Why the Rule of 40 Matters to Your SaaS

Tim McLain

As your platform scales and revenue grows, your board and CFO will inevitably start talking about something called the 40% rule and how it applies to your healthy SaaS company.

“The 40% rule is that your growth rate + your profit should add up to 40%,” explains Brad Feld, a prolific blogger/author and speaker on venture capital investing and entrepreneurship. “So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.”

The Rule of 40% For a Healthy SaaS Company

Growth & Profits: Key Drivers

Early-stage growth is the easiest to achieve, accounting for year-over-year growth of your monthly recurring revenue (MRR). Matched with a solid gross margin to filter your financials against any high cost of goods sold (COGs) and growth north of 1,000% per year is attainable.

The challenge comes with measuring your profits. Your best bet is to focus on the traditional bottom-line metric of EBITA, your earnings before interest, taxes, and amortization. If your solution is hosted in the cloud, your EBITA will be easier to calculate. If you’re invested in hardware or a datacenter you’ll need to figure in hardware purchases or finances, leases, etc.

Improve EBITA & Save on Telecom Costs

While your sales and marketing teams are busy accelerating your growth, there’s one often overlooked way to increase your profits: embed an easy-to-install, cost-efficient voice and messaging provider in your tech stack.

thinQ by Commio’s intelligent voice routing technology optimizes outbound and inbound calls in real-time, reducing your OPEX/CAPEX by 30-50%. Six-second rounding boosts performance further, saving up to 75% on individual calls. Plus, with support for A2P messaging (Application to Person), Commio goes far beyond the features of traditional SMS APIs to get the scale, savings, and functionality you need. Add SMS and MMS texting to domestic and toll-free numbers to take advantage of the modern way to stay in touch, provide support, and more.

Thaddeus Shaw started using Twilio to bring a dozen applications to life since 2010. Twilio’s APIs provided the new foundation for the app his clients were seeking, but when traffic spiked 57% over 90 days, two gaps were uncovered: A lack of visibility into the voice carrier network, and the inability to reduce costs. That’s when he augmented Twilio by adding thinQ Voice to his application to route and deliver his calls.

After a few hours of work in Twilio, Shaw reduced his telecom costs by 46%. That helped his company reach the Rule of 40 a year earlier than expected.

Book a demo to learn how Commio will help you reduce expenses so you can achieve the Rule of 40 faster.

Date posted: October 20, 2021

Topic: APIs   CPaaS   Inbound Voice   Messaging   Outbound Voice   SaaS   Software as a Service (SaaS)   UCaaS  

Tags: MMS   SMS   Twilio  

Tim McLain

A passionate technologist at heart with more than 25 years of marketing experience, Tim loves using technology to help businesses solve problems and grow their bottom line. Tim is happiest brainstorming new approaches to marketing and communications to help Commio's partners better understand, trust, and embrace our cloud communications solutions. In his spare time, he loves shooting and editing video, riding long distances on North Carolina’s amazing bike trails, and enjoying the darkest craft beer he can find.

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