SaaS Metric
Rule of 40
Definition
The Rule of 40 is a SaaS health heuristic: a company’s revenue growth rate plus its profit margin should add up to at least 40%. Rule of 40 score = revenue growth rate (%) + profit margin (%). It balances growth against profitability — a company can grow fast and burn cash, or grow slowly and print profit, as long as the two together clear 40%.
Formula
Rule of 40 score = revenue growth rate (%) + profit margin (%) (profit margin is commonly EBITDA margin or free-cash-flow margin)
Benchmark
A combined score of 40% or higher is considered healthy. Top performers reach 50%+. Below 40% suggests the growth/profit trade-off is out of balance.
How to read the score
The Rule of 40 lets you compare companies with very different strategies on one line. A startup growing 60% while running a −20% margin scores 40 and passes; a mature SaaS growing 15% at a 30% margin scores 45 and also passes. Both are considered to be balancing growth and efficiency well.
There is no single official margin to use — EBITDA margin and free-cash-flow margin are the most common. The important thing is to apply the same definition consistently when comparing periods or companies, because mixing margin definitions makes the score meaningless.
Frequently asked questions
What is the Rule of 40 in SaaS?
It is a heuristic stating that a SaaS company’s revenue growth rate plus its profit margin should total at least 40%. It captures the trade-off between growing fast and being profitable in a single number.
Which profit margin should you use for the Rule of 40?
EBITDA margin and free-cash-flow margin are the two most common choices. Either works as long as you apply it consistently. The key is comparing like with like rather than switching margin definitions between periods.
Is a Rule of 40 score above 40 always good?
A score of 40%+ is the healthy threshold, and 50%+ is excellent. But the score hides composition: a high score driven almost entirely by margin with little growth may concern investors who want durable expansion, so context still matters.
Related metrics
Monthly Recurring Revenue (MRR)
Monthly recurring revenue (MRR) is the normalised, predictable subscription revenue earned each month. Learn the MRR formula, its movement components, and how it relates to ARR.
Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is the normalised yearly value of recurring subscriptions. Learn the ARR formula, how it differs from MRR and total revenue, and when to use it.
Expansion Revenue
Expansion revenue is additional recurring revenue from existing customers via upgrades, seats and cross-sells. Learn how it drives net negative churn and NRR above 100%.
SaaS Quick Ratio
The SaaS quick ratio measures growth efficiency: new + expansion MRR divided by churned + contraction MRR. Learn the formula, what a ratio of 4+ means, and benchmarks.
Track this automatically
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Benchmarks are general SaaS ranges and vary by segment, stage and business model. Last reviewed 2026-05-30.