A widely used SaaS benchmark that exists specifically to stop comparing fast-growing, unprofitable companies against slow-growing, profitable ones on a single metric.
How it works
Revenue growth rate and profit margin (commonly EBITDA or free cash flow margin) are simply added together. A score of 40 or more is the commonly cited passing threshold — reachable by being very fast-growing and unprofitable, slow-growing and highly profitable, or anywhere in between.
What this does not include
The Rule of 40 says nothing about which combination of growth and margin is preferable for a specific company’s stage or investor base — two companies can both score 45 with very different, and not equally attractive, underlying profiles.
How to use this calculator
- Enter revenue growth rate and profit margin.
A worked example
A SaaS company growing 30% annually with a 15% profit margin: Rule of 40 score = 30 + 15 = 45 — above the 40 threshold, considered a healthy balance of growth and profitability.
Growth 10%, margin 5%: score = 15 — well below 40, a warning sign for either weak growth or weak profitability (or both).
What the variables mean
| Variable | Meaning |
|---|---|
| Growth rate | Annual revenue growth rate, as a percentage |
| Profit margin | Profitability margin, as a percentage |
Edge cases worth knowing
The Rule of 40 treats growth and profitability as substitutes. A fast-growing but unprofitable company can pass the same way a slower-growing but highly profitable one can — the sum matters, not the individual components.
This is a rough software-industry heuristic, not a universal financial rule — its usefulness is most established for evaluating SaaS and subscription businesses specifically.
Frequently asked questions
Is 40 a hard cutoff?
No — it’s a widely cited rule of thumb, not a formal standard; some investors and analysts use different thresholds or weight growth and margin differently.
Can a company pass with negative margin?
Yes — a company growing 60% with a -15% margin still scores 45, passing purely on growth, which is common for early-stage, high-growth companies prioritizing expansion over profitability.
What margin should I use?
EBITDA margin or free cash flow margin are both common choices — this site’s EBITDA margin and free cash flow calculators can supply that input.
