Wolf&Grayson EditorialThe “Rule of 40” has become a shorthand for financial health across the SaaS landscape. It combines growth and profitability into a single, board-level signal that investors, executives, and operators can quickly align around. Its appeal lies in its simplicity, but that same simplicity often masks the operating discipline required to sustain it over time.
“CROs seem to treat Rule of 40 like a report card, like at school,” says Keith Vere Fenner, Chief Revenue Officer at Morae Global. The most common path to a short-term “win” is to pull levers that look good in a quarterly update but create long-term pain. “I think of it as a collection of integrated execution initiatives.”
The Rule of 40, used well, becomes a way to build durable Rule-of-40 performance that can survive volatility, staffing changes, and delivery realities. “If all you do is go for a score, you’re going to get there by more likely definitely pulling the wrong levers,” he says.
Rule-of-40 Performance Starts With Revenue Mix Design
Most conversations about the Rule of 40 begin with growth and EBITDA. Fenner starts earlier, with the mechanics that determine whether growth and margin are real.
“It doesn’t just come from the growth or the margin,” he says. “It comes from how the entire revenue mix is designed.” That mix includes what the company sells, who sells it, how it is priced, and how it is delivered. Each decision carries different win rates, margins, and downstream costs that eventually show up on the P&L.
What the company sells is the first variable. A portfolio of products and services rarely behaves uniformly. Some offerings close quickly but deliver thin margin. Others take longer to sell but scale efficiently. The key is knowing, in advance, how each combination affects the business model.
Then comes who sells, and making the distinction between new sales and revenue that renews on the strength of delivery alone. “If you have repeat business which hasn’t had any sales work needed, an ongoing month-by-month contract that’s just evergreen because you do good service delivery, that would have a higher margin,” he says, since that revenue carries little to no incremental sales or marketing cost.
Delivery is the next lever, and for services-enabled SaaS companies it can be decisive. “If I deliver this onshore, there’s a price of X. If I deliver it offshore, it’s Y. If I deliver it as a mix of both, it’s Z,” Fenner says. In legal technology and consulting, those choices are further shaped by jurisdictional requirements, data sensitivity, and client expectations. A one-size-fits-all model is not simply inefficient. It can be non-compliant.
Deal Desks as Guardrails, Not Bureaucracy
When Rule-of-40 performance is built intentionally, guardrails are designed into the operating model. In more established SaaS organizations, this often means setting clear pricing and discounting rules that protect baseline margins before deals ever reach a contract stage. “We will pre-program discount structures to drive the right margin, so that the salespeople just do their day job and it will flag to them if they’re hitting close to an area that’s going to require a deal desk approval,” he says.
The most valuable outcome from strong guardrails is visibility. When a deal falls short on margin, the question is whether the structure can be improved or whether the company is choosing, consciously, to accept a tradeoff.
In practice, this means a deal may still move forward, but the commercial leader takes responsibility for offsetting the margin shortfall elsewhere in the quarter. “If we came up short $100,000 on a major deal,” he says. “We work together with sales leaders to go and find the extra margin in their next mix of products for the rest of the quarter.” The discipline is system-wide rather than punitive, and it keeps short-term decision-making tethered to long-term economics.
“If your sales motion requires sales heroics, extensive discounting or custom products or delivery changes just to hit your numbers, you’ve already broken the Rule of 40,” he says. “It’s just not on your P&L yet.”
Avoiding “Margin Debt” Disguised as Growth
Rule-of-40 manipulation often shows up at year-end, when leaders shift revenue recognition in ways that flatter the current period while damaging valuation later.
For example, substituting recurring revenue with services revenue to boost short-term performance. Invoicing services upfront can help a company make the year, but the cost is often hidden. Most SaaS companies are valued primarily on the multiple applied to their ARR, not on transient services income. Adjustments like this may be technically sound, but they can materially impair long-term valuation and strategic optionality.
Beyond accounting choices, the deeper trap is selling growth that dilutes profitability. Fenner describes it as a compounding liability: “If your fastest growing deals are the least profitable deals, then you don’t actually have the momentum you’re looking for. You’re moving into margin debt.”
He traces the root cause to what he calls “the three big evils”: over-hiring salespeople, over-discounting deals, and over-promising delivery. Those moves can create the appearance of velocity while locking the business into low-margin commitments it struggles to fulfil.
Strong Rule-of-40 leadership focuses on growth that compounds. Fenner points to multi-product attach rates, larger deal values that allow quotas to rise without adding headcount, and service lines that accelerate software delivery so revenue is recognised earlier. Instead of asking only whether the team hit plan last quarter, he asks a more diagnostic question: based on the product mix, “would we want to do the same next quarter or would we want to make some changes?”
Turning Revenue Into a Repeatable Asset
Fenner’s third principle is a reframing of the CRO role itself. Closing a quarter is not the same as building a revenue engine that survives change. “A lot of CROs can close out a quarter,” he says. “But can the CRO build revenue that survives that change, survives the future impacts that will come?” Delivery turnover, subcontracting needs, and unforeseen constraints do not just affect operational outcomes. They eat margin if deals were priced too tightly.
To prevent that, he insists on pipeline intelligence that includes profitability, not just bookings probability. “My pipeline, I will know the margin on every single one of those opportunities,” he says, rolled up by region, category, or any lens the business needs.
Repeatable deal structures make that possible. Fenner describes standardising product and services combinations into repeatable deal patterns, supported by “super clear selling rules programmed into the CRM system.” This way, teams can focus on execution and are only alerted when a deal falls outside the approved model. The goal is to eliminate the quarterly adrenaline rush that slows velocity and pushes deals out.
With the right partnership between CRO and COO, the transition can be quick. “If you’ve got the right team in place, it’s a one quarter job,” he says. The payoff is what investors reward: less earnings volatility, more dependable growth, and the kind of margin resilience that supports higher valuation multiples.
Rule-of-40 companies design for balance, then operationalise it so that frontline teams can execute without heroics. “You cannot take these problems to the front line. It just shouldn’t exist there. They should be doing what they do and the systems and the whole way that revenue engine works delivers the growth and the margin.”
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