Rule of 40

Balancing growth and profitability

At the beginning of 2019, about 50% of companies in the publicly traded SaaS market adhered to Rule of 40; those companies comprised 80% of total market valuation.

Companies calculate Rule of 40 by adding year-over-year Annual Recurring Revenue (ARR) growth to a profitability measure, usually EBITDA or Free Cash Flow (FCF). While EBITDA is perhaps the best measure of overall investment for company comparison, FCF is more reflective of the actual cash available to the business.

Achieving profitable revenue growth in today’s competitive market is becoming increasingly more difficult. The key is finding the right profitable growth path for your business to help drive to Rule of 40 and beyond.

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Article | 1 Min Read Why XaaS Revenue Leaders Should Care About Rule of 40

Demonstrating ARR growth isn’t enough; companies must demonstrate an ability to grow revenue profitably to attain higher multiples in public & private markets.

Article | 1 Min Read Rule of 40–Capacity & Deployment Considerations

Adding headcount to meet ARR goals may not be the answer. As a company with recurring revenue streams, capacity and deployment decisions are more nuanced.

Article | 1 Min Read Rule of 40–Implications for Fiscal Year Go-to-Market Planning

Set the right operational plan for your company and focus on the appropriate planning levers to ensure revenue growth.

Article | 1 Min Read Rule of 40–Coverage Models and Roles for 2020

How does a company ensure they have the right coverage model and roles for profitable revenue growth? This framework and key considerations can help your annual planning process.

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