SaaS: Growth vs Profitability
There’s a balance between growth and profit, and it’s measurable.
Typically if you’re growing at a rapid pace, you’re investing heavily in sales and marketing. If you’re growing slowly, you should hope you’re running a profitable operation.
In SaaS, the “Rule of 40” is an excellent way to measure your value and attractiveness to investors.
The Rule of 40 formula is:
Growth Rate (%) + Profitability (%)
For example, if your growth is 15% and your profit is 20%, your number is 35% (15 + 20) which is below the 40% target. You want this number to be 40% or higher.
This rule is intended for slightly more mature companies, not startups. I think you can begin to measure this when you’ve built out most of your core recurring revenue drivers. Brad Feld pegs this time at around $1 MRR.
Why I like the Rule of 40: it helps you maintain balance.
Sacrificing profits for growth isn’t bad as long as you’re seeing serious growth. The opposite is also true: slow growth is fine for a cash machine.