The Rule of 40 in Subscription Business |forbesmagazine

 Subscription Business: The SaaS industry is overgrowing. The COVID-19 pandemic streamlined SaaS growth due to the necessity of shifting to online, even for those businesses that were traditionally operating offline.

 

 While the crisis impacted many companies, specific industries like wellness, entertainment, gaming, and ed-tech are experiencing a significant increase in demand. Looking at the SaaS boom, revenue-financing firms plan to invest more funds in tech startups attracted with their low margins and exponential growth potential. rule of 40 saas

 

This simple formula’s key idea is that a fast-growing Subscription Business with sales growth of 40% and more may have from zero to negative profit and remain sustainable. If you have continuously grown sales, the profit is only a matter of time – this belief underlies the SaaS rule of 40. Brad Feld claims that this rule can be applied equally to $50 million businesses and companies with only $1 million revenue.

To get more understanding of how to calculate your rule of 40, see the example below.

 

Here the growth % is calculated using a YTD (year-to-date) revenue growth. The requirement is to use a period that shows the best your actual revenue and profit picture. For the profit calculation, the EBITDA margin is used.

 

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