👉 Background: Xero is the accounting software started in New Zealand in 2006. It was one of the OG accounting platforms to launch in the cloud when others were still on CD-ROM. Since then, it has grown into a global accounting giant with over 4.2 million subscribers.

👉 What happened: Now, Xero has announced that its operating earnings jumped by 50% to over $311 million NZD over the past six months, after jacking up the price of subscriptions as well as seeing overall subscription growth of 6%.

👉 What else: But, subscriber growth in North America actually fell by 8%. So, while their growth may have slowed a little in some places, they’re still exceeding their Rule of 40 goal.

What's the key learning?

💡The Rule of 40 is the idea that a software company's growth rate and profit margin should exceed 40% when combined — that could mean 20% growth rate and 20% profit margin, or 30% growth rate and 10% profit margin.

💡In recent years, the Rule of 40 has been used widely by software companies around the world, including Salesforce, Adobe and Zoom. And investors like it as a high-level health check of a company.

💡Back in November last year, Xero announced their plans to achieve the Rule of 40, during the time they were sitting at 33%. But by May 2024, Xero cracked over the 40% mark for the first time for growth rate and profit margin. Now, they’ve hit their main goal of 44% in the most recent half, despite slowing subscriber numbers.