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Rule of 40

What is the Rule of 40?

The Rule of 40 is a financial benchmark often used to evaluate the balance between growth and profitability in SaaS (Software-as-a-Service) and subscription-based businesses.

It states that:

A company’s Revenue Growth Rate (%) + Profitability Margin (%) should be at least 40%.

This ensures that even if a business is growing fast but not yet profitable (or vice versa), it’s still performing well overall.

How to calculate the Rule of 40?

The Rule of 40 is calculated by adding the Revenue Growth Rate (%) and the Profitability Metric (%).

Steps to calculate Rule of 40

  • Step 1:

    • Determine Revenue Growth Rate

  • Step 2:

    • Find Profitability Metric

  • Step 3:

    • Add Both Metrics – Revenue Growth Rate + Profitability Margin.

Formula to calculate Rule of 40

Rule of 40 Score=Revenue Growth Rate (%)+Profitability Margin (%)

Benchmark for Rule of 40

The Rule of 40 score above or equal to 40% is considered ideal as it indicates strong performance and a healthy balance between growth and profitability.

Related Metrics for Rule of 40

  • Gross Margin
  • LTV:CAC Ratio
  • Net Revenue Retention (NRR)

FAQ's

Because the combined score of growth and profitability should ideally be 40% or higher.

Mostly yes. It’s widely used in SaaS, subscription, and recurring-revenue businesses. For other industries, benchmarks vary.

EBITDA Margin, Operating Margin, or Free Cash Flow Margin. The choice depends on company reporting standards.