You’ve probably heard of the 50/40/90 club in basketball. It’s that elite tier where players like Stephen Curry or Kevin Durant live, hitting impossible percentages from the field, the three-point line, and the free-throw stripe. But lately, a different set of numbers—the 40 50 90 club—has been quietly circulating in high-performance business circles and SaaS (Software as a Service) boardrooms. It’s not about jump shots. It’s about survival, scale, and the brutal reality of running a company that actually makes sense in today's economy.
The 40 50 90 club is a framework used to measure the health of a growing business, specifically focusing on the Rule of 40, gross margins, and retention rates.
Honestly, most founders are obsessed with just one number: growth. They want to see that revenue line go up like a rocket ship. But growth is a liar if it costs you $2 for every $1 you bring in. That’s where these metrics come in to slap some sense into the spreadsheet.
What Does the 40 50 90 Club Actually Mean?
Let’s break this down without the corporate fluff. This isn’t a formal "club" with a clubhouse and fancy jackets. It’s a benchmark. When investors or CEOs talk about these numbers, they’re looking for a specific trifecta of operational excellence.
First, you have the Rule of 40. This is the big one. It basically says that your growth rate plus your profit margin should equal 40% or more. If you’re growing at 60% but losing 20% in profit, you’re at 40. You're in. If you're growing at a modest 10% but pulling in 30% profit, you’re also at 40. It’s about balance.
Next up is the 50. This usually refers to a 50% threshold for specific efficiency metrics, often related to Customer Acquisition Cost (CAC) payback periods or, in some stricter circles, a floor for operating margins in mature stages. However, in the most common "performance club" context, the 50 represents the target for year-over-year growth for mid-stage startups trying to prove they aren't just a flash in the pan.
Then there’s the 90. This is almost always about Net Revenue Retention (NRR) or Gross Margin. If 90% of your customers aren't sticking around or if you aren't keeping 90 cents of every dollar after the cost of goods sold, you have a leaky bucket.
It's a hard target. Really hard.
Why the Rule of 40 is the Foundation
The 40 in the 40 50 90 club is the most scrutinized of the bunch. Brad Feld and the team at Foundry Group popularized this back in the mid-2010s. It became the gold standard for SaaS companies because it allowed for different "personalities" of companies to be compared fairly.
Think about it.
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A "Growth at All Costs" company and a "Slow and Steady" company look totally different on paper. But the Rule of 40 gives them a common language. If you're burning cash to grow, that growth better be fast enough to justify the burn. If you’re not growing, you better be printing money.
Lately, though, the market has gotten cranky. Back in 2021, you could get away with a Rule of 40 score driven entirely by growth while your profits were deep in the red. Investors didn't care. Now? They care. They want to see the "profit" side of that equation doing some of the heavy lifting.
The Brutal Reality of 90% Retention
Let’s talk about the 90. If you’re in the 40 50 90 club, your retention has to be elite.
Gross Revenue Retention (GRR) at 90% is often considered the floor for "good" enterprise software. But Net Revenue Retention? That’s the real hero. NRR includes upsells and expansions. If your NRR is 110%, it means even if you didn't sign a single new customer this year, your business would still grow by 10% just from your existing fans.
Why does 90 matter so much?
Churn is a silent killer. You can have the best marketing team in the world, but if your product is a "leaky bucket," you're just pouring money down the drain. High retention proves "Product-Market Fit." It proves people actually use the thing you built.
I’ve seen companies with 100% year-over-year growth fall apart because their retention was 60%. They were just exhausting their market. Eventually, you run out of new people to sell to.
Breaking Down the 50: The Efficiency Gap
The "50" in the 40 50 90 club is often the most debated. Some analysts use it to signify a 50% Gross Margin as a minimum (though for SaaS, you really want that closer to 80%).
More often, in the context of high-performance benchmarks, the 50 refers to the Sales and Marketing (S&M) efficiency.
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Basically, are you spending more than 50% of your revenue just to keep the lights on and the leads coming in? If your S&M spend is bloated, your path to profitability is a hallucination. High-performing companies in the 40 50 90 club usually keep their acquisition costs under a tight leash. They want to see that for every dollar spent on sales, they get at least 50 cents of recurring revenue back almost immediately.
