Rule of 40
A heuristic stating that a healthy software company’s revenue growth rate plus its profit margin should equal or exceed 40%. It frames the trade-off between growth and profitability.
Related terms
Annual Recurring Revenue (ARR)
The value of a subscription business’s recurring revenue normalized to a one-year period. ARR excludes one-time fees and is the headline growth metric for most B2B SaaS companies.
Monthly Recurring Revenue (MRR)
The predictable subscription revenue a company expects to receive each month. MRR is tracked alongside its components — new, expansion, contraction, and churned MRR — to understand growth drivers.
Customer Acquisition Cost (CAC)
The total sales and marketing cost required to acquire one new customer, calculated by dividing those costs over a period by the number of customers won. CAC is a core measure of go-to-market efficiency.
Customer Lifetime Value (LTV)
The total gross profit a business expects to earn from a customer over the entire relationship. LTV is driven by average revenue, gross margin, and retention, and is most useful when compared against CAC.
LTV:CAC Ratio
The ratio of customer lifetime value to acquisition cost, used to judge whether a GTM motion is economically sustainable. A ratio around 3:1 is a common benchmark for healthy B2B SaaS.
CAC Payback Period
The number of months it takes for the gross profit from a customer to repay the cost of acquiring them. Shorter payback periods mean faster, less capital-intensive growth.
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