Rule of 40
What is Rule of 40?
The Rule of 40 is a SaaS health benchmark stating that a company's revenue growth rate plus its profit margin should add up to 40% or more.
Also known as: Rule of Forty, R40
Rule of 40 Formula
Rule of 40 Score = Revenue Growth Rate + Profit Margin | Variable | Meaning |
|---|---|
Revenue Growth Rate | Year-over-year recurring revenue growth rate, in percent. |
Profit Margin | Profitability margin, typically free cash flow margin or EBITDA margin, in percent. |
How to Calculate Rule of 40
Worked example
- Revenue Growth Rate
- 25%
- Profit Margin (FCF or EBITDA)
- 15%
- → Rule of 40 Score
- 40%
Rule of 40 Calculator
Rule of 40 Score = Revenue Growth Rate + Profit Margin | Variable | Meaning |
|---|---|
Revenue Growth Rate | Year-over-year recurring revenue growth rate, in percent. |
Profit Margin | Profitability margin, typically free cash flow margin or EBITDA margin, in percent. |
Worked example
- Revenue Growth Rate
- 25%
- Profit Margin (FCF or EBITDA)
- 15%
- → Rule of 40 Score
- 40%
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Rule of 40 Benchmarks
| Segment | Level | Benchmark |
|---|---|---|
| general | target | 40% |
| general | great | 60% |
Common Mistakes with Rule of 40
- Mixing profitability definitions: pick one margin (FCF or EBITDA) and apply it consistently — switching between them makes the score meaningless.
- Applying the Rule of 40 too early: pre-scale companies (under roughly $1M ARR) are usually judged on growth and unit economics like LTV to CAC Ratio, not the Rule of 40.
Rule of 40 vs Related Metrics
- Rule of 40 vs Burn Multiple — how the two differ and when each matters.
Rule of 40 FAQ
What is the Rule of 40?
The Rule of 40 is a SaaS health benchmark: revenue growth rate plus profit margin should be at least 40%. A company growing 25% with a 15% margin scores exactly 40%.
How do you calculate the Rule of 40?
Add your year-over-year revenue growth rate to your profit margin (commonly free cash flow margin). Growth 30% + margin 5% = a Rule of 40 score of 35%.
Is the Rule of 40 a good benchmark for early-stage SaaS?
It matters most from growth stage onward. Early-stage companies can score well on growth alone, while mature companies need profit margin to contribute.
More questions? See the full Rule of 40 FAQ.