Paid’s Post

The Rule of 40 breaks with AI. For those who don’t know, the rule of 40 states that your company is healthy if growth rate + profit margin ≥ 40. Traditional SaaS has got used to 20% profits with costs breaking down at: - 20% COGS - 25% S&M - 25% R&D - 10% G&A 20% profit + 20% growth = healthy company.  Easy. In the agent world, with all your LLM and tool calls, COGS often goes up to 60%. BUT NONE OF YOUR OTHER COSTS GO DOWN. That’s why AI companies are often looking at -20% profits.  Those companies must grow at at least 60% YOY durably to be healthy. Some are seeing that level of growth, but it’s not sustainable with the current level of competition. The party has to end sometime. Something will have to give. One area that will change is sales comp. I think we’ll see a lot more companies moving sales commissions from % of revenue to % of margins. It’s not a new concept. In many industries this is the norm. Door to door sellers selling encyclopedias or cookware were doing it before.  And if they gave a discount, it came out of their own pockets. Sellers were incentivized by the same metrics that mattered to the business - more deals, bigger deals, and bigger margins. How are you compensating sellers in the AI era? I’m hosting a roundtable on this topic soon. DM me to get on the guestlist.