What Is the Rule of 40?

Definition

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 at least 40%. It captures the trade-off between growth and profitability: you can run lower-margin if you're growing fast, or slower-growing if you're profitable.

Key takeaways

Rule of 40: growth rate % + profit margin % ≥ 40%.
It balances growth against profitability in a single number.
Margin can be EBITDA, free cash flow or another consistent measure.

How it works

Growth Rate % + Profit Margin % ≥ 40%

Examples

40% growth with 0% margin hits exactly 40. So does 20% growth with 20% margin, or 10% growth with 30% margin. The rule says any of these is healthy — it's the sum that matters, letting fast growers spend and profitable companies grow slower.

Frequently asked questions

What is the Rule of 40?

A SaaS benchmark stating that growth rate plus profit margin should total at least 40%, balancing growth against profitability.

How do you calculate the Rule of 40?

Add your revenue growth rate (%) to your profit margin (%). If the sum is 40 or above, you pass.

What margin do you use for the Rule of 40?

Commonly EBITDA or free-cash-flow margin — use one consistent measure so comparisons hold.