What is the Rule of 40?
The Rule of 40 says a healthy SaaS company's revenue growth rate plus its profit margin should add up to at least 40%. It captures the trade-off between growth and profitability in one number, so a business can grow fast and burn cash, or grow slowly and run profitably, and still clear the bar as long as the two together reach 40. It is a fast screen, not a full diagnosis, which is why investors read it alongside retention and margin quality.
How this calculator works
One line of arithmetic, no black box:
The formula: Rule of 40 score = revenue growth rate % + profit margin % Passing = score is 40 or higher Below 40 = score is under 40
Both inputs are percentages. Profit margin can be negative, which is common for high-growth SaaS still investing ahead of profitability. A strong growth rate can offset a negative margin and still pass, and vice versa.
What counts as a good Rule of 40 score?
| Rule of 40 score | Read | What it means |
|---|---|---|
| Below 40 | Falls short | Growth and profit together are not efficient enough by this screen. |
| 40 to 60 | Healthy | Balanced, efficient SaaS performance that most investors respect. |
| Above 60 | Elite | Rare, best-in-class combination of growth and profitability. |
How to improve your Rule of 40
- Add efficient growth. Channels like organic search compound over time, lifting growth without inflating acquisition cost.
- Protect and expand margin. Trim low-ROI spend and grow expansion revenue so more of each dollar reaches profit.
- Retain more customers. Lower churn helps both halves of the score, since less revenue leaks and less budget goes to re-acquisition.
- Fix your definitions. Pick one margin (EBITDA or FCF) and one growth metric, then hold them steady so the score stays honest quarter over quarter.
Frequently asked questions
What is the Rule of 40?
The Rule of 40 is a SaaS health benchmark that says a company's revenue growth rate plus its profit margin should add up to at least 40%. It captures the trade-off between growth and profitability in a single number: a company can grow fast and burn cash, or grow slowly and run profitably, and still look healthy as long as the two together clear 40. Growth and later-stage investors popularised it as a quick screen for balanced, efficient SaaS businesses.
How do you calculate the Rule of 40?
Add your revenue growth rate to your profit margin, both expressed as percentages. For example, 30% year-over-year growth plus a 15% profit margin gives a Rule of 40 score of 45%, which passes. A company at 60% growth and a negative 15% margin also scores 45 and passes, because rapid growth offsets the loss. Any score of 40 or higher passes; below 40 falls short.
Which profit margin should I use (EBITDA vs FCF)?
There is no single official definition, so pick one and stay consistent. EBITDA margin and free-cash-flow (FCF) margin are the two most common choices for SaaS, and some operators use operating margin instead. FCF margin is often preferred for SaaS because it reflects the cash impact of deferred revenue and annual upfront billing. Whichever you choose, pair it with the same growth metric (usually revenue growth) every period so the score stays comparable over time.
Is the Rule of 40 still relevant for SaaS in 2026?
Yes, and arguably more than during the growth-at-all-costs era. Now that investors and boards weigh capital efficiency heavily, the Rule of 40 remains a fast, widely-understood screen for balanced SaaS performance. Treat it as a starting point, not a verdict: it does not capture net revenue retention, gross margin quality, or how durable the growth is, so read it alongside those metrics rather than treating 40 as a hard pass/fail line.