000 of gross profit, though it needs more people to deliver it. Same ARR growth, very different results.
A growth chart cannot show that. It takes a second view: how much gross profit each line adds.
How Do You Measure Revenue Quality?
For each recurring revenue line, track five things:
- Gross margin percentage
- Labor hours per $1,000 of MRR
- 12-month churn
- Share of total MRR
- Contract term and renewal pattern
Then report MRR by line, and gross profit by line, next to total MRR. A rising total with a falling share of high-quality revenue is a warning, not a win.
All of this depends on accurate costs. If a vendor raises a price or seats go unbilled, a line that looks healthy may not be. Gradient Reconcile compares your vendor invoices against your agreements, so the margin on each line reflects what you actually pay and what you actually bill.
FAQ
What is MRR?
Monthly recurring revenue (MRR) is the predictable revenue you expect to bill every month from subscriptions, managed services, and other recurring agreements. Multiply by 12 for annual recurring revenue (ARR).
Is there an ideal mix of recurring revenue?
There is no single ideal mix. A useful goal is to grow the share of revenue that is profitable and sticky, and to watch how your gross profit by line changes as your total MRR grows.
How do buyers think about MSP recurring revenue?
Generally, they pay more attention to recurring revenue that is profitable, sticky, and not dependent on heavy labor. Talk to your advisor about how your own mix would be viewed.
