For many companies, the Rule of 40 has become a vital gauge of performance. The rule simply puts forth the principle that a software company’s profit margin and growth rate should both exceed 40%. Checkout the Bain Brief Hacking Software Rule of 40. Organizations that beat this rule are on average three times more valuable in terms of total enterprise value to revenue than those that fall short.
As most executives know, the market rewards SaaS companies more for growth as opposed to profitability. The surprising thing however, is by how much more. Research shows that higher growth delivered twice the improvement on enterprise value as stronger cash flow. As such, SaaS executive teams looking to maximize their value shouldn’t prioritize operational improvements over growth.
Below are six capabilities that the most successful SaaS companies are performing better than their peers; and being rewarded heavily by the market for it.
6 Habits of Highly Successful Software Companies
1. They keep operating expenses (opex) in check
Due to the global recession resulting from COVID-19, most companies have been compelled to reduce expenses. However, software companies that beat the Rule of 40 already have better opex-to-revenue ratios. Since their product development processes are efficient, they don’t invest in products that go nowhere.
Others are ruthless in culling development pipelines and pulling investments from less promising ventures. Obviously, this allows them to focus on more promising opportunities. What’s more, they tend to have highly productive sales organizations that keep administrative costs in check and invest in customer success.
2. They spend efficiently on sales and marketing to generate revenue
Keeping the magic number high is another crucial indicator when it comes to the Rule of 40. This number is the ratio of revenue growth to spending on sales and marketing. Essentially, this measures the productivity of the Salesforce to generate incremental value thus reflecting whether the Salesforce is geared towards expanding the business.
3. They're great at retaining employees
Out of the five leading indicators for software companies to beat the Rule of 40, employee retention was the most vital. Leaders in software and other fields as well understand that customer satisfaction correlates with employee satisfaction. As a result, they devote resources to ensuring both.
Of course, employee satisfaction is likely to depend on different factors than before when there wasn’t any pandemic to worry about. Senior executives will therefore need to change the way they measure and manage satisfaction. And take into account changes in staffing, travel, staffing, and safety too.
4. They nurture growth from their existing customers
What’s the worst thing a company can do? A lot actually. But no sin is greater than being so tied up looking for new customers that you forget your loyal, everyday customers. Doesn’t matter if it’s the ones who spend the least; the fact that they’re repeat consumers is what organizations need to focus on.
Companies that Beat the Rule of 40 are far more efficient when it comes to developing new revenue from existing customers. This includes cross selling and upgrades. However, they don’t only focus on the growth end of the spectrum. They also do a much better job of limiting customer churn. Keeping customers happy helps them grow exponentially from within.
5. They ensure customers have a high lifetime value
By looking at most of the leading organizations, they tend to show better customer lifetime value-to customer acquisition cost. This is to say that they do a great job of targeting the right customers and delivering products that return high value over expended periods.
Across numerous industries, companies are improving this metric with investments that take the cost out of the entire customer acquisition process. This is where digital native SaaS companies have and edge. Their capabilities over incumbents allow them to push this advantage and take costs out wherever they can.
6. They are incredibly ambitious
This might not exactly qualify as a capability, but it’s right up there. Ambition is one of the major driving forces when it comes to achieving organizational success. Just look at Microsoft; they had an ambition of having a computer on every desk when they started out. And this was when a lot of people had barely heard of computers.
Then there’s Google who set out with an almost impossible goal and ambition. If you’d told anyone that almost all the world’s information could be gathered and organized in one place, they’d expect libraries bigger than Alexandria’s. Great software companies are incredibly ambitious and build things that create a massive impact.
Final Word on Successful Software Companies
In the months since COVID-19 began taking a toll on commercial and industrial activity, most IT budgets have been severely sliced. However, many other enterprise software buyers are planning to boost spending on SaaS production across different categories. This especially applies to security and collaboration as more and more employees work from home during lockdowns.
Along with the trend that seems to be going away from on-premise software, this suggests that many companies should be able to continue their growth trajectories and beat the Rule of 40 even in times of economic hardship. Do you want to see a list of the best software companies and what they’re doing to remain successful?
Checkout reviews for many software companies including 100s of 5 Stars for Veloxy plus reviews in: