Guide
4 min read
By MSP Margin Editorial
Monthly recurring revenue is the number MSP owners quote most often and define least carefully. Ask three people at the same company what last month's MRR was and you may get three answers, each pulled from a different report.
MRR is a management metric, not an accounting term. GAAP doesn't define it, so nobody will stop you from stuffing it. That is exactly why a written definition matters.
Recurring means contracted and repeating
A workable definition: MRR is the monthly value of revenue you are contractually entitled to bill again next month without making a new sale.
That covers the core of the business. Managed services agreements priced per user, per device or as a flat monthly fee belong in it. So do recurring add-ons sold under the same agreement, such as backup, security monitoring or a monthly block of hours that renews automatically.
What doesn't belong:
- Project work. A server migration or office move is real revenue, but it ends when the project ends.
- Onboarding fees. They are charged once at the start of an agreement. Even when the agreement itself is recurring, the setup fee is not.
- Hardware. Firewalls, laptops and switches are one-time sales, even if the same client buys hardware every quarter.
- Ad hoc labor billed by the hour. If it depends on the client calling, it isn't contracted.
Two items need a rule rather than a gut call.
Annual agreements paid upfront count as one-twelfth of the annual amount each month. A $12,000 annual prepayment is $1,000 of MRR, not $12,000 in the month it was invoiced.
Resold licensing, such as Microsoft 365 seats billed through your PSA, is recurring in pattern but different in economics. The margin is usually thin and the price is largely set by the vendor. Many MSPs report it separately, as recurring resale, so it does not inflate the services number.
A worked example from one invoice run
Take an illustrative month where an MSP's invoices to its clients break down like this:
| Line | Amount | Counted in services MRR |
|---|---|---|
| Managed services agreements | $80,000 | Yes |
| Recurring backup and security add-ons | $10,000 | Yes |
| Resold Microsoft 365 licensing | $25,000 | No, tracked as recurring resale |
| Onboarding fees | $5,000 | No |
| Hardware | $20,000 | No |
| Project labor | $15,000 | No |
| Total invoiced | $155,000 |
Services MRR is $90,000, the agreements plus the add-ons. Annualized, that is $1,080,000 of services ARR.
If the same MSP folds licensing into MRR, the figure becomes $115,000, and annualized it reads $1,380,000. That is $300,000 of difference in the headline number, all of it coming from revenue with a fraction of the margin. If someone counted every line on the invoices, MRR would show $155,000, which overstates recurring revenue by $65,000 a month.
None of these numbers is wrong on its own. They are wrong when one gets compared with another, or when last quarter used one definition and this quarter uses a different one.
Why the definition drives pricing and valuation
Pricing decisions depend on knowing what your recurring services actually earn. If you divide services MRR by managed users to get an effective per-user rate, licensing in the numerator makes that rate look healthier than it is. You might hold prices flat when your labor-backed revenue per user has actually slipped.
Gross margin has the same problem. Recurring services and resold licensing carry very different costs. Blending them hides whether your service delivery is profitable or whether licensing volume is propping it up.
Valuation is where the definition gets tested hardest. Buyers and lenders tend to put more weight on recurring revenue than on project or hardware revenue, because it is more predictable. They also tend to rebuild the number themselves from invoices, contracts and the general ledger. If your reported MRR includes one-time items or treats resale the same as services, the rebuilt number comes in lower, and the conversation shifts from price to credibility.
The fix is mostly discipline. Map every product and agreement type in your PSA to a category, whether you run ConnectWise PSA, Autotask, HaloPSA or something else. Mirror those categories in your chart of accounts so the income statement and the MRR report come from the same buckets. Then write the definition down and use it every month, including the months when a looser version would look better.
One more check: MRR should reconcile, at least roughly, to recurring revenue recognized on the books. If MRR says $90,000 and the recurring income accounts show $70,000, something is miscategorized, unbilled or double-counted.
This is general information about how MSPs commonly define and report MRR. How recurring revenue is presented in your financial statements, and how a specific buyer or lender will treat it, depends on your contracts and circumstances, so it is worth reviewing your definition with your CPA.