Rule of 40: How to Balance Growth vs. Profitability

Written By Cody Gutierrez

The first question I asked a new CEO client wasn't about their marketing funnel.

It was: "What's your tax bill?"

They’re crushing it:

- ~$20M ARR

- 25% YoY growth

- 40% NET margins (not gross. Net.)

Highest net margins I've ever touched directly outside the wedding industry.

And their marketing budget was only 8% of revenue.

Very impressive, BUT a huge chunk of their profit was going straight to the government. I recommended they be LESS profitable - i.e. spend more on the foundation to 10X the business.

That's a tough conversation. Because you can make a real case for leaving it alone and harvesting the cash.

Which is exactly why I use the Rule of 40 framework:

Revenue Growth % + Profit Margin % > 40 = great.

It originally came from VCs & SaaS. (this client's also in software.) But I use it everywhere.

It's the fastest way to spot-check operating performance and see how a company is trading off growth vs. profitability.

It also tells you which of 4 modes a company is in:

- Win: high growth + high profit. The unicorn path.

- Harvest: high profit, low growth. Collecting the cash.

- Build: high growth, low or no profit. Investing for enterprise value.

- Fix: low growth + low profit. Something has to change.

There’s no right answer. I had a different client with a different choice: they ran at a deliberate 0% net margin. Not unprofitable. Profit-ABLE. Every dollar went back into growth to drive enterprise value.

Neither approach is right or wrong. Cash flow vs. enterprise value depends on the business and the owners' goals.

The point is this formula tells you what a company's priorities actually are, whether or not leadership has said them out loud.

As for the SaaS client: 25% growth + 40% margin = 65. Way above 40. Plenty of headroom to scale. They increased investment in marketing and product development, and it’s paying off.

It’s not every day I tell a client to be less profitable, shoutout to them for crushing it.

Which business' P&L would you prefer to own?

- Biz #1: 25% growth rt. + 15% profit = 40

- Biz #2: 50% growth rt. + (10% loss) = 40

(Here’s my LinkedIn post).

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I’ll be sharing my 140+ page Revenue Growth Playbook, page by page, for free.

These are the exact same fundamental strategies I’ve used to help scale revenue 10X for a SaaS brand, 10X for an Ecomm brand & 2X for an agency. Drove $100M+ in net-new revenue.

Follow along on LinkedIn or grab the whole thing.

If you want to work with me or hire me, book a call or shoot a DM my way.

Meet Cody Gutierrez, CMO turned Fractional CMO for Hire:

I help $1M-$100M businesses to scale-up profitably. In the corporate world, I earned 9 promotions in 10 years & scaled revenue 10X for a SaaS brand, 10X for an Ecomm brand & 2X for an agency. Drove $100M+ in net-new revenue for the brands I led. Then, I walked away from my executive job (CMO) at a VC-backed startup to build my own portfolio of companies to grow & invest in. Learn about me here.

Download Resume Here

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Cody Gutierrez
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