Are we seeing operating leverage as we scale?
№ 227 · Operating leverage curve
Definition
MetricOperating expense as a share of revenue plotted against revenue scale, with incremental margin
Unitpercent of revenue for opex, and incremental EBITDA as a percent of incremental revenue
Scatter or line showing revenue growth on x-axis and EBITDA margin on y-axis. Should slope up with scale. Build from quarterly P&L. Flat or downward slope means scaling diseconomies. Example: 22% revenue growth + 8% operating margin (positive leverage; the trajectory matters).
- EBITDA
- Earnings before interest, tax, depreciation and amortisation. Operating profit with depreciation and amortisation added back.
- P&L
- Profit and loss statement. Revenue minus cost of goods sold minus operating expenses, down to operating profit.
Benchmarks
| Bottom 30% | Median | Top 30% |
|---|---|---|
| operating expense share rising with scale, incremental margin negative | operating expense roughly flat as a share of revenue, Rule of 40 score below 40 | operating expense falls 4 or more points as a share of revenue per revenue doubling, with incremental EBITDA margin above 40 percent |
private B2B SaaS by ARR band for FY2024, with US listed nonfinancial companies as of January 2026 as the cross-market anchor · Operating leverage is a shape rather than a level, so these quartiles describe the slope of the curve rather than a point on it, which is why confidence is medium despite good underlying data. The size of the prize is visible in the gap between private and public software cost structures: Benchmarkit puts private SaaS at roughly 37 percent of revenue for sales and marketing, 34 percent for R&D and 24 percent for G&A, summing well above 100 percent, while Damodaran's January 2026 data has US listed system and application software at 24.4 percent SG&A and 16.0 percent R&D. High Alpha's 800-company dataset has the median Rule of 40 below 40 in every ARR band with only the upper quartile at or above it, and attributes the shortfall to growth deceleration rather than to margin, which means the leverage question and the growth question are the same question.
| Category | Bottom 30% | Median | Top 30% |
|---|---|---|---|
| VC-backed private SaaS, sales and marketing | above 60 percent | 47 percent of revenue | below 35 percent of revenue |
| PE-backed private SaaS, sales and marketing | above 45 percent | 33 percent of revenue | below 25 percent |
| Private SaaS above $100M ARR, sales and marketing | above 42 percent | 33 percent of revenue | below 27 percent |
| US listed system and application software, SG&A | above 33 percent | 24.4 percent of sales | below 18 percent |
| Private SaaS R&D against listed software R&D | above 40 percent | 34 percent private against 16.0 percent listed | below 22 percent of revenue |
| Private SaaS G&A | above 28 percent | 15 to 24 percent depending on dataset | below 12 percent of revenue |
When it looks bad
Revenue rises along the x-axis but the operating expense percentage line is flat or tilts upward, and the incremental margin bars are smaller than the average margin, which means every new dollar is arriving at worse economics than the base.
Revenue moves $18M to $26M while operating expense moves $21M to $30M, giving an incremental margin of minus 12 percent against an average margin of minus 17 percent, so the curve is flattening but has not turned.
What to do about it
- Chart incremental margin, the change in EBITDA divided by the change in revenue, alongside average margin. It is the only version of this chart that shows leverage arriving, and it turns positive one to two years before the average margin line does, which is the window in which hiring decisions are actually made.
- Break G&A out from the rest and hold it to an absolute number rather than a percentage. Benchmarkit puts private SaaS G&A at 24 percent of revenue against 15 percent in the SaaS Capital survey, and a G&A line that does not decline as a share of revenue with scale is the clearest sign the leverage is not structural.
- Benchmark the sales and marketing ratio against a peer set matched on funding source, not on size. Benchmarkit has VC-backed companies at 47 percent of revenue against 33 percent for PE-backed, so a VC-backed company comparing itself to a PE-backed peer will conclude it is inefficient when it is simply executing a different plan.
- Set the target from the public comparable rather than the private median. The private-to-listed gap of roughly 13 points on SG&A and 18 points on R&D is the leverage that has not yet been realised, and it is a more useful destination than the median of a peer group that is also unprofitable.
Sources
- Benchmarkit Reports private SaaS operating expense at median levels of 37 percent of revenue for sales and marketing, 34 percent for R&D and 24 percent for G&A, with sales and marketing at 47 percent of revenue for VC-backed companies against 33 percent for PE-backed, and 33 percent for private companies above $100M ARR, matching the public software level. benchmarkit.ai ↗
- NYU Stern (Aswath Damodaran) Reports SG&A at 24.38 percent of sales and R&D at 15.98 percent for US listed system and application software as of January 2026, against SG&A of 13.97 percent and R&D of 4.14 percent for all US listed nonfinancials. pages.stern.nyu.edu ↗
- SaaS Capital Reports median G&A spend at 15 percent of ARR for private B2B SaaS, up from 14 percent the previous year, with total departmental spend at 96 percent of ARR for bootstrapped and 101 percent for equity-backed companies. saas-capital.com ↗
- High Alpha Reports the median Rule of 40 score below the 40 percent target across every ARR band in 2025, with the upper quartile at or above 40 across all cohorts, and attributes the shortfall primarily to growth deceleration rather than margin deterioration. highalpha.com ↗
- High Alpha Reports ARR per employee climbing sharply with scale while median headcount has fallen since 2022, particularly above $5M ARR, based on 800 plus companies. highalpha.com ↗
- SaaS Capital Reports median revenue per employee for private SaaS rising from $125,000 in 2024 to $129,724 in 2025 and $141,125 in 2026, with bootstrapped companies ahead of equity-backed peers in every ARR band. saas-capital.com ↗
- KeyBanc Capital Markets and Sapphire Ventures Reports private SaaS EBITDA margins improving every year since 2022 and expected to cross into profitability in 2026, which is the point at which the leverage curve turns. prnewswire.com ↗
- The Hackett Group Reports European SG&A costs at a five-year high across Europe's largest companies even with stronger revenue growth, indicating leverage running backwards at index level in that market. thehackettgroup.com ↗