Formula
Rule of 40 Score = Revenue Growth Rate % + EBITDA / Profit Margin %
Interactive Widget
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About Rule of 40 Calculator
The Rule of 40 is a simple heuristic used to evaluate the health of a SaaS business by combining two metrics that are often in tension: revenue growth rate and profit margin. The rule states that a healthy SaaS company's growth rate plus profit margin should add up to 40% or more.
The logic behind it: a company can be unprofitable if it is growing extremely fast (high growth, low margin), or grow slowly if it is highly profitable (low growth, high margin) — both can be defensible strategies. What the Rule of 40 flags is a business that is doing neither: growing slowly and burning cash at the same time.
Benchmarks
A combined score of 40% or higher is generally considered healthy. Early-stage companies often run well above 40% (growth-heavy, low or negative margin) — this is normal and often expected by investors. As a company matures and growth naturally slows, profit margin is expected to rise to compensate and keep the combined score near or above 40%.
Investors increasingly want to see the Rule of 40 trending upward over time, not just the current score in isolation — evidence that the business is becoming more efficient as it scales matters as much as the number itself.
Frequently Asked Questions
What is a good Rule of 40 score?
A combined score (revenue growth rate % + profit margin %) of 40% or higher is generally considered healthy for a SaaS business. Early-stage companies often exceed 40% through high growth alone, while more mature companies rely more on profit margin to hit the threshold.
Is it better to prioritize growth or profit margin?
Neither is inherently better — the Rule of 40 treats them as substitutes. A fast-growing, unprofitable early-stage company and a slower-growing, highly profitable mature company can both score well. What matters most is not being weak on both dimensions simultaneously.
Which profit metric should I use — EBITDA or free cash flow margin?
Either is commonly used, and different investors may prefer one over the other. What matters most is consistency: use the same profit metric every time you calculate and report the Rule of 40, so trends over time are comparable.
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