It’s about "Magic Numbers."
If your Magic Number—calculated as (Net New ARR in Quarter / S&M Expense in Previous Quarter)—is above 0.75, you're doing great. If it’s above 1.0, you’re a god. The 50 is that psychological midpoint where you shift from "spending to survive" to "investing to dominate."
Why These Numbers are Harder to Hit Now
The world changed.
A few years ago, capital was cheap. Interest rates were near zero. You could borrow money for nothing, throw it at Facebook ads, and call yourself a genius.
Now? Debt is expensive. Equity is harder to get.
The 40 50 90 club has become the "Standard of Sanity."
Public markets are rewarding companies that show "Balanced Growth." Look at the BVP Nasdaq Emerging Cloud Index. The companies that stayed on top during the recent downturn weren't the ones with the highest growth—they were the ones with the best Rule of 40 scores.
Efficiency is the new growth.
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Common Misconceptions About the Benchmarks
People get these numbers mixed up all the time.
- "It’s only for SaaS." While these specific percentages started in software, the logic applies everywhere. Whether you're selling shoes or cloud storage, your growth + profit needs to exceed a baseline to be sustainable.
- "You have to hit them every single month." No. These are trailing twelve-month (TTM) figures. Business has seasons. You might have a heavy spend quarter that tanks your Rule of 40 temporarily, but the trend line is what matters.
- "40 is the ceiling." Actually, for the best companies, 40 is the floor. The "Greats" like ServiceNow or Adobe have historically operated at 50, 60, or even 70.
How to Audit Your Own Business
If you want to see if you're anywhere near the 40 50 90 club, you need to get honest with your data.
Start with your Rule of 40. Take your revenue growth rate (say, 30%) and add your EBITDA margin (maybe it’s -5%). Your score is 25. You’re failing the benchmark. You either need to grow 15% faster at the same cost, or cut 15% of your expenses while maintaining your growth.
Next, look at your Retention. If your gross retention is under 80%, stop hiring sales reps. Seriously. Stop. You have a product problem, not a sales problem. Fix the product until the 90% mark feels reachable.
Finally, check your Margins. If your gross margin is under 50%, you aren't a tech company; you're a services company masquerading as one. There's nothing wrong with that, but the market won't value you like a high-growth tech firm.
Actionable Steps to Improve Your Score
Stop looking at the scoreboard and start looking at the plays.
- Audit your "Zombie" spend. Most companies have 10-15% of expenses tied up in software they don't use or marketing channels that don't convert. Cutting this instantly boosts your Rule of 40 profit side.
- Focus on Expansion. It is 5x cheaper to sell more to an existing customer than to find a new one. To hit that 90% NRR, your CS (Customer Success) team should be incentivized on upsells, not just "happiness."
- Raise Prices. It’s the fastest way to fix a margin problem. Most companies are terrified to do it, but if your product is actually providing value, a 5-10% increase won't kill your retention, but it will transform your Rule of 40 score.
- Tighten the ICP. Stop selling to everyone. The customers who churn the fastest are usually the ones who shouldn't have bought the product in the first place. By narrowing your focus to your "Ideal Customer Profile," your retention naturally climbs toward that 90 mark.
The 40 50 90 club isn't about being perfect. It's about being disciplined. In an era of "fake it 'til you make it," these numbers are the truth-tellers. They show who is building a real, lasting institution and who is just burning investor cash for a nice office and a fancy logo.
If you can get close to these benchmarks, you're not just running a business. You're building an asset. That's the difference between a job and a legacy. Keep your head in the spreadsheets, but keep your eyes on the margins. Efficiency is finally cool again.
Next Steps for Implementation:
- Calculate your current Rule of 40 score using your TTM (Trailing Twelve Months) data.
- Segment your churn data by "Reason for Leaving" to identify if your 90% retention gap is a product issue or a sales expectations issue.
- Review your Gross Margin; if it's below the 50% mark, evaluate your COGS (Cost of Goods Sold) for immediate efficiency gains in hosting or labor costs.