Rule of 40
ROOL uv FOR-tee
Revenue growth rate plus profit margin should equal 40 or higher. A shorthand for whether a SaaS company balances growth and profitability.
The Rule of 40 is a shorthand investors use to assess SaaS business health. Add your revenue growth rate to your profit margin. The sum should be 40 or higher.
A company growing 50% with a -10% margin? That is 40. Passing. A company growing 20% with 25% margins? That is 45. Passing. A company growing 15% with 10% margins? That is 25. Trouble.
The Rule of 40 captures a fundamental tradeoff. You can grow fast and lose money. You can grow slow and make money. But you cannot grow slow and lose money. That is just dying. Early-stage companies often run below 40 because they are investing heavily in growth. Investors weigh the Rule of 40 alongside NDR and CAC payback period. That is fine if the growth is actually happening. Mature companies that fall below 40 have a harder story to tell.
Examples
A high-growth startup.
Revenue growing 80% year over year. Operating margin is -30%. Rule of 40 score: 50. Investors are happy. The growth justifies the losses.
A mature SaaS company.
Revenue growing 15%. Operating margin is 28%. Rule of 40 score: 43. Solid. The company is profitable and still growing at a healthy clip.
A company in trouble.
Revenue growing 8%. Operating margin is 5%. Rule of 40 score: 13. Neither growing fast nor making real money. Investors see a company that is stuck.
In practice
Read more on the blog
Frequently asked questions
How do you calculate the Rule of 40?
Add your year-over-year revenue growth rate (as a percentage) to your operating profit margin (as a percentage). If your revenue is growing 30% and your operating margin is 15%, your Rule of 40 score is 45. A score of 40 or above is considered healthy.
Related terms
The annualized value of your active subscription contracts. The heartbeat metric of every SaaS business.
Revenue minus cost of goods sold, expressed as a percentage. For SaaS, this is revenue minus hosting, support, and delivery costs.
New MRR plus expansion MRR divided by churned MRR plus contraction MRR. Measures whether your growth outpaces your losses.
Want the complete playbook?
Picks and Shovels is the definitive guide to developer marketing. Amazon #1 bestseller with practical strategies from 30 years of marketing to developers.