Rule 40
The Rule of 40 states that your growth rate plus this margin should equal at least 40.
What is Profit (or EBITDA) Margin?
This popular structure protects an owner's personal assets from business debts without the complexity of a full corporation.
What is an LLC (Limited Liability Company)?
LVR measures the month-over-month growth of these "potential" customers, rather than actual closed deals.
What are Leads?
To calculate LTV, you multiply the average revenue per user (ARPU) by the length of time they stay, known by this term.
What is Customer Lifespan?
If a company is growing at 50% year-over-year but has a profit margin of 5%, its Rule of 40 score is this.
What is 45?
Double taxation is a major disadvantage for this specific type of corporate structure.
Corporation (The company pays tax on profit, and shareholders pay tax again on dividends).
While revenue is a lagging indicator (what happened in the past), LVR is used as a "predictive" indicator for this specific type of business mode
What is B2B SaaS?
LTV is not just total revenue; it must be multiplied by this percentage to account for the cost of servicing the user.
What is Gross Margin?
The Rule of 40 is most commonly applied to this type of business model, which relies on recurring subscriptions.
What is SaaS (Software as a Service)?
An owner is frustrated to find that their business's $100,000 profit was taxed at 21% at the end of the year. When they try to move that remaining money into their personal bank account, they are taxed again on that same money at their personal income rate.
What Structure is this?
What is a Corporation?
Company A has 100 leads in May and 140 leads in June. This is the percentage that represents their June Lead Velocity Rate.
What is 40%?
A meditation app charges $20/month. Users stay for 12 months and the margin is 80%. What is the resulting LTV.
What is $192?
Investors use this rule because a company with low growth can still be "healthy" if it has high levels of this.
What is Profitability (or Cash Flow)?
Ranjeet is sued personally after a business accident. The court rules that because the owner didn't keep separate bank accounts and didn't hold formal annual meetings or keep "minutes," the legal "shield" is gone and their personal house can be seized.
What structure is this?
What is an LLC? (Or Corporation)
High LVR is often used to grade the performance of this specific department, even if the sales team hasn't closed the deals yet.
What is Marketing?
A B2B SaaS tool charges $100/month. Users stay for 2 years (24 months) and the margin is 70%. What is the resulting LTV.
What is $1,680?
In the Rule of 40, "Growth" is most often measured by the increase in this specific type of recurring revenue.
What is ARR (Annual Recurring Revenue)?
If owners fail to file their paperwork correctly with the state, the law ignores their shield. By default, the business is legally reclassified as this structure, making every owner's personal bank account 100% liable for any debt signed by any other owner.
What structure is this?
What is a Partnership?
A company’s LVR is rising, but their Conversion Rate is dropping. This situation makes the company less valuable overall, but increases the value of this specific team.
What is the Sales Team?
A company increases its ARPU but sees its Lifespan drop by half. If the Gross Margin stays the same, ARPU must do this to maintain the exact same LTV.