Guide
4 min read
By MSP Margin Editorial
Most MSPs resell software subscriptions. Microsoft 365 through a CSP program or a distributor is the common case, but the same pattern shows up with backup licenses, security add-ons and line-of-business software. The client gets one invoice, and the MSP collects the license fee and pays the vendor or distributor.
That convenience has a cost on the financial statements. License resale can make a company look bigger than it is and less profitable than it is, both at the same time. If you are comparing your margins to a target, to last year, or to what a buyer expects, you need to know how much of your top line is pass-through.
License revenue is large and thin
Managed services revenue is mostly labor and tooling you control. You set the price, you deliver the work, and a healthy agreement leaves a meaningful share of each dollar after direct costs.
Resold licenses work differently. The vendor sets the list price, the distributor sets your cost, and your markup is usually small. The dollars are real, and the spread covers some of the admin work of provisioning and billing, but the gross profit per dollar is a fraction of what services produce.
When both streams sit in one revenue line and one cost of revenue line, the blended gross margin drops as licensing grows, even if your service business is performing exactly as before. The reverse is also true: a client who moves licensing elsewhere can make your margin look better without anything improving.
Gross or net is a principal-versus-agent judgment
Under ASC 606, an entity reports revenue gross when it is the principal in a transaction and net when it is an agent. The principal reports the full amount billed as revenue and the vendor cost as cost of revenue. The agent reports only its fee or commission, the amount it keeps.
The core question is whether you control the specified good or service before it transfers to the customer. The standard gives indicators that help answer that, including whether you are primarily responsible for fulfilling the promise, whether you carry inventory risk, and whether you have discretion in setting the price. These indicators support the control assessment. They are not a scorecard where the side with more checkmarks wins.
For license resale, the answer depends on facts and circumstances. It can turn on what exactly you promised the client, whether the license is a distinct item or an input to a combined managed service you deliver, who the client looks to if something goes wrong, and how much pricing latitude you actually have. Two MSPs reselling the same product can reach different conclusions because their contracts and practices differ. This is a judgment to document and review with your CPA, not a default to pick because it makes a number look better.
An example of the same business, presented two ways
Here is an illustrative example with round numbers. An MSP has $1,000,000 of managed services revenue with $500,000 of direct costs. It also resells $400,000 of licenses that cost it $360,000.
| Presentation | Revenue | Cost of revenue | Gross profit | Gross margin |
|---|---|---|---|---|
| Licenses reported gross | $1,400,000 | $860,000 | $540,000 | 38.6% |
| Licenses reported net | $1,040,000 | $500,000 | $540,000 | 51.9% |
Gross profit is $540,000 either way. Only revenue changes, and with it the margin percentage. Under gross presentation, services earn 50% and licensing earns 10%, which blend to 38.6%. Under net presentation, the $40,000 license spread is revenue with no matching cost, and the margin reads 51.9%.
Neither number is wrong if it follows the correct accounting conclusion. The problem is reading 38.6% as a verdict on service delivery when most of the gap is licensing mix.
Report licensing on its own lines
Whatever the presentation in your financial statements, your management reporting should separate licensing from services. A practical setup looks like this:
- Separate income accounts for managed services, project work and resold licensing.
- Matching cost of revenue accounts, so license cost never mixes with labor or tooling cost.
- PSA products or agreement additions mapped to those accounts, so invoices post to the right place without manual reclassing.
- A monthly report showing gross margin for each stream and a services-only margin alongside the blended figure.
With that structure, you can track the number that tells you how delivery is going, which is services margin, and still see licensing spread as its own small line. It also makes conversations with lenders or buyers easier, because you can show exactly how much of the revenue is pass-through.
One more check worth adding: reconcile license quantities billed to the client against quantities on the distributor invoice every month. A gap there turns thin margin into negative margin quickly, and it is easier to catch when licensing has its own accounts.
This article is general information, not accounting advice for your company. Principal-versus-agent conclusions depend on your specific contracts and facts, so confirm your treatment with your CPA.