Rule of 40
Definition
A benchmark for software businesses holding that a company's revenue growth rate plus its profit margin should total at least 40%. It balances the trade-off between growing fast and being profitable.
Formula
Rule of 40 = Revenue growth rate (%) + Profit margin (%)
Related Terms in Financial Analysis
LTV:CAC Ratio
The ratio of customer lifetime value to customer acquisition cost, showing how much value a customer returns for each unit spent to win them. A healthy ratio signals efficient, sustainable growth.
CAC Payback Period
The time it takes to recover the cost of acquiring a customer from the gross profit that customer generates. A shorter payback means cash spent on growth comes back faster.
Expansion Revenue
Additional recurring revenue earned from existing customers through upgrades, add-ons or increased usage. It is a key driver of net revenue retention and efficient growth.
Bookings vs Revenue
Bookings are the value of contracts customers commit to; revenue is what is actually recognised as earned over time. The gap matters because a signed deal is not the same as recognised income.
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