What is Evergreen Ratio?
The Evergreen Ratio is a framework coined by Richard Ewing that measures the balance between fixed-cost software (traditional code with near-zero marginal cost) and variable-cost AI features (code with per-interaction costs) in a product.
The Evergreen Ratio is a framework coined by Richard Ewing that measures the balance between fixed-cost software (traditional code with near-zero marginal cost) and variable-cost AI features (code with per-interaction costs) in a product.
Formula: Evergreen Ratio = Fixed-Cost Code Revenue ÷ Variable-Cost AI Revenue
A high Evergreen Ratio (>3:1) means most of your revenue comes from traditional software with high margins. A low ratio (<1:1) means AI features dominate, compressing margins.
The Evergreen Ratio helps teams decide when to replace AI features with deterministic code — if an AI feature's behavior becomes predictable enough, converting it to rules-based logic eliminates the variable cost entirely.
Why It Matters
SaaS companies are valued on gross margins. AI features that compress margins reduce enterprise value. The Evergreen Ratio helps teams protect margins by identifying which AI features should be converted to deterministic code.
How to Measure
Categorize all revenue-generating features as fixed-cost or variable-cost. Calculate the ratio. Track over time — a declining ratio means margin erosion.
Frequently Asked Questions
What is a good Evergreen Ratio?
Above 3:1 is healthy (most revenue from fixed-cost code). Below 1:1 is dangerous — AI costs are dominating margins. Between 1:1 and 3:1 requires active margin management.
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Richard Ewing is a Product Economist and AI Capital Auditor. He helps companies translate technical complexity into financial clarity.
